Illinois can no longer function

SUBHEAD: It enters third year without a budget, resulting in the state's imminent downgrade to junk status.

By Tyler Durden on 20 June 2017 for Zero Hedge -
(http://www.zerohedge.com/news/2017-06-20/illinois-comptroller-state-can-no-longer-function-we-have-reached-new-phase-crisis)


Image above: The seal of the State of Illinois with motto "State Sovereignty -National Union". From (https://commons.wikimedia.org/wiki/File:Seal_of_Illinois.svg).

With just 10 days to go until Illinois enters its third year without a budget, resulting in the state's imminent downgrade to junk status and potentially culminating in a default for the state whose unpaid bills now surpass $15 billion, Democratic Illinois Comptroller Susana Mendoza issued a warning to Illinois Governor Rauner and other elected officials on Tuesday, saying in a letter that her office has "very serious concerns" it may no longer be able to guarantee "timely and predictable payments" for some core services.

In the letter posted on her website, Mendoza who over the weekend warned that Illinois is "in massive crisis mode" and that "this is not a false alarm" said the state is "effectively hemorrhaging money" due to various court orders and laws that have left government spending roughly $600 million more a month than it's taking in.

Mendoza said her office will continue to make debt payments as required, but indicated that services most likely to be affected include long-term care, hospice and supportive living centers for seniors.

She added that managed care organizations that serve Medicaid recipients are owed more than $2.8 billion in overdue bills as of June 15th.

"The state can no longer function without a responsible and complete budget without severely impacting our core obligations and decimating services to the state's most in-need citizens," Mendoza wrote. "We must put our fiscal house in order. It is already too late. Action is needed now."

Unveiling the most dire language yet, in her letter Mendoza said "we are now reaching a new phase of crisis" perhaps in an attempt to prompt the Democrats and Republicans to sit down and come up with a compromise:

As Illinois’ Chief Fiscal and Accountability Officer, my Office is responsible for managing the state’s financial accounts as well as providing the public and the state’s elected leadership with objective and timely data concerning the state’s difficult fiscal condition. As you are quite aware, I have been very vocal regarding these issues and the budgetary impasse since assuming office six months ago; however we are now reaching a new phase of crisis.

She then addresses "the full extent of [Illinois'[ dire fiscal straits and the potential disruptions that we face in addressing even our most critical core responsibilities":

Accordingly, I must communicate to you at this time the full extent of our dire fiscal straits and the potential disruptions that we face in addressing even our most critical core responsibilities going forward into the new fiscal year.

My Office has very serious concerns that, in the coming weeks, the State of Illinois will no longer be able to guarantee timely and predictable payments in a number of areas that we have to date managed (albeit with extreme difficulty) despite an unpaid bill backlog in excess of $15 billion and growing rapidly.

The cause for alarm in America's most bananish state is well-known: living far beyond one's means, resulting in soaring deficits and the critical need for constant debt funding.

My cause for alarm is rooted in the increasing deficit spending combined with new and ongoing cash management demands stemming from decisions from state and federal courts, the latest being the class action lawsuit filed by advocates representing the Medicaid service population served by the state’s Managed Care Organizations (MCOs).

As of June 15th, the MCOs, and their provider networks, are owed a total of more than $2.8 billion in overdue bills at the Comptroller’s Office.

There is no question that these obligations should be paid in a more timely manner and that the payment delays caused by the state’s financial condition negatively impact the state’s healthcare infrastructure.

We are currently in court directed discussions to reach a workable and responsive payment schedule going forward, but any acceleration of the timing of those payments under the current circumstances will almost certainly affect the scheduling of other payments, regardless of other competing court orders and Illinois statutory mandates.

There was one silver lining: a default is not imminent, at least not in Mendoza's view, as the comptroller explained that "debt service payments will not be delayed or diminished going forward and I will use every statutory avenue or available resource to meet that commitment."

It is a necessary pledge in order to attempt to avoid further damage to our already stressed credit ratings and to make possible the additional debt financing that we all know will be required to achieve some measure of stability going forward.

And when "every available resource" runs out, that's when things get really bad.

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Meanwhile, as the state's budget director warns of fire and brimstone, in a last ditch attempt to reach an agreement with the legislature, Illinois' Republican Gov. Bruce Rauner will deliver a brief address Tuesday night calling for unity as lawmakers prepare to return to Springfield for a special session, a move Democrats quickly dismissed as a political stunt.

The speech, which is closed to the press but expected to air live on 6 p.m. television newscasts, comes just days after Rauner launched a TV advertising blitz attacking Democratic House Speaker Michael Madigan, whom the governor has spent years vilifying as the source of the state's deep financial woes according to the Chicago Tribune. Democrats have long argued that Rauner's frequent political attacks do little to bring about common ground. The governor says political gamesmanship is part of being in public service but should not impact what happens at the Capitol.

Rauner will give his remarks at the Old State Capitol, where Abraham Lincoln gave his "House Divided" speech and Barack Obama kicked off his first White House run in 2007.

The speech will fall short.

Democratic governor candidate J.B. Pritzker called Rauner's address a "sham," saying Rauner "either doesn't have the slightest clue what unity is or just doesn't care." House Democrats called it laughable, saying if Rauner wanted to negotiate he would do it behind closed doors not in front of television cameras. "I find it tragically comedic that a governor who has done more to divide this state than probably any other governor in history is going to give a unity address," said Rep. Christian Mitchell, D-Chicago.

It's not just the Democrats: Republican lawmakers said they would vote for that tax plan, but only if the hike were limited to four years starting in July, and were tied to a four-year property tax freeze. The Senate Democrats' plan makes the tax hikes permanent and applies them retroactively to the beginning of 2017.

While Rauner is expected to talk about the need for unity and compromise, House GOP leader Jim Durkin said last week that Republicans expect "substantial compliance" from Democrats, warning that he would reject "reform light or anything that is significantly diluted."

Finally, in a harbringer of what's to come for the entire state, Bloomberg reports that Chicago’s junk-rated school system just went "no bid", and is paying bond-market penalties similar to those seen during the financial crisis.

The Chicago school district, slammed by the fallout from the Illinois budget gridlock, has been stuck paying punitive interest rates on $167.5 million of adjustable-rate bonds after PNC Capital Markets failed in March to resell the securities once previous owners sold them.

Remember the failure of Auction-Rate Securities just before all hell broke loose in 2008? Well, it's kinda like that.

The rate on the bonds, which are supposed to stay extremely low because investors can resell them to banks periodically, jumped to a maximum 9% on March 1 from 4.64% the week before and has stayed there ever since, according to data compiled by Bloomberg.

The spiraling interest bills are reminiscent of the chaos that erupted in the wake of the Lehman Brothers Holdings Inc.’s bankruptcy in 2008, when state and local governments were stung by soaring costs after investors sold the variable-rate securities en masse just as banks were scrambling to raise cash. In Chicago’s case, though, it reflects how skittish investors have become about holding the debt of the cash-strapped school system.

In another preview of what's coming once Illinois is junked, the school district agreed this week to pay a rate of 6.39% for a short-term $275 million loan from JPMorgan Chase & Co. to help make a pension payment and cover the cost of staying open through the end of the school year.

As we reported last week, the schools didn’t receive $215 million more in state aid to make the retirement-fund contribution after a measure was vetoed by Governor Bruce Rauner.

Illinois has failed to pass a budget for more than two years as the Republican governor and Democrat-led legislature battle over how to close the state’s chronic budget deficits.

"Chicago Public Schools has been unable to crate a fiscally responsible budget and it relies on outside sources that, as we see, sometimes comes through and sometimes don’t,” said Matt Dalton, chief executive officer of Rye Brook, New York-based Belle Haven Investments, which manages $6 billion of municipal bonds, including about $3 million of insured Chicago school debt.

“That’s unsettling investors."

Unfortunately, that's just the beginning, and once the state itself is junked, investors will be even more unsettled.

But the biggest insult and injury is to the near-insolvent state is that Illinois is facing a full-blown crisis just one day after chronic defaulter Argentina managed to pull off a 100 year bond offering, which was 3.5x oversubscribed.
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IMF plan to crash Europe

SUBHEAD: Wikileaks reveals IMF plan to "Cause a credit event in Greece and destabilize Europe".

By Tyler Durden on 2 April 2016 for Zero Hedge -
(http://www.zerohedge.com/news/2016-04-02/wikileaks-reveals-imf-plan-cause-credit-event-greece-and-destabilize-europe)


Image above: IMF negotiator Poul Thomsen. From (https://medium.com/mosquito-ridge/imf-plots-new-credit-event-for-greece-534b4b300318#.jdum3i3z0).

One of the recurring concerns involving Europe's seemingly perpetual economic, financial and social crises, is that these have been largely predetermined, "scripted" and deliberate acts.

This is something the former head of the Bank of England admitted one month ago when Mervyn King said that Europe's economic depression "is the result of "deliberate" policy choices made by EU elites.  It is also what AIG Banque strategist Bernard Connolly said back in 2008 when laying out "What Europe Wants"

To use global issues as excuses to extend its power:

• environmental issues: increase control over member countries; advance idea of global governance
• terrorism: use excuse for greater control over police and judicial issues; increase extent of surveillance
• global financial crisis: kill two birds (free market; Anglo-Saxon economies) with one stone (Europe-wide regulator; attempts at global financial governance)
• EMU: create a crisis to force introduction of “European economic government”

This morning we got another confirmation of how supernational organizations "plan" European crises in advance to further their goals, when Wikileaks published the transcript of a teleconference that took place on March 19, 2016 between the top two IMF officials in charge of managing the Greek debt crisis - Poul Thomsen, the head of the IMF's European Department, and Delia Velkouleskou, the IMF Mission Chief for Greece.

In the transcript, the IMF staffers are caught on tape planning to tell Germany the organization would abandon the troika if the IMF and the commission fail to reach an agreement on Greek debt relief.

More to the point, the IMF officials say that a threat of an imminent financial catastrophe as the Guardian puts it, is needed to force other players into accepting its measures such as cutting Greek pensions and working conditions, or as Bloomberg puts it, "considering a plan to cause a credit event in Greece and destabilize Europe."

According to the leaked conversation, the IMF - which has been pushing for a debt haircut for Greece ever since last August's 3rd Greek bailout - believes a credit event as only thing that could trigger a Greek deal; the "event" is hinted as taking place some time around the June 23 Brexit referendum.

As noted by Bloomberg, the leak shows officials linking Greek issue with U.K. referendum risking general political destabilization in Europe.


Image above: IMF official Delia Velculescu. From (https://medium.com/mosquito-ridge/imf-plots-new-credit-event-for-greece-534b4b300318#.jdum3i3z0).

The leaked transcript reveals how the IMF plans to use Greece as a pawn in its ongoing negotiation with Germany's chancelleor in order to achieve the desired Greek debt reduction which Germany has been pointedly against: in the leak we learn about the intention of IMF to threaten German Chancellor Angela Merkel to force her to accept the IMF's demands at a critical point.
From the transcript:

THOMSEN: Well, I don't know. But this is... I think about it differently. What is going to bring it all to a decision point? In the past there has been only one time when the decision has been made and then that was when they were about to run out of money seriously and to default. Right?

VELKOULESKOU: Right!

THOMSEN: And possibly this is what is going to happen again. In that case, it drags on until July, and clearly the Europeans are not going to have any discussions for a month before the Brexits and so, at some stage they will want to take a break and then they want to  start again after the European referendum.

VELKOULESKOU: That's right.

THOMSEN: That is one possibility. Another possibility is one that I thought would have happened already and I am surprised that it has not happened, is that, because of the refugee situation, they take a decision... that they want to come to a conclusion. Ok? And the Germans raise the issue of the management... and basically we at that time say "Look, you Mrs. Merkel you face a question, you have to think about what is more costly: to go ahead without the IMF, would the Bundestag say 'The IMF is not on board'? or to pick the debt relief that we think that Greece needs in order to keep us on board?" Right? That is really the issue.

VELKOULESKOU: I agree that we need an event, but I don't know what that will be. But I think Dijsselbloem is trying not to generate an event, but to jump start this discussion somehow on debt, that essentially is about us being on board or not at the end of the day.

THOMSEN: Yeah, but you know, that discussion of the measures and the discussion of the debt can go on forever, until some high up.. until they hit the July payment or until the leaders decide that we need to come to an agreement. But there is nothing in there that otherwise is going to force a compromise. Right? It is going to go on forever.

The IMF is also shown as continuing to pull the strings of the Greek government which has so far refused to compromise on any major reforms, as has been the case since the first bailout.

As the Guardian notes, Greek finance minister Euclid Tsakalotos has accused the IMF of imposing draconian measures, including on pension reform. The transcript quotes Velculescu as saying: “What is interesting though is that [Greece] did give in … they did give a little bit on both the income tax reform and on the … both on the tax credit and the supplementary pensions”. Thomsen’s view was that the Greeks “are not even getting close [to coming] around to accept our views”. Velculescu argued that “if [the Greek government] get pressured enough, they would …

But they don’t have any incentive and they know that the commission is willing to compromise, so that is the problem.”

Below is Paul Mason's summary of what is shaping up as the next political scandal.

The International Monetary Fund has been caught, red handed, plotting to stage a “credit event” that forces Greece to the edge of bankruptcy, using the pretext of the Brexit referendum.

No, this is not the plot of the next Bond movie. It is the transcript of a teleconference between the IMF’s chief negotiator, Poul Thomsen and Delia Velculescu, head of the IMF mission to Greece. 

Released by Wikileaks, the discussion took place in Athens just before the IMF walked out of talks aimed at giving Greece the green light for the next stage of its bailout.

The situation is: the IMF does not believe the numbers being used by both Greece and Europe to do the next stage of the deal. It does not want to take part in the bailout. Meanwhile the EU cannot do the deal without the IMF because the German parliament won’t allow it.

Let me decode. An “event” is a financial crisis bringing Greece close to default. Just like last year, when the banks closed, millions of people faced economic and psychological catastrophe.

Only this time, the IMF wants to inflict that catastrophe on a nation holding tens of thousands of refugees and tasked with one of the most complex and legally dubious international border policing missions in modern history.

The Greek government is furious: “we are not going to let the IMF play with fire,” a source told me.

But the issue is out of Greek hands. In the end, as Thomsen hints in the transcript, only the European Commission and above all the German government can decide to honour the terms of the deal it did to bail Greece out last July.

The transcript, though received with fury and incredulity in Greece, will drop like a bombshell into the Commission and the ECB. It is they who are holding E300bn+ of Greek debt. It is the whole of Europe, in other words, that the IMF is conspiring to hit with the shock doctrine.

The Greeks are understandably angry and confused; As Bloomberg reported earlier, "Greece wants to know whether WikiLeaks report regarding IMF anticipating a Greek default at about the time of the U.K. June 23 referendum on its EU membership is the fund’s official position" government spokeswoman Olga Gerovasili says Saturday in e-mailed statement.

For its part, an IMF spokesman in e-mail Saturday said it doesn’t "comment on leaks or supposed reports of internal discussions."
Two side observations:

1. has a "Snowden" leaker now emerged at the IMF; if so we can expect many more such bombshell accounts in the coming weeks; or perhaps the reason for the leak is less nuanced: a bugged hotel.
2. it may be another turbulent summer in Europe.

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For the Nothing Is Happening crowd

SUBHEAD: A lot of people out there expected something to happen in September that did not ultimately happen.

By Michael Snyder on 29 September 2015 for The Economic Collapse -
(http://theeconomiccollapseblog.com/archives/this-is-for-the-nothing-is-happening-crowd)


Image above: A palace of wealth built on the foundation of a shack.  From (http://www.eurekastreet.com.au/article.aspx?aeid=34683#.Vg1-0XsnpBo).

There were all kinds of wild theories floating around, and many of them had no basis in reality whatsoever.  But without a doubt, some very important things did happen in September.

As I warned about ahead of time, we are witnessing the most significant global financial meltdown since the end of 2008.  All of the largest stock markets in the world are crashing simultaneously, and so far the amount of wealth that has been wiped out worldwide is in excess of 5 trillion dollars.

In addition to stocks, junk bonds are also crashing, and Bank of America says that it is a “slow moving trainwreck that seems to be accelerating“.

Thanks to the commodity price crash, many of the largest commodity traders on the planet are now imploding.  I wrote about the death spiral that has gripped Glencore yesterday.

On Tuesday, the stock price of the largest commodity trader in Asia, the Noble Group, plummeted like a rock and commodity trading giant Trafigura appears to be in worse shape than either Glencore or the Noble Group.

The total collapse of any of them could easily be a bigger event than the implosion of Lehman Brothers in 2008.  So I honestly do not understand the “nothing is happening” crowd.  It takes ignorance on an almost unbelievable level to try to claim that “nothing is happening” in the financial world right now.

Within the last 60 days, we have seen some things happen that we have never seen before.

For example, did you know that we witnessed the greatest intraday stock market crash in U.S. history on August 24th?

During that day, the Dow Jones Industrial Average plunged from a high of 16,459.75 to a low of 15,370.33 before rebounding substantially. That intraday point swing of 1,089 points was the largest in all of U.S. history.

Overall, the Dow was down 588.40 points that day.  When you combine that decline with the 530.94 point plunge from the previous Friday, you get a total drop of 1119.34 points over two consecutive trading days.

Never before in history had the Dow fallen by more than 500 points on two trading days in a row.  If that entire decline had fallen within one trading day, it would have been the largest stock market crash in U.S. history by a very wide margin, and everyone would be running around saying that author Jonathan Cahn was right again.

But because this massive decline fell over two consecutive trading days that somehow makes him wrong?

Are you kidding me?

Come on people – let’s use some common sense here.  We are already witnessing the greatest global stock market decline in seven years, and after a brief lull things are starting to accelerate once again.

Last night, stocks in Hong Kong were down 629 points and stocks in Japan were down 714 points.  In the U.S., the Nasdaq has had a string of down days recently, and the “death cross” that has just formed has many investors extremely concerned…

The Nasdaq composite spooked investors on Monday after forming a death cross, a trading pattern that shows a decline in short-term momentum and is often a precursor to future losses.

A death cross occurs when the short-term moving average of a security or an index pierces below the long-term trend, in this case the 50-day moving average breaking through the 200-day moving average.

In the past month, similar chart patterns formed in the S&P 500, Dow and small-cap Russell 2000, but the Nasdaq avoided a death cross formation until Monday.

What we witnessed in September was not “the end” of anything.

Instead, it is just the beginning.

And if you listen carefully, some of the biggest names on Wall Street are issuing some very ominous warnings about what is coming.  For instance, just consider what Carl Icahn is saying…

Danger ahead—that’s the warning from Carl Icahn in a video coming Tuesday.

The activist says low rates caused bubbles in art, real estate and high-yield bonds—with potentially dramatic consequences.

“It’s like giving somebody medicine and this medicine is being given and given and given and we don’t know what’s going to happen – you don’t know how bad it’s going to be. We do know when we did it a few years ago it caused a catastrophe, it caused ’08. Where do you draw the line?”

Even people like Jim Cramer are starting to freak out.  He recently told his audience that “we have a first-class bear market going”…

Jim Cramer, the ex-hedge fund manager and host of CNBC’s show “Mad Money,” has been vocal recently on air, saying repeatedly that he doesn’t like the market now, and last week said “we have a first-class bear market going.”

Similarly, Gary Kaltbaum, president of Kaltbaum Capital Management, has been sending out notes to clients and this newspaper for weeks, saying the poor price action of the stock market and many hard-hit sectors, such as energy and the recently clobbered biotech sector, has all the earmarks of a bear market. Over the weekend, Kaltbaum said: “We remain in a worldwide bear market for stocks.”

As I have warned repeatedly, there will continue to be ups and downs.  The stock market is not going to fall every day.  In fact, on some days stocks will absolutely soar.

But without a doubt, we have entered the period of time that I have warned about for so long.  The global financial system is now beginning to unravel, and any piece of major bad news will likely accelerate things.

For instance, the total collapse of Deutsche Bank, Petrobras, Glencore, the Noble Group, Trafigura or any of a number of other major financial institutions that I am currently watching could create mass panic on the global financial stage.

In addition, an unexpected natural disaster that hits a financially important major city or a massive terror attack in the western world are other examples of things that could accelerate this process.

Our world is becoming increasingly unstable, and we all need to learn to expect the unexpected.

The period of relative peace and security that we all have been enjoying for so long is ending, and now chaos is going to reign for a time.

So get prepared while you still can, because there is very little time remaining to do so…

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The Greek Butterfly Effect

SUBHEAD: Angela Merkel wanted a concluded Greek deal before markets open on Monday. Now she has a mess.

By North Man Trader on 27 June 2015 for NorthManTrader -
(http://northmantrader.com/2015/06/27/the-greek-butterfly-effect/)


Image above: An illustration of the "Butterfly Effect" in Chaos Theory. From (http://ledaza.com/blog/how-many-butterflies-do-you-have-in-your-company/).

Many times nothing happens for a long time. Then all of a sudden everything happens at once. Like a dam break. It builds slowly and then it bursts. Example: Who would have ever thought the Confederate flag would be taken down across the South during the same week that a rainbow flag is symbolically hoisted across the entire country? Just because things seem unthinkable doesn’t mean they won’t happen.

Take the global debt construct as another example. For decades the world has immersed itself in ever higher debt. The general attitude has been one of indifference. Oh well, it just goes higher. Doesn’t really impact me or so the complacent rationalize.

When the financial crisis brought the world to the brink of financial collapse the solution was based on a single principle:

Make the math workable.

In the US the 4 principle “solutions” to make the math workable were to:

1. End mark to market which had the basic effect of allowing institutions to work with fictitious balance sheets and claim financial viability.
   
2. Engage in unprecedented fiscal deficits to grow the economy. To this day the US, and the world for that matter, runs deficits. Every single year. The result: Global GDP has been, and continues to be overstated as a certain percentage of growth remains debt financed and not purely organically driven.
   
3. QE, to flush the system with artificial liquidity, the classic printing press to create demand out of thin air.
   
4. ZIRP. Generally ZIRP has been sold to the public as an incentive program to stimulate lending and thereby generate wage growth & inflation. While it could be argued it had some success in certain areas such as housing, the larger evidence suggests that ZIRP is not about growth at all.

No, ZIRP’s true purpose is actually much more sinister: To make global debt serviceable. To make the math work without a default.

Here’s the reality: If we had “normalized” rates tomorrow the entire financial system would collapse under the weight of the math. In short: Default.

Which brings us to Greece the butterfly, the truth and indeed the future:

Greece for all its structural faults is the most prominent victim of fictitious numbers. From the original Goldman Sachs deal to get them into the EU based on fantasy numbers and to numerous bail-outs, the simple truth has always been the same: The math doesn’t work.

It never has and it never will until there is a default on at least some of the debt.

And in this context the Greek government’s move to call for a public referendum on July 5 may be a very clever strategic move as it forces the issue of math.

Here’s the strategic frame-up:

Ultimately what Greece needs is debt relief. Big time debt relief to make the math work.

The global cabal of creditors, ECB, EU, and IMF do not want that. Why not? Because the very second they do this everybody else would want a cut on their debt starting with Italy, Spain, Portugal etc. and the dominos would be rolling.

No, they do not want this as a default would require acknowledging that debt matters.

What are the alternatives?

Greece’s referendum move risks putting a debt deal up for a vote to citizens. When has that ever happened? Have Americans every voted on their government’s debt spree? Have citizens ever had a say on their central bank’s policies and balance sheet expansions? The answer is no. This so ever important element of our global economic system is completely removed from voters.

And so Yanis Varoufakis is very much correct in highlighting this open secret on Twitter:

Democracy deserved a boost in euro-related matters. We just delivered it. Let the people decide. (Funny how radical this concept sounds!) 2:55 PM - 26 Jun 2015

No, voters are very much not permitted to participate in this decision making process. And hence the only reason a Greek referendum may actually proceed is this: To make an example of Greece. You want to default? Watch what we will do to Greece.

But that’s a big gamble for the EU, for the ECB, the IMF and everybody else including China and the US.

Why? Because all of them have carefully orchestrated a construct that they do no want to see disturbed. It’s not an accident that we have seen 46+ rate cuts this year. It’s not an accident that China announced another rate cut just a day after Chinese stocks plummeted 7% this past Friday. It was no accident that the Fed’s Bullard talked about QE4 in October the moment US stocks got close to a 10% correction.

No, you see their primary mission in their timed actions and their words: To make the math work. And to continue to make the math work.

And hence Janet Yellen is not delaying rate hikes because she is “data dependent”. She is dealing in reality: Over $18 trillion in US debt (and ever growing) a large portion of which needs to be refinanced over the next 5 years. And higher rates will become an ever larger burden on the discretionary budget of the US. And the world, heavily indebted that it is, has the same problem:

Math.

So this next week is not so much about Greece the butterfly, but it is about keeping the butterfly from becoming a hindrance to the math working globally. And the Greek government knows this. They are negotiating on the basis that a bad Greek deal from Europe’s point of view is better than a default.

Angela Merkel wanted a concluded Greek deal before markets open on Monday. Now she has a mess.

And in the world of gamesmanship every percentage drop in the #DAX will enhance Greece’s negotiation stance.

This past week saw a massive rally in the #DAX in the hopes that a deal would certainly be positively concluded. Now this weekend all this bullish sentiment may find itself tested come Sunday night and Monday morning unless Europe blinks quickly. China is doing its part to support the construct with this latest rate cut, but the ECB can’t be happy about its QE program challenged by the constant Greece distraction. As we outlined in technical charts a default of Greece would risk a structural repeat of 2011.

And it couldn’t come at a worse time. No, odds are they’re not going to let Greece default. They can’t afford to. The math has to work.

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Greek Black Monday

SUBHEAD: G-7 and EU banking officials hold emergency calls ahead of Black Monday

By Tyler Derden on 28 June 2015 for Zero Hedge -
(http://www.zerohedge.com/news/2015-06-28/g-7-eu-banking-officials-hold-emergency-calls-ahead-black-monday)


Now that the Greek parliament has given PM Alexis Tsipras’ euro referendum the go ahead (the vote will effectively be a poll on euro membership or, on the choice between sovereignty and servitude if you will, because as the IMF flatly noted on Saturday, the proposal that was supposed to form the basis for the referendum will be null and void by the time Greeks go to the polls) and now that Greeks have pulled another €1 billion plus from the ATMs, capital controls are all but certain early next week, especially now that the ECB has frozen the ELA cap. This means the crisis, to use Irish FinMin MIchael Noonan’s words, “has now commenced” and a “Lehman weekend” is indeed underway.

Against this backdrop, multiple “emergency” meetings have been scheduled for Sunday as EU officials scramble to figure out how best to deal with what is likely to be a turbulent week and to consider the financial impact a potential Grexit will have on the currency bloc, its member nations and institutions, and on the global financial system as a whole. Here’s Bloomberg with more:

G-7 deputies to hold conference call Sunday to discuss development of Greek crisis, Handelsblatt reports, citing unidentified euro region official.

Purpose is to inform non-European govts

European banking supervision officials also will hold conference call on situation of Greek banks and possible impact of Greek developments on European financial system

Euro Working Group to hold evening conference call

European Systemic Risk Board to convene immediately after ECB Governing Council meeting: Skai TV

And more from Handelsblatt (via Google translate):

Because of the impending bankruptcy of Greece are on Sunday a series of crisis talks planned. The most industrialized countries (G7) wanted throughout the day to advise on a conference call, said a representative of the Euro zone the Handelsblatt.

The conversation should at Deputy level, ie between the state secretaries, take place. It serves mainly to inform the non-European governments on the developments in the Greek crisis.

In addition, was also a Sunday teleconference of European Banking Supervisors (SSM) planning, told the Handelsblatt. There are representatives of the European Central Bank (ECB) and the national supervisory authorities. In the Phone Unlock should be advised on the situation of Greek banks and the possible impact on the European financial system, it said.

Meanwhile, German Chancellor Angela Merkel is set to confront lawmakers in Berlin on Monday and apprise them of the latest developments in the Greek drama. Over the course of the last two months, political support for continued aid to Athens has worn thin among German MPs, while influential Finance Minister Wolfgang Schaeuble has at every turn expressed reservations about the lengths Europe has gone to in order to keep Greece afloat. Here's Bloomberg again:

"German Chancellor Angela Merkel will brief leaders of German parties and parliamentary groups on Monday at 1:30 p.m., her spokesman Steffen Seibert says in e-mailed ."

Expect some lawmakers to ask how exposed Germany is to a Greek default. After all, given Berlin's role as the EU paymaster and the country's massive TARGET2 credit with the ECB, Germany stands to lose the most (financially anyway) from a potential Grexit, considering EFSF contributions and the country's share of committed ECB credit lines. Once more, via Bloomberg:

German public coffers face loss of at least EU80b from a Greek default, lawmaker Gunter Krichbaum, chairmanof European Affairs Committee in lower house of parliament, tells Leipziger Volkszeitung newspaper. Amount includes exposure to bailout mechanisms, ECB measures.

And indeed, Germany's financial 'obligation' to assist its ailing EU 'partner' may persist long after Grexit, because as we've warned repeatedly, the economic malaise that will almost certainly accompany default and redenomination will create a political and social crisis, the magnitude of which will likely necessitate outside intervention. With that, we'll leave you with the following, again from Bloomberg, citing Gunter Krichbaum:

Lower house of parliament may have to meet during summer recess to vote on measures related to Greece. German lawmakers may need to approve “humanitarian aid” because a Greek default may ignite unrest.

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History in Free Verse

SUBHEAD: We’ll have our moment when the 55-gallon drum full of cement can’t be kicked down the road.

By James Kunstler on 22 June 2015 for Kunstler.com -
(http://kunstler.com/clusterfuck-nation/history-in-free-verse/)


Image above: Man leans on 55 gallon drum filled with cement. Comfrey Jacobs handcuffed himself to a hunter orange 55-gallon barrel filled with concrete, and locked a Yellowstone Park road before more wild bison could be loaded onto trailers destined for slaughter facilities. Photo credit: Deby Dixon/ BFCFrom (http://ecowatch.com/2014/03/11/yellowstone-ends-bison-slaughter-following-blockade/).

History might not rhyme, exactly, but it’s not bad for free verse. Greece is this century’s Serbia — a tiny, picturesque backwater nation blundering haplessly into the center stage of geopolitics. And the European Union is, whaddaya know, Germany in drag, on financial steroids.

Nobody knows what will happen next in the struggle to wring some kind of debt repayment promises out of poor Greece. Without “restructuring” — a virtual national bankruptcy proceeding — there can be no plausible promises of repayment.

Both sides seem to have exhausted their abilities to juke their way out. The European Union and its wing-men at the European Central Bank (ECB) and the International Monetary Fund (IMF) can only pretend to kick that fabled can down the road because it has turned into a cement-filled 55-gallon drum. The Greek government can only pretend to further dismantle its civil service and pension systems lest angry citizens toss it out and replace it with a new government, perhaps an ugly and pugnacious one made up of Golden Dawn party Nazis.


In the background, Spain, Portugal, Italy, Ireland, and perhaps even France wait without peeping to see if Greece is allowed to restructure, because you can be sure they will demand the same privilege to debt relief.

But that’s hardly possible because the ECB has been engineering a shift of debt-holding away from the big corporate banks  — which made all the stupid loans — to the taxpayers of their member states, especially Germany, which stands to be the biggest bag-holder when a contagion of serial default seeps across the continent.

This implies, of course, that along the way to that outcome something sickening happens to the price of all the bonds that the debt is embodied in. Namely, its value craters for the simple reason that the threat of non-payment makes interest rates shoot up to reflect the actualization of risk.

That would certainly set off the booby-trap of derivative interest rate swaps and credit default swaps that have been laid into history’s greatest financial minefield. Thus, the big banks that were supposedly shielded by the ECB shell game of Hide the Debt Pea Somewhere Else, will blow up in a daisy-chain of unpayable obligations.

The net effect of all that will be the disappearance of nominal wealth — it crosses an event horizon into a black hole never to be seen again. The continent discovers it is a lot poorer than it thought. Fifty years of financial engineering comes to the grief it deserves for promoting the idea that it’s possible to get something for nothing.

The same thing more or less awaits the USA, China, and Japan. For the USA in particular the signs of bankruptcy have been starkly visible for a long time outside the bubble regions of New York, Washington, and San Francisco.

You see it in the amazing decrepitude of the built environment — the cities and towns left for dead, the struggling suburban strip malls tenanted if at all by wig shops and check-cashing operations, the rusted bridges, pot-holed highways, the Third World style train service.

Most sickeningly you see it in a population of formerly earnest, hard-working, basically-educated people with hopes and dreams transformed into a hopeless moiling underclass of tattooed savages dressed in baby clothes devoting their leisure hours (i.e. all their time) to drug-seeking and the erasure of sexual boundaries.

That shocking social and political bankruptcy has, so far, acted as the sinkhole for all America’s financial degeneracy and the entropy it generates. The financial class (the 1 percent who own 40-plus percent of the financialized economy) must think it’s immune to the consequences of its activities, namely racketeering of one kind or another — criminal misconduct and accounting fraud in the service of money-grubbing.

They must truly believe that risk has been offloaded into the ring-fenced concentration camps of capital: the derivatives pools. But risk, like rust, never sleeps and can’t be so easily contained.

The obstreperous claims of debt only die down with the acknowledged disappearance of wealth, as when a bottom-feeding collection agency attempts to collect a few cents on the dollar of a car loan gone bad.

The US Federal Reserve, like the European Central Bank, sits atop a vault of bonds representing a colossal aggregate promise to repay debt that can never be repaid. Their loss of value will come to be seen for what it is: the disappearance of national wealth.

We’ll have our moment, too, when the 55-gallon drum full of cement can’t be kicked down the road another inch. It might come when Europe sets the example for a loss of faith in a system run to crime and rot.


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Greece and Germany agree!

SUBHEAD: They have agreed on the impossibility of making this Euro system work.

By Clive Crook on 21 June 2015 for Bloomberg News -
(http://www.bloombergview.com/articles/2015-06-21/greece-and-germany-agree-the-euro-can-t-work)


Image above: The ruins of the Parthenon temple on the Acropolis in Athens, Greece. Looks like a bank after a run on the currency. From (http://affairstoday.co.uk/greek-archaeological-history-acropolis-parthenon/).

Ahead of Monday's European Union summit, the only thing you can rule out is a happy ending. Whatever happens at the leaders' meeting -- even if a deal of some sort emerges -- the EU has suffered lasting and perhaps irreparable damage.

The available choices run from bad to terrible.

The costs to Greece and to the EU of a default followed by Greece's ejection from the euro system could be huge. But even if the worst doesn't happen, Europe has suffered a total breakdown of trust and goodwill. That can't easily be undone -- and it's a dagger pointed at the heart of the entire project.
Two things, I believe, will strike historians as they look back on this collapse of European solidarity.

The first is that the principals were able to draw such a poisonous dispute out of such an easily solvable problem. The second helps to explain why that was possible: Greece and its partners fell out thanks to a delusion they have in common -- the idea that sharing a currency can leave fiscal sovereignty intact.

On the eve of the summit, the economic distance between Greece and its creditors is small. Differences over fiscal targets have narrowed down to timing -- what happens next year rather than the year after -- and fractions of a percentage point of gross domestic product. There's even tacit agreement that further debt relief will be needed as part of a successor bailout program, though the creditors won't discuss the details until the current program is completed. That's a procedural rather than substantive issue, and it simply shouldn't matter.

The problem is that the creditors don't trust Alexis Tsipras and his Syriza ministers to hit the targets they might sign up to. The creditors don't even trust them to try. They want firm commitments to specific policy changes -- tax increases and new retirement rules to cut pension spending -- that Tsipras has promised not to accept.

Again, the revenue these policies would generate is small in relation to the fiscal adjustment Greece has already achieved and to the forecasting errors involved in all such calculations. It isn't the numbers that separate the two sides. Greece and the creditors are standing on principle, and oddly enough it's essentially the same principle -- that of sovereignty.

Greece has had enough of being dictated to by the rest of the EU. Of course, its government wants debt relief and a milder profile of fiscal adjustment -- and that's justified, because without them the Greek economy will recover too slowly, if at all.

But more than debt relief and softer fiscal targets, Greece wants to be back in charge of its own policy. Its years under the creditors' supervision have been terrible. Being force-fed any more of their medicine is what the country rejected when it voted for Syriza.

The creditors believe in sovereignty just as much. They don't think their taxpayers should be on the hook for Greece's failure to balance its books. They too have a point. The sovereignty Greece demands shouldn't come at others' expense. Responsible sovereign governments recognize a budget constraint: They see there's a limit to how much they can safely borrow. And if they exceed it, they, not their neighbors, suffer the consequences.

What neither side will acknowledge is that monetary union, if it's going to work, has to infringe the sovereignty of creditors and borrowers alike. Without national currencies and interest rates to act as shock absorbers, fiscal flows across borders are necessary to help smooth out economic fluctuations.

This needn't mean a permanent flow of subsidy in one direction; it does mean temporary reversible flows from countries with low unemployment to countries in recession. In the particular case of Greece, it requires from the creditors further patience and fiscal support.

If this is what Germany and other creditors are ruling out when they say they will have no part of a "transfer union," the euro system will be permanently biased toward stagnation.

But the essential quid pro quo is that borrowers must accept limits on their fiscal freedom as well -- or else the consequences of reckless borrowing are borne by other members of the currency area.  There's the deal: To make monetary union work, some limited sacrifice of fiscal sovereignty is necessary on both sides.

The EU's efforts to address this problem with mechanical fiscal rules have failed at every step. Now, by stirring so much mutual contempt, the Greek crisis may have put the solution permanently out of reach. Pooling of fiscal sovereignty -- an expression of political solidarity -- is what both sides in this quarrel have set their faces against, and with steadily mounting fervor.

Greece isn't willing to do what it takes. Nor is Germany. Nor, after four months of being called pillagers and criminals by Tsipras, are the other creditors. Yet don't say they disagree.

All through this crisis, there has been more agreement than meets the eye: They have agreed, it seems to me, on the impossibility of making this system work.

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Greece blew up the debt Death Star

SUBHEAD: The Greek Elites and kleptocrats are terrified of the discipline that leaving the euro will impose.

By Charles Hugh Smith on 1 February 2015 for of Two Minds -
(http://charleshughsmith.blogspot.co.uk/2015/02/greece-just-blew-up-empires-death-star.html)


Image above: Death Star destroyed. From (http://reachingutopia.com/white-house-denies-petition-to-construct-death-star/big-death-star/).

The Greek Elites and kleptocrats are terrified of the discipline that leaving the euro will impose, but the general public should welcome the transition to an economy and society that has been freed from the shackles of Imperial debt and the kleptocracy that has bled the nation dry.

Although the financial media is blathering about negotiations and gamesmanship, the truth is Greece just blew up the Empire's Death Star of debt. There's nothing left to negotiate except the official admission that the Imperial Death Star of debt, the most fearsome threat in the galaxy, has been blown to smithereens.

There are three fundamental points that need to be emphasized, mostly because they've been lost in handwringing, fearmongering and the ceaseless chatter of propaganda shills.

ONE:
Impaired debt and defaults result from imprudent underwriting and lender incompetence/ greed. Since when did it become accepted policy to reward imprudent lending, incompetence and greed?

Classical Capitalism is very clear on what should happen to lenders who ignored risk management; they get destroyed. As imprudently issued loans default, the losses pile up and the lender become insolvent. At that point, Capitalism kicks in and the management is fired, the stock goes to zero, the lender's assets are auctioned off and the creditors are issued whatever remains after wages, taxes, accounts payable, etc. are paid.

There's nothing complicated about it: Capitalism requires the discipline of losses being taken by those responsible, the firing of incompetents and the destruction of imprudent lenders.

Yet somehow the dominant narrative has reversed this essential core of Capitalism into blaming the borrower for the losses.

Look, if someone offers to loan me a billion dollars with no collateral and no assessment of the risks that I might not be able to pay the interest or principal, then who's the fool? The idiot who wants to give me $1 billion without any risk assessment, or the borrower who takes the "free money" being offered?

Yes, no one should borrow money that they can't pay back, blah blah blah, but the primary fiduciary responsibility is on the lender to not offer loans to marginal borrowers and those at high risk of defaulting on their debts.

Yet the official line on debt is "the lenders are blameless, the borrowers are at fault and should pay." The borrowers were imprudent to take on debt they couldn't service, but it is the lenders who made the bad loans who are ultimately are at fault and who should suck all the losses.

Let's set aside the propaganda for a moment and get real: anyone with the slightest knowledge of Greek finances and the power structure of the Greek economy/society knew it was insanely risky to loan Greece billions of euros. No one can deny this, yet somehow the lenders deserve to be paid for their avarice, stupidity, incompetence and total disregard for the standards of prudent lending? No, they deserve to be destroyed--closed down and their assets auctioned off.

TWO:
Greece will not be wiped out by leaving the euro currency--it will be freed to rebuilt itself with prudent fiscal management and policies that reward investment and penalize risky borrowing, speculation and corruption.

Here's the thing about Greece issuing its own fiat currency--it will force fiscal discipline in a way that the euro did not and could not. This is why the Greek Status Quo is quivering with fear--the gravy train of irresponsibility enabled by the euro is ending, and they are terrified of living within their means and having to face the discipline that the market will impose on the Greek fiat currency.

If there's one thing Greece needs more than anything, it's the discipline and the rewards of the market. Any nation that issues its own fiat currency has a choice: it can exercise fiscal prudence and enforce policies that reward entrepreneurism, prudent lending, savings, wise investments, fair taxation, etc., or it can try to prop up its bloated, corrupt kleptocracy by printing rivers of fiat money.

If it chooses the Dark Side and prints money in excess, it will soon drive the value of that currency to near-zero. The kleptocracy that hoped to benefit from money-printing is impoverished or forced to move their capital elsewhere.

In other words, Greece returning to being responsible for its own currency is a good thing. The new currency will be valued cheaply relative to other currencies at first, and this is also a good thing, as imports will be unaffordable for all but the wealthy (kiss BMW sales in Greece good-bye) and everything produced in Greece becomes a bargain globally.

This will attract capital seeking places where it can make a profit and is treated fairly, and it will enable Greece to rebuild its export sector and boost its substantial tourist trade.

The promise that marginal borrowers would be transformed into sterling-credit borrowers by adopting the euro was always a fantasy--and a painfully visible fantasy at that. Anyone with their eyes even partially open could see that the vast differences in productivity, credit, risk and culture between the eurozone nations made the euro unworkable from the start.

It was equally visible that the eurozone's inept policies and loose lending standards would obscure these fundamental differences until the damage would be too great to hide--which is exactly what transpired.

THREE:
The hundreds of billions of euros in so-called bailouts did not help Greece--all they did was bail out imprudent lenders and Euroland Elites. Virtually none of these vast sums helped the Greek nation or its people; what little did stay in Greece flowed to the kleptocrats that continued to rule Greece.

The harsh reality of misrule and corruption was recently spelled out in Misrule of the Few: How the Oligarchs Ruined Greece:

"Greece has failed to address (rising wealth/income inequality) because the country’s elites have a vested interest in keeping things as they are. Since the early 1990s, a handful of wealthy families -- an oligarchy in all but name -- has dominated Greek politics.

These elites have preserved their positions through control of the media and through old-fashioned favoritism, sharing the spoils of power with the country’s politicians. Greek legislators, in turn, have held on to power by rewarding a small number of professional associations and public-sector unions that support the status quo. Even as European lenders have put the country’s finances under a microscope, this arrangement has held."

Greece just blew up the Death Star of debt, and now the threat has been lifted from other debtor nations suffering from the yoke of Imperial misrule. The Greek Elites and kleptocrats are terrified of the discipline that leaving the euro will impose, but the general public should welcome the transition to an economy and society that has been freed from the shackles of Imperial debt and the kleptocracy that has bled the nation dry.
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Better to throw than catch grenade

SUBHEAD: John Boehner throws then catches his own debt-default political hand grenade.

By Noam Scheiber on 15 October 2013 for the New Republic -
(http://www.newrepublic.com/article/115204/government-shutdown-2013-collapse-boehner-plan-ends-stalemate)


Image above: Detail from WWII combat watercolor by P. Archer. GI throws hand grenade as he faces fire. From (http://snyderstreasures.com/images/artworks/combat/CombatArtThrowGrenadeOA.jpg).

On Monday I wrote that the shutdown/default-threat/Republican extortion plot was essentially over—it was just a matter of Harry Reid and his Republican counterpart, Mitch McConnell, hammering out the final details of a deal whose contours were coming into focus. Once they’d reached a deal, it would pass the Senate with a fair amount of bipartisan support.

After which John Boehner would tearfully bring it to the floor of the House in defiance of the so-called Hastert Rule (requiring a majority of House Republicans to support a bill before it can come to a vote), possibly with some minor face-saving alteration that the Senate signaled it could accept.

Regrettably, I was wrong. As it happens, Reid and McConnell came very close to inking a deal Monday night, but then McConnell suspended their negotiations on Tuesday to give Boehner a chance at passing a bill, which promptly collapsed under the weight of his own ineptitude and your basic garden-variety House Republican lunacy, at which point Reid and McConnell resumed their negotiation over a deal that will soon pass the Senate and force Boehner’s hand. Which is to say, I missed the all-important “let’s briefly pause so Boehner can flail helplessly while the entire world looks on in horror before we officially end this thing” step in the process.

In retrospect, I’m not sure how I overlooked it. That final pathetic lurch is a tradition Boehner inaugurated during the fiscal cliff negotiation last December (recall “Plan B,” which Boehner also chose to euthanize before it came to a vote in the House). There was every reason to believe he’d observe that same sacrament this time around.

But don’t mistake it for anything other than what it was: the final spasm of a still-fresh corpse, the corpse being the GOP’s legitimacy as a political entity, to say nothing of its negotiating position in this particular conflict.

If Boehner had actually had the votes to pass a bill that reopened the government and raised the debt ceiling while enacting a few modest Republican priorities—which is to say, a bill that would have been taken seriously inside Washington and put Democrats in something of a bind—he would have done it days ago, in time to give himself some actual leverage.

As Boehner told his caucus, you’d “rather throw a grenade than catch a grenade.” But he didn’t have the votes. With his conservative members still lingering in a different dimension, and their peasant army of activists and moneymen declaring anything short of death to Obamacare a capitulation, it was utterly hopeless. Boehner, as is his wont, simply unpinned a grenade he knew he didn’t have the arm-strength to throw.

In the end, I’m rather relieved that this all happened Tuesday—still relatively early in the process as these things go. A few savvy congressional reporters lamented that we’d lost an entire day while Boehner took a final lap around the mental institution he runs, possibly pushing the resolution of the showdown beyond Thursday.

But if you size up the situation from a bit of a distance, you see that Boehner’s final farcical move almost certainly sped things up. Given that the House GOP almost always lurches away from the eventual solution at least once before swallowing its pride and allowing it to pass, far better to get it out of their system Tuesday rather than waiting till Thursday night, with only a few hours to go before D-Day.

Better yet, the fact that it happened before Reid and McConnell had finished their negotiation—with McConnell having suspended the negotiation to give Boehner a chance to embarrass himself further—strengthens Reid’s hand at the margin and allows him to strike a slightly more favorable deal.

All of which is to say, it’s hard not to be encouraged by this latest development. Boehner’s pathetically weak hand was always going to be exposed. On Tuesday, he did us the courtesy of completely exposing it before the last possible moment. I, for one, think we owe the House speaker a (tiny) measure of thanks.


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Default has already begun

SUBHEAD: The House GOP has already managed to inflict significant, lasting damage to the US and the global economy.

By Felix Salmon on 14 October 2013 for Reuters -
(http://blogs.reuters.com/felix-salmon/2013/10/14/the-default-has-already-begun/)


Image above: House Speaker John Boehner today in Washington DC.

The big question in Washington this week is whether, in the words of the NYT, we’re going to see “a legislative failure and an economic catastrophe that could ripple through financial markets, foreign capitals, corporate boardrooms, state budget offices and the bank accounts of everyday investors”. In this conception — and I have subscribed to it just as much as anybody else — the sequester is bad, the shutdown is worse, and the default associated with hitting the debt ceiling is so catastrophic as to be unthinkable.

This frame is a useful one, not least for the politicians in Washington, who seem to have become inured to the suffering caused by the shutdown, and downright blasé about the negative consequences of the sequester. Both of them could last more or less indefinitely were it not for the debt ceiling, which is helpfully providing a hard-and-fast deadline: Congress is going to have to come up with a deal before the ceiling is reached, because the alternative is, well, the zombie apocalypse.

There’s more than a little truth here: I’m a firm believer, for instance, that the president both can and should prioritize debt repayments in the event that the debt ceiling is reached. If we’re going to be so stupid as to hit the ceiling, then prioritizing debt service is the least-worst outcome.

But at the same time, the situation is less binary than it looks, not least because the US government is already in default on its obligations.

The best way to look at this, I think, is that there’s a spectrum of default severities. At one end, you have the outright repudiation of sovereign debt, a la Ecuador in 2008; at the other end, you have the sequester, which involves telling a large number of government employees that the resources which were promised them will not, in fact, arrive.

Both of them involve the government going back on its promises, but some promises are far more binding, and far more important, than others.

Right now, with the shutdown, we’ve already reached the point at which the government is breaking very important promises indeed: we promised to pay hundreds of thousands of government employees a certain amount on certain dates, in return for their honest work.

We have broken that promise. Indeed, by Treasury’s own definition, it’s reasonable to say that we have already defaulted: surely, by any sensible conception, the salaries of government employees constitute “legal obligations of the US“.

Conversely, if you really do expect zombies to start roaming the streets the minute that the US misses a payment on its Treasury obligations, you’re likely to be disappointed. Yes, the stock market would fall. But the price of Treasury bonds would remain in the general vicinity of par, and it might even go up if Treasury announced that past-due interest would be paid on all debt at a statutory rate of 8% per annum.

Even when it’s Treasury bonds themselves which are the instruments in default, Treasury bonds remain the world’s flight-to-quality trade, and the expected recovery on all defaulted Treasury obligations would be 100 cents on the dollar — or more.

The harm done to the global financial system by a Treasury debt default would not be caused by cash losses to bond investors. If you needed that interest payment, you could always just sell your Treasury bill instead, for an amount extremely close to the total principal and interest due. Rather, the harm done would be a function of the way in which the Treasury market is the risk-free vaseline which greases the entire financial system.

If Treasury payments can’t be trusted entirely, then not only do all risk instruments need to be repriced, but so does the most basic counterparty risk of all. The US government, in one form or another, is a counterparty to every single financial player in the world. Its payments have to be certain, or else the whole house of cards risks collapsing — starting with the multi-trillion-dollar interest-rate derivatives market, and moving rapidly from there.

And here’s the problem: we’re already well past the point at which that certainty has been called into question. Fidelity, for instance, has no US debt coming due in October or early November, and neither does Reich & Tang:

While he doesn’t believe the U.S. will default, Tom Nelson, chief investment officer at Reich & Tang, which oversees $35 billion including $17 billion in money-market funds, said that the firm isn’t holding any U.S. securities that pay interest at the end of October through mid-November because if a default does take place, “we’d be criticized for stepping in front of that train.”

The vaseline, in other words, already has sand in it. The global faith in US institutions has already been undermined. The mechanism by which catastrophe would arise has already been set into motion. And as a result, economic growth in both the US and the rest of the world will be lower than it should be.

Unemployment will be higher. Social unrest will be more destructive. These things aren’t as bad now as they would be if we actually got to a point of payment default. But even a payment default wouldn’t cause mass overnight failures: the catastrophe would be slower and nastier than that, less visible, less spectacular.

We’re not talking the final scene of Fight Club, we’re talking more about another global credit crisis — where “credit” means “trust”, and “trust” means “trust in the US government as the one institution which cannot fail”.

While debt default is undoubtedly the worst of all possible worlds, then, the bonkers level of Washington dysfunction on display right now is nearly as bad. Every day that goes past is a day where trust and faith in the US government is evaporating — and once it has evaporated, it will never return.

The Republicans in the House have already managed to inflict significant, lasting damage to the US and the global economy — even if they were to pass a completely clean bill tomorrow morning, which they won’t. The default has already started, and is already causing real harm. The only question is how much worse it’s going to get.
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Creepily Close

SUBHEAD: We can play all the games we want with money. And then the moment will come when we can’t.

By James Kunstler on 14 October 2013 for Kunstler.com -
(http://kunstler.com/clusterfuck-nation/creepily-close/)


Image above: Cartoon of fiscal cliff negotiations by Rick McKee, for Augusta Chronicle on 12/412.  From (http://www.caglecartoons.com/viewimage.asp?ID={7422AC15-B571-4CEE-8FE2-CFF42D78F82E}).

Things that can’t go on, the prophet Herb Stein once observed, go on until they can’t. Criticality eventually bushwhacks credulity. The aggregation of rackets that American life has become is rolling over like a great groaning wounded leviathan and the rest of the world is starting to freak out at the spectacle. Instead of a revolution, we’re having a suicide party.

But don’t worry, a revolution would not be far behind. My guess is that it would kick off as generational rather than regional or factional, but it would eventually incorporate all three. A generation already swindled by the college loan racket must be chafing at the bureaucratic nightmare that ObamaCare instantly turned into at its roll-out, with a website that wouldn’t let anyone log in. 

Isn’t technology wonderful? I wonder when the “magic moment” will come when all those unemployed millennials join a Twitter injunction to just stop paying back their loans. If that particular message went out during this month’s government food fight, it would do more than just get the attention of a few politicians. It would crash the banks and snap the links in every chain of obligation holding the fiasco of globalism together.

So far, the millennials have shown about as much political inclination as so many sowbugs under a rotten log, but it is in the nature of criticality that things change real fast. In any case, the older generations have completely disgraced themselves and it is only a question of how cruelly history will treat them in their unseating. 

The last time things got this bad, the guys in charge divided into two teams with blue and gray uniforms, rode gallantly onto the first fields of battle thinking it was a kind of rousing military theatrical, only to find themselves in a grinding four-year industrial-scale slaughter in which it was not uncommon for 20,000 young men to get shot to pieces in a single day — one day after another.

Of course, things are a bit different now since we became a nation of overfed clowns dedicated to getting something for nothing, but despite the abject futility of American life in its current incarnation, there is room for plenty of violence and destruction. The sad and peculiar angle of the current struggle is that both sides in government wish heartily to keep all the rackets of daily life going — they just disagree on the distribution method of the vig.

What amuses me at the moment is the behavior of the various financial markets and the cockamamie stories circulating to explain what they are doing in this time of perilous uncertainty. One popular story is called “the energy renaissance.” This is a fairy-tale that pretends that we have enough oil at a cheap enough price to keep driving to WalMart forever. 

Of course, shale oil wells that cost $12million to drill and produce 80 barrels-a-day for three years before crapping out altogether do not bode well for that outcome, but the wish to believe over-rides the reality. Another laughable story du jour is “the manufacturing renaissance.” This story proposes that the “central corridor” of the USA, from North Dakota to Texas, is about to give China a run for its money in manufacturing. 

The catch is that any new factory opening up in this scenario will be run on robots — leaving who, exactly, to be the customers paying for what these factories produce? Think about it for five minutes and you will understand that it is just a story calculated to goose up a share price here and there, and only for moment until it is discovered to be just a story. What interests me most is what happens when the stories lose their power to levitate the legitimacy of the people who tell them.

Well, Christine LeGarde, chief of the IMF, tried to read the riot act to the American clownigarchs over the weekend, but they’re not paying attention to her. What has she done for her own country, France, lately anyhow. They’ve got their own set of rackets running over there. 

The Chinese are getting a little prickly, too, since they are sitting on a few trillion in US promises to pay cash money in the not so distant future. The Chinese are beginning to apprehend that future perhaps never arriving.

In case you haven’t heard: America is “in recovery.” We can play all the games we want with money, or what passes for money these days. And then the moment will come when we can’t. That moment begins to feel creepily close.

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Shutdown and Default

SUBHEAD: We can’t prevent some unfortunate results of processes that humanity set in motion decades ago.

By Richard Heinberg on 10 October 2013 for Resilience.org-
(http://www.resilience.org/stories/2013-10-10/shutdown-and-default-the-worst-case-scenario)


The Lincoln Memorial closed during the United States federal government shutdown of 2013. (From: Flickr user reivax via Wikimedia Commons).

I’m not saying the worst is going to happen. But if it does, matters could get depressingly bad, disturbingly fast.

 

How bad? Start with Treasury Secretary Jack Lew’s estimate of the potential damage from a failure by Congress to increase the nation’s borrowing limit. On Sunday morning’s TV talk shows, he pointed out that credit markets could freeze, the value of the dollar could plummet, and US interest rates could skyrocket. Think 2008 all over again. [http://www.csmonitor.com/USA/DC-Decoder/2013/1006/Congress-playing-with-fire-on-debt-limit-warns-Treasury-Secretary-Jack-Lew-video]

But it’s actually much worse than that. Almost nobody in the commentariat mentions that the US economy is currently being held together by deficit spending and quantitative easing. Rapid economic growth as experienced during the mid-20th century is over and done with. [www.ted.com/talks/robert_gordon_the_death_of_innovation_the_end_of_growth.html]

However, our financial system is set up to require constant growth. This is a serious problem, and the only solution anybody has come up with so far is for the Federal government and the Federal Reserve to purchase a few more years of ersatz growth with borrowed money.

Financial markets would crash without a constant injection of quantitative easing (QE), and Main Street would wither without monthly deficit-funded infusions from Washington. Absent ongoing stimulus (which is admittedly not a permanent solution), we would be hurtled back to the deflationary hell of five years ago. It’s hard to see how a US government debt default could fail to get us there.

That’s just the potential economic fallout from default. The possible political consequences are almost as unfathomable. According to Jonathan Chait, writing in New York Magazine, the current Democrat-Republican impasse is actually a foreseeable, if not inevitable, outgrowth of the American political system, with its division of power between a separately elected President and Congress. [http://nymag.com/news/politics/nationalinterest/government-shutdown-2013-10/]

Chait cites the opinion of the late Spanish political scientist Juan Linz that “All such systems are based on dual democratic legitimacy: No democratic principle exists to resolve disputes between the executive and the legislature about which of the two actually represents the will of the people.” The current standoff, in which both sides believe they have an enormous amount to lose by compromising, could—again, in the worst instance—come to represent the most serous constitutional crisis since the Civil War.

There are also looming geopolitical repercussions. If the United States defaults, other nations may ditch the US dollar as reserve currency. That would have serious ongoing consequences for the American economy, but it would also reduce the nation’s international political clout. Last week, President Obama had to cancel a key Asian trip to deal with the domestic shutdown crisis.

Chinese leader Xi Jinping did show up as scheduled, looking confident and in charge. The US empire has been fraying for the past decade anyway; default could speed that process dramatically.

In the worst case, the United States could emerge from the current political crisis in a way that renders it, only months from now, economically and politically unrecognizable.

Again, none of this is inevitable. Cooler heads may prevail. But the worst-case scenario is hardly far-fetched. Look at the incentives.

Congressional Republicans have boxed themselves into a corner. By taking the nation’s government and economy hostage and making heavy demands, they incur high political risks. They stand to lose power and legitimacy unless they come away from the confrontation with some tangible gain they can trumpet to their base. (Indiana Republican Congressman Marlin Stutzman: “We have to get something out of this. And I don’t know what that even is.” [http://talkingpointsmemo.com/livewire/gop-congressman-says-he-doesn-t-know-what-republicans-want-in-shutdown-fight]) The higher the price the country pays for the standoff, the greater the Republicans’ need for some reason to say it was all worthwhile.

Meanwhile Mr. Obama believes that if he gives in to Congress, a precedent will have been welded into place. Every time the debt ceiling needs to be raised, there will be opportunity for Congress to make further demands. Elections will cease to matter.

Obama probably regrets his negotiations with Congress in a similar standoff in 2011, which resulted in the Sequester. The current dispute is not just about Obamacare. It is about maintaining the scope of presidential power in the face of a congressional effort to dramatically reduce it. Obama’s historic legacy is at stake.

In a better-case scenario, and a more likely one, the standoff is resolved before the nation defaults. The Tea Party’s big-business backers are already yanking its leash. [http://maddowblog.msnbc.com/_news/2013/10/09/20886987-gop-losing-powerful-allies-in-hostage-crises?lite] President Obama has offered House Republicans the possibility of a short-term debt-cap increase and funding of the government to make time for negotiations; while House Speaker Boehner initially rejected this, it is probably the best face-saving measure available.

However, if both sides hold firm and the nation defaults, we’re headed into uncharted territory. And only an understanding of ecology (as well as politics and economics) reveals the true dangers ahead.

Back in the early 1970s a famous computer-assisted study of the physical systems that support economic growth (agriculture, natural resources, and the ability of the environment to absorb pollution) concluded that world industrial output would likely peak and decline in the early 21st century. [http://en.wikipedia.org/wiki/The_Limits_to_Growth] That study, which has been validated by recent research, [www.csiro.au/files/files/plje.pdf] did not consider the roles of financial or political systems.

At first economists scoffed at the idea that economic growth might not continue forever. But today, one by one, economists are beginning to recognize that, as Stephen B. King, chief economist at HSBC wrote in a recent New York Times op-ed, “We are reaching end times for Western affluence.” [www.nytimes.com/2013/10/07/opinion/when-wealth-disappears.html?pagewanted=1&_r=0]

In 2008 it became clear that, as limits to growth are encountered, the inherent instability of financial systems can precipitate a much faster crash than would otherwise be the case. It also became clear that governments and central banks will undertake extraordinary measures to avert a fast-crash scenario.

The rapid expansion of household debt, which had kept the growth balloon inflated since 1980, effectively ceased with the advent of the Great Recession. The balance sheet of the Fed stretched dramatically, and the Federal Government’s debt levels soared, as policy makers strove to keep the economy from imploding.

But government debt quickly became a political hot potato, and that helped lead us to the present impasse.

In 2013 we are learning that the US political system is rigged in such a way that backstops against a fast financial crash may fail.

Some aspects of our 21st century dilemma are inevitable: you can’t run an ever-growing economy on non-renewable resources without eventually facing symptoms of depletion and scarcity (e.g., high oil prices). Some aspects are slowly cumulative, like the buildup of greenhouse gases in Earth’s atmosphere and the consequences for ecosystems that support life on our planet.

But we also face looming crises brought on by the design of our political institutions, and by the personalities and tactics of specific leaders. One would hope that these latter crises could be more easily averted than those tied to the very sinews of our industrial way of life.

We can’t prevent some unfortunate results of processes that humanity set in motion decades ago: we’re already committed to a certain amount of climate change, given past greenhouse gas emissions; we’ve already unleashed a mass extinction event and made a wasteland of the oceans. But we can avoid the worst-case scenario. Here’s what to do:

Release the hostages. Pass a new debt limit and re-open the government, no conditions attached. Then get to work designing a post-growth, post-fossil fuel economy that protects people and planet. Do it in that order. Simple. Go to it. Hello, Washington, anybody listening?

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Do the Corporatists want us to fail?

SUBHEAD: Wall Street and the Fortune 100 are not screaming about impending catastrophe of U.S. Default.

By Curtis Ellis 8 October 2013 for Huffington Post -
(http://www.huffingtonpost.com/curtis-ellis/do-the-corporatists-want-_b_4054104.html)


Image above: Illustration of corporatism by LibertyManiacs. From (http://libertymaniacs.deviantart.com/art/Corporatism-213145097).

The fiscal chaos mounts and the usual suspects over at the U.S. Chamber of Commerce seem unable to work their will on a Congress driving toward the cliff with its foot on the gas.

Simon Johnson, former chief economist of the International Monetary Fund, wonders why business leaders are silent about what he sees as a catastrophic situation that threatens America's pre-eminence in the world.

He wrings his hands over shattering the debt ceiling.

At some point in mid-October -- on the 17, according to the latest estimates -- the Treasury will reach the legal limit on its ability to borrow. If Congress refuses to increase the legal limit on the amount of debt outstanding, the Treasury will be unable to pay its bills. Precisely how this would play out is subject to some debate, but there is no question that it would involve a great deal of uncertainty, in the best case, or a catastrophic default that can safely be regarded as the worst case.

Johnson is flummoxed why Wall Street and the captains of the Fortune 100 are not screaming about impending catastrophe at the top of their lungs.

The silence of much of the business and financial elite on the debt ceiling -- as well as on the sequester and the government shutdown -- is somewhat shocking. This is a group that is usually quite vocal in promoting its self-interest. It benefited greatly from the expansion of the global economy after 1945, and that shifting perception of what business needs was part of the pressure that encouraged the Republican Party to become much more international in its orientation.

But Johnson misses the key question: does the globalist corporate elite really need the United States of America anymore?

The answer seems to be "no" - or more accurately, "Hell no!"

The corporatists at the misleadlingly named U.S. Chamber of Commerce (it's really the Multinational Chamber of Commerce), the Business Roundtable, Goldman Sachs and the rest of the Wall Street and boardroom cronies have been leading the charge to render the United States moot through the TransPacific Partnership and the TransAtlantic Partnership.

These deals, which they are assiduously crafting behind closed doors, would replace elected governments, including our own, with an international authority of the elites, by the elites and for the elites with the power to enforce rules protecting corporatist interests the world over, national laws be damned.

Ralph Gomory has long said the interests of American-in-name-only multinational corporations have diverged from the interests of the United States. While discussing the current government dysfunction, the Washington Post's Wonkblog spelled out the terms of the divorce [emphasis added]:

Few of America's biggest businesses are purely American anymore, having taken full advantage of free trade and lower labor costs around the world. That has two effects. First, since they've off-shored or automated much of their workforces, it's harder to tell a legislator that Washington dysfunction is hurting jobs in their district. And second, their stake in America isn't as large as it used to be: If business conditions deteriorate at home, they can invest more heavily in Brazil or China instead.

Fiscal chaos that undermines the United States actually serves the interests of corporatists who care little for our representative government (or anyone else's). This crowd is happy to clip the wings of an American eagle that stands in the way of their global hegemony.

Washington burns and the silence of business leaders is the dog that didn't bark.
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