Friday, December 30, 2011

America’s Financial Leviathan

"In 1950, finance and insurance in the United States accounted for 2.8% of GDP, according to US Department of Commerce estimates. By 1960, that share had grown to 3.8% of GDP, and reached 6% of GDP in 1990. Today, it is 8.4% of GDP, and it is not shrinking. The Wall Street Journal’s Justin Lahart reports that the 2010 share was higher than the previous peak share in 2006.
Lahart goes on to say that growth in the finance-and-insurance share of the economy has “not, by and large, been a bad thing....Deploying capital to the places where it can be best used helps the economy grow...”
But if the US were getting good value from the extra 5.6% of GDP that it is now spending on finance and insurance – the extra $750 billion diverted annually from paying people who make directly useful goods and provide directly useful services – it would be obvious in the statistics. At a typical 5% annual real interest rate for risky cash flows, diverting that large a share of resources away from goods and services directly useful this year is a good bargain only if it boosts overall annual economic growth by 0.3% – or 6% per 25-year generation.
There have been many shocks to the US economy over the past couple of generations, and many factors have added to or subtracted from economic growth. But it is not obvious that the US economy today would be 6% less productive if it had had the finance-insurance system of 1950 rather than the one that prevailed during the past 20 years.
There are five ways that an economy gains from a well-functioning finance-insurance system. First, people are no longer as vulnerable to the effects of fires, floods, medical disasters, unemployment, business collapses, sectoral shifts, and so forth, because a well-working finance-insurance system diversifies and thus dissipates some risks, and deals with others by matching those who fear risk with those who can comfortably bear it. While it might be true that America’s current finance-insurance system better distributes risk in some sense, it is hard to see how that could be the case, given the experience of investors in equities and housing over the past two decades..."


French Unemployment Hits 12-Year High (It's Going to Get Much Worse); Sarkozy Outlines Jobs Plan (Mathematically It Can't Work); Olli Rehn to Give Keynote Speech at Eurobond Seminar

"The EU Observer reports France to hold jobs summit as unemployment hits 12-year high
A sharp rise in France's unemployment figures is putting pressure on President Nicolas Sarkozy to deliver, with over half the French population wanting the candidates for the spring presidential election to focus their energies on maintaining jobs.

Figures released by the labour ministry this week show that the number of those unemployed hit 2.85 million in November, a 12-year high and the seventh consecutive monthly increase.

The numbers have sparked a debate in France about the nature and future of employment with Sarkozy convening a jobs summit on 18 January..."


Guest Post: New Asian Union Means The Fall Of The Dollar

"One of the most frustrating issues to haunt the halls of alternative economic analysis is the threat of misrepresentative terminology. For instance, when the U.S. government decided to back the private Federal Reserve in lowering the interest rates on lending windows to European banks last month, they did not call this a bailout, even though that’s exactly what it was. They did not call it quantitative easing, or fiat printing, or a hyperinflationary landmine; rarely does bureaucracy ever apply honest terminology to their subversive activities. False terminology is the bane of every honest analyst, because in order for them to educate and awaken those who are unaware of the truth, they must first battle through the daunting muck of the general public’s horrifically improper perceptions and vocabulary.

The chain of financial events taking place over the past decade in Asia have been correspondingly mislabeled and misunderstood. What some economists see as total collapse is actually a new and decidedly prophetic (or engineered) transition. What some naively see as the “natural” progression of globalism, is actually a distinctly deliberate program of centralization meant to further the goals of world economic and political totalitarianism. Asia, and most especially China, is a Petri dish for elitist psychopaths. What we see as suffocating collectivism in this region of the world today is the exact social schematic intended for the West tomorrow. Call it whatever you will, but on the other side of the Pacific, like the eerie smile of a sinister clown, sits fabricated fate..."


The Number One Catastrophic Event That Americans Worry About: Economic Collapse

"In the new survey mentioned above, those contacted were asked to select the top three potential catastrophes that worry them the most.

The following results come directly from the survey....

Economic Collapse: 63%
Natural Disaster: 46%
Terrorist Attack: 44%
Global Disease Outbreak: 33%
Global War: 27%
Nuclear Accident: 25%
Global Warming: 22%
Fuel Shortage: 15%
Cyber War: 8%
Famine: 8%
Oil Spill: 6%
Industrial Accident: 5%..."


Wednesday, December 28, 2011

Why Is The Term “Financial Repression” Being Sold?

"Over the past few months, the concept of “Financial Repression” has come into the lexicon and is increasingly used to describe a possible set of government strategies that constrains the financial sector. Economists Carmen M. Reinhart and M. Belen Sbrancia reintroduced it with this paper, explaining that the public debts accrued during the financial crisis might be reduced through such strategies.
Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial repression.” Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historic standards).
In other words, financial repression means doing things rentiers hate, like preventing them from moving their capital anywhere in the world at a moment’s notice, stopping them from engaging in predatory lending and usury, directing investment to national priorities (like public investment, war, health care and education, a safety net, etc), and regulating banks so they don’t become casinos. Keynes called the process of reducing the return on capital “the euthenasia of the rentier and consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.”


Treasury Sees U.S. Debt Near Limit By End Of Friday

"The U.S. debt will come within $100 billion of its ceiling on Friday, and the Treasury Department anticipates the Obama administration will begin steps to seek a $1.2 trillion increase in the limit.
A senior Treasury official on Tuesday told reporters the administration will need to let Congress know when the debt gets within $100 billion of the ceiling, expected to happen by the close of business Friday. Currently, the debt limit is $15.194 trillion, and it would be $16.394 trillion after an increase...."



"Just when you thought you have read the most negative articles and predictions possible, you stumble across a whole other level of negativity. James Petras, a Bartle Professor (Emeritus) of Sociology at Binghamton University, New York, just released a piece called the “Doomsday View of 2012“.
He kicks it off with feel good Christmas Eve spirit:
The economic, political and social outlook for 2012 is profoundly negative. The almost universal consensus, even among mainstream orthodox economists is pessimistic regarding the world economy. Though even here their predictions understate the scope and depth of the crises.
And the highlights of the events to come in 2012:
  • The Collapse of the European Union
  • The US: The Recession Returns with a Vengeance..."

Japan Industrial Production Declines 2.6%, 3rd Quarter Capital Spending Drops 9.8%, Corporate Sentiment Drops to Minus 4; Powder Keg Waiting for a Spark

"A torrent of bad news hit Japan in November. Please consider some details from the Bloomberg article Japan Factory Output Falls on Global Slump

  • Factory output fell 2.6 percent from October
  • Exports fell for the second straight month
  • Capital spending in the third quarter dropped 9.8 percent
  • The Bank of Japan Tankan quarterly index of corporate sentiment fell to minus 4 this month. A negative figure indicates that pessimists outnumber optimists..."

European Bank-to-Bank Lending Mistrust Hits Second Consecutive High; ECB's LTRO Won't Stop Collateral Contagion

"Bond action in the Eurozone has modestly picked up (yields steady or falling) since the ECB's 3-Year LTRO program - Long Term Refinance Operation. However, European banks still do not trust each other, not even for overnight lending.

Instead, banks park all available funds with the ECB, as noted by the Wall Street Journal in Deposits at ECB Hit Record High..."


"It's a Mistake To Pursue a United States of Europe" says German Supreme Court Justice in Spiegel Interview ; Interpretation of Interview from Saxo Bank Chief Economist

"Those looking for a reason for a sinking Euro and falling stock markets today just may find the answer in a Spiegel Interview with German Constitutional Court Judge Udo Di Fabio who says "It's a Mistake To Pursue a United States of Europe"..."


Update On The "Non-Printing" ECB's Parabolically Rising Balance Sheet

"While the surge in the ECB's balance sheet has been discussed to death on these pages, with a particular emphasis on what we believe the key correlation driver-cum-pissing contest of 2012 will be - namely the relative size of the ECB vs Fed balance sheets - it is often best to see things for oneself. Such as the fact that the balance sheet of the European Central Bank, which has been accused of not printing, has grown at the fastest non-pre apocalypse pace in history for a modern central bank (the only exception is the Fed, whose balance sheet grew from under $1 trillion to over $2.2 trillion in the aftermath of the money market collapse in about a month), increasing by EUR800 billion, or over $1 trillion, in six months, to E2.73 trillion (obviously an all time record). Annualized this is an increase of over $2 trillion or more than the Fed did in all of QE1. So, just what happens next year when the banks box Draghi in a corner and the Goldmanite decides to actually... print. Perhaps this is a question, as before, left best to our German readers, who unlike their detached from reality peers in the US, know that hyperinflation is and can be all too real."


Former Fed VP Accuses Bernanke Of Bailing Out Europe Via Currency Swaps

"First it was Zero Hedge. Then Ron Paul joined in. Now it is the turn of a former Dallas Fed Vice President, Gerald ODriscoll, to outright accuse the Fed of bailing out Europe courtesy of "incomprehensible" currency swaps, and implicitly accusing Bernanke of lying that he would not bail out Europe even as he has done precisely that. And not only that: by cutting the USD swap spread from OIS+100 to OIS+50, the Fed has made sure it gets paid less than ever for extended Europe the courtesy of bailing it out all over again. Incidentally, O'Driscoll says, "America's central bank, the Federal Reserve, is engaged in a bailout of
European banks. Surprisingly, its operation is largely unnoticed here.
" One thing we can say proudly - it has been noticed loud and clear here...

From the WSJ:

The Federal Reserve's Covert Bailout of Europe

When is a loan between central banks not a loan? When it is a dollars-for-euros currency swap.

America's central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here..."


Currency Wars Update

"Yesterday, the fine folks of Tradition Analytics were kind enough to explain (once again) just how it is that the Fed has boxed itself into a corner, where in order to maintain the already outlierish growth rate of monetary supply, the Fed will have no choice but to print (same with the ECB), or else risk a massive economic collapse (thank you Austrian theory). Today, the same group provides an update on what everyone knows has been the status quo's only way of dealing with the deleveraging tsunami since March 18, 2009: currency warfare. In the note below, they provide a recap of the recent history of FX warfare, as well as an update of where we stand currently. Keep in mind, currency warfare only works to a point. Then it escalates into other, more violent forms, first trade wars, then real ones..."


J.P.Morgan Chief Economist Tells Lies to Help His Firm and Harm Ron Paul

"Michael Feroli, chief U.S. economist at JPMorgan Chase (, stated that Ron Paul’s idea of returning to the gold standard would result in the exact opposite of what, in reality, it would result in. He implies that under a gold standard, financial markets would be volatile and would be based on manipulation of the money supply by gold producers.
In reality, asset prices on a gold standard could never rise over the long term—they could only fall. They would also be very calm, as there would not be new, fake money sloshing around. Indeed, prior to the Fed’s creation in 1913, most financial markets were very calm, even boring. Commodities in particular spiked stongly—periodically—in parallel to the bursts of money printing, and then fell again upon the subsequent monetary contraction. But all asset (and consumer) prices at the end of the 1800s were the same as the beginning of the 1800s, oil included. Indeed, if the banks had been restrained by a free market from creating monetary booms, commodity prices would also not have boomed. Equities and oil in particular were basically flat-lined.
In contrast, these days, with banks being able to print unlimited quantities of money, asset prices are very volatile and continue to rise. Feroli alludes to the OPEC cartel controlling oil prices (which they don’t). But the banks are in fact a cartel that controls—indirectly—ALL asset prices, including oil. Still, Feroli says that if the free market and gold producers supplied our money, prices would be high and volatile. In other words, what Feroli says would be the case under a gold standard would not be. It’s the case currently because Feroli’s industry is in charge of creating money instead of the free market. And, it’s absurd to think that scores of producers could control the supply of money—especially any more than the monopoly central bank does today!
Feroli knows better. He knows the real story. He lied in order to help is bank, his industry, and himself..."


Monday, December 26, 2011

The Real Negative Real Shock

"Are all the problems in the U.S. economy nominal? Robert Gordon implicitly says no in a new paper on the long-run outlook for U.S. productivity (hat tip Reihan Salam). He makes the case that rapid productivity gains from 1995-2005 will not persist going forward:..."



"President Obama’s 2012 Intrade reelection odds now stand at about 52%, roughly a 2% increase in the last few days. What has changed to make the “crowds” assign a higher probability to this event? The payroll tax situation remains unsolved (or at least only temporarily resolved), the deficit issue still looms large, and the Republican candidates still have the same issues they had a week ago. The one thing that did change however is that we’ve had a stock market rally. Is there a relationship?
The charts below show that day-to-day the relationship may not be strong, but the similarity in trends is unmistakable. This is a six-month chart that takes us through the worst of the crisis (the Intrade contract wasn’t very actively traded prior to that). The two track well during earlier period as well, except when Osama bin Laden was killed, the President’s reelection chances spiked for a short time. The market went up too, but not nearly as much.
The top chart is the Intrade probability of Obama becoming president for the second term, while the bottom chart shows the S&P500 index.

Obama reelection probability vs. the S&P500
This is by no means a proof of causality, but the relationship may indicate that whatever factors drive the equity markets may be the same factors that benefit an incumbent president. Once again we may have an indication that politics and the economy are even more inseparable than we imagined."



"History may not be on the side of those calling for recession currently. According to recent data from Deutsche Bank the current expansion is still on the shorter end of the historical average length.
Since 1854 the average expansion has lasted 40 months. Since the great depression the average expansion has lasted 58 months. The last 7 expansion, however, have lasted almost 70 months on average. At month 27 the current expansion would be short by historical standards. Of course, if you’re following my balance sheet recession theory this is a relatively moot point, but if we’re going to following the standard NBER data points on recessions then this casts doubt on the odds of a technical recession occurring in the coming 12 months..."


Japan Seeks to Market Record 145 Trillion Yen Bonds in 2012; Kicking the Can Japanese Style

"Japan, the country with the highest debt-to-GDP ratio in the G7 to Sell Record 149.7 Trillion Yen Debt in Fiscal 2012
Japan’s government said it will increase bond sales to the market to a record 149.7 trillion yen ($1.9 trillion) in the fiscal year starting April 1.

The amount for investors such as banks and life insurers is 4.8 trillion yen more than 144.9 trillion yen in the initial plan for fiscal 2011. Total debt issuance, including securities to replace maturing debt and so-called zaito bonds sold for government agencies, will increase by 4.6 trillion yen to a record 174.2 trillion yen..."

Japan Will Raise More Cash From Debt Issuance Than Taxes For Fourth Year In A Row

"While the world is watching Europe and the US for signs of imminent decoupling, and now has added China to its insolvency focus list, things in Japan, which is "fine" courtesy of a self-destruct autopilot, are just getting plain ridiculous. As we reported earlier this year, Japan's marketable public debt, already the largest in the world at $11.2 trillion compared to America's $10 trillion (of course this assumes the whole SSN sleight of hand is funded, which it isn't), is due to surpass ¥1 quadrillion any month now (aka the exponential phase). And that's just the beginning. As Bloomberg reports, "Bond sales to the market will climb to a record 149.7 trillion yen ($1.9 trillion), while the national budget’s reliance on debt for funding will rise to an unprecedented 49 percent in the year starting April 1, Japan’s government said Dec. 24. The government said it plans to sell 44.2 trillion yen of new bonds to fund 90.3 trillion yen of spending in next fiscal year’s budget. It estimates that tax revenue will total 42.3 trillion yen in fiscal 2012, meaning that new bond sales will exceed tax revenue for a fourth year." In other words, in a world increasingly disconnected form any sort of reality, very soon no taxes at all will be needed: after all each and every government (or uber-union in teh EU's case, once the imploding Eurozone turns to the final Deus Ex - a fiscal protectorate issuing joining Eurobonds) will simply fund all its cash needs by printing its own money. Naturally, anyone daring to suggest that this is beyond idiotic will be given an MMT 101 manual and/or incarcerated for grand treason. And any last voices of sanity will be promptly muted: "I think the reliance on bonds to compile budgets is reaching its limit,” Japanese Finance Minister Jun Azumi said Dec. 24, after the announcement of the budget plan..."


Guest Post: The Nightmare After Christmas

"The pathetic state of the global financial system was again on display this week. Stocks around the world go up when a major central bank pumps money into the financial system. They go down when the flow of money slows and when the intoxicating influence of the latest money injection wears off. Can anybody really take this seriously?

On Tuesday, the prospect of another gigantic cash infusion from the ECB’s printing press into Europe’s banking sector, which is in large part terminally ill but institutionally protected from dying, was enough to trigger the established Pavlovian reflexes among portfolio managers and traders.

None of this has anything to do with capitalism properly understood. None of this has anything to do with efficient capital allocation, with channelling savings into productive capital, or with evaluating entrepreneurship and rewarding innovation. This is the make-believe, get-rich-quick (or, increasingly, pretend-you-are-still-rich) world of state-managed fiat-money-socialism. The free market is dead. We just pretend it is still alive.

There are, of course those who are still under the illusion that this can go on forever. Or even that what we need is some shock-and-awe Über-money injection that will finally put an end to all that unhelpful worrying about excessive debt levels and overstretched balance sheets. Let’s print ourselves a merry little recovery..."


Sunday, December 25, 2011

Why Buy Gold Now, Forecast $4,500

"...Both the US and EU have made it abundantly clear that they have no intention of implementing an intelligent coherent plan. Instead they will print because it's the easiest thing for them to do, in droplets at first and then in torrents. That will destroy both the dollar and the Euro and it will ultimately drive gold higher than anyone anticipated just a couple of years ago. What's more the general public has yet to dip their toe into the gold bull market, but they will as they search for shelter from the storm. That phase of the bull market will drive gold to a minimum of US $4,500/ounce with relatively few interruptions along the way..."


The Banking Oligopoly

"Market share among U.S. banks
Top 3 Banks = 44%
Top 20 Banks = 92%
All Banks = 100%"


Saturday, December 24, 2011

US missiles 'hit Iranian village'

"Two American missiles struck a village in south-west Iran early today.
The news was given in a report by the country's Islamic Republic News Agency (IRNA).
IRNA had said yesterday that three people were injured when an earlier US missile struck an oil depot in Abadan.
The state-run news agency also said British and American jets had entered Iranian airspace several times.
The two rockets hit Manyuhi village near the border with Iraq's Al-Faw Peninsula, an Iranian military commander told IRNA.
He gave no details of casualties or damage.
"In the border city of Arvand-Kenar, the invading American and British airplanes violated the airspace of the Islamic Republic of Iran three times," the commander said.
"In two cases, two rockets... hit the Manyuhi village."
The governor of Abadan told IRNA that three people, including a guard at the oil depot, had been released from hospital after receiving treatment.
Iran has strongly condemned the US-led military assault on Iraq."


Spanish Implosion Coming Up; Deficit Up, Receipts Down, a Need to Cut 40 Billion in Expenses from 90 Billion; Spain's "Hidden Deficit"

"My friend Bran from Spain sent a pair of articles in Spanish that highlight the impossible situation facing Spain. The links below have a target of Google Translations.

Need to Cut 40 Billion Euros from 90 Billion

Spain needs to cut 40 billion euros from its budget to meet its deficit target for 2012. The problem is there is only 90 billion of expenses to 'play with' according to an article in Libre Mercado: The maze of Montoro: save 40,000 million without "social cuts"..."


ECB Holds Off Bond Purchases, Italian 10-Year Yield Back Over 7 Percent

"The ECB has held off purchasing sovereign debt bonds in Europe the past two weeks and the results were easily predictable. Yield on 10-Year Italian debt is back over 7%..."

Italy 10-Year Government Bond Yield


Summarizing The Global Balance Sheet's Negative Feedback Loop Of Debt

"...According to The Economist, global sovereign debt is forecasted to grow an additional 7% in 2012 reaching a historical high of $47 trillion. Measuring debt against gross domestic product (GDP), the global debt-to-GDP ratio at the end of 2010 reached approximately 80%. While the heaviest balance sheet offenders include troubled European countries like Italy, Greece and Portugal (See Figure 1 below), the United States isn’t far behind with $15 trillion in debt and a debt-to GDP ratio topping 100%. And tipping the scale at over 200% at the end of 2010 was Japan. The result of this rising debt means more government interference, a further slowdown in the already debilitated economic environment and the possibility of further citizen uprisings.

One of the problems with economic crises is that mainstream economists and financial advisors either don’t see them coming or simply won’t admit to them. That’s exactly what happened in the fall of 2008, when the financial crisis kicked off in the United States. Since that time, governments have continued to spend, all while production has slowed and unemployment has skyrocketed. As we enter the fourth year of the post-crisis environment, there is no sign of growth that is impressive enough to get us out of the negative feedback loop in which governments have continued to operate. A negative feedback loop takes hold when massive government debt loads, a weakening financial system and a slowing economy feed off each other, interrupted by Federal Reserve and other central bank reflationary attempts. As shown in the chart below, rising debts become unsustainable and trigger austerity measures designed to reduce spending and/or increase taxes or other revenue sources to try and reduce debt. In significantly depressed economies, the drag continues and a recession or even depression like conditions hit. The more production and employment falter, the more lending contracts, causing further harm to the economy, missed budgets and higher bond yields. The result is a downward spiral of business and financial activity and a banking crisis usually ensues. Under pressure to stimulate the market, the Federal Reserve and other central banks carryout band aid fixes by printing money and governments implement additional austerity measures which starts the vicious cycle of the feedback loop all over again.

Negative Feedback Loop

In the center of the feedback loop is what we call Euphoric Mania. This is when the Federal Reserve and central banks step in to help with their band-aids whether it’s printing money, lowering rates, coordinating central bank action, or expanding the balance sheet by trillions. But, like any high, the lift is temporary and doesn’t take hold. In no time at all, we are back to where we were at the top of the loop, because without sustainable economic growth, the band aids don’t solve the problem.

Roger Nightingale, well-known European economist and strategist at RDN Associates, believes a 2012 global recession is a 65 to 75 percent probability and that further deterioration into a lengthy depression is possible. So what does this mean in terms of a growth outlook? Nightingale offered this forecast:

“The peak rate of growth for the world's economy occurred more than 12 months ago. We are probably going into negative territory around spring of next year; it is not for certain, but that is the most likely scenario… should recession kick in; the global economy might be too weak to generate any GDP growth for years, or even decades. When the downturn ends, and when the upturn begins, will it be powerful enough to take us into some sort of growth again? Or are we going to find ourselves in a protracted depression-type scenario?"

The fix needs to come from a unified front, not just a single country or continent. When we look at the three global pillars of the world economy — the United States, Europe and China — sure, each has its own problems, but each one’s fiscal choices impact the globe as a whole. And really, it’s four pillars when we add the Federal Reserve. We are a four-legged intertwined economic and financial system that relies heavily on each other for banking resources, government debt issuance, investments and exports. The feedback loops are never ending. And when economic growth stalls, debt accumulation increases. Without taking tough, systemic and coordinated economic measures including fiscal consolidation and a commitment by governments to cut rising deficits and reduce what are, in some cases, dangerous levels of national indebtedness, a second crisis may indeed be inevitable. The world is trying to recover from the worst financial crisis in 70-years and is suffering from debts levels not seen in decades and the crisis continues to intensify. And, as the graph below shows, with the exception of Ireland, countries need just as much, if not more, financing to cover debts in 2011 compared to 2010. Nothing has changed.

Read the full analysis (pdf)..."


Iran Begins Straits of Hormuz Wargames

"As was reported yesterday, Iran has now officially commenced its 10 day wargame exercise in the Straits of Hormuz. What happens next is 10 days in which one false move, either planned or false flagged, can have some serious (if required by the status quo) consequences: after all WTI is at $100, and the ECB has quietly "printed" $700 billion in the past 6 months, with the Fed not far behind - there has to be some implicit backstop to keep crude from soaring once it becomes clear that print mode is on, and the only way that can happen is the "possibility" of expanded oil supply through control of the main supply channels. From Reuters: "Iran began 10 days of naval exercises in the Strait of Hormuz on Saturday, raising concern about a possible closure of the world's most strategic oil transit channel in the event of any outbreak of military conflict between Tehran and the West. The military drill, dubbed "Velayat-e 90", comes as the tension between the West and Iran is escalating over the Islamic state's nuclear programme. Iranian authorities have given no indication the strait will be closed during the exercise, and it has not been shut during previous drills. "Displaying Iran's defensive and deterrent power as well as relaying a message of peace and friendship in the Strait of Hormuz and the free waters are the main objectives of the drill," Sayyari said. "It will also display the country's power to control the region as well as testing new missiles, torpedoes and weapons."


Thursday, December 22, 2011

2012 – the year of the double dip

"Festive cheer seems to be in short supply at Capital Economics:
– We don’t have high hopes for 2012. In fact, we continue to think that the UK will re-enter recession. Output could already be contracting and is likely to continue to fall throughout most of next year.
– If any other country will be hit by the eurozone crisis, it is the UK. The chances of net trade offsetting the effects of the fiscal squeeze therefore now look pretty slim.
– And the indirect effects of the euro-zone crisis won’t help the UK’s domestic economy either. Indeed, concerns about UK banks’ exposures to euro-zone debt have already pushed up banks’ wholesale funding costs, a rise which is now starting to feed through into borrowing rates for firms and households..."

Hungary Downgraded to Junk; Expect Defaults on Public and Private Debt, Especially Mortgages

"A few days ago I saw a report that the IMF was breaking off negotiations with Hungary regarding a debt package. I knew what was next: a weakening currency and more downgrades. The downgrades came in spades.

Bloomberg reports Hungary Hit by Second Debt Downgrade to Junk on Orban’s Policies
Hungary lost its investment-grade rating at Standard & Poor’s, the second such downgrade in a month, increasing pressure on Premier Viktor Orban to obtain an International Monetary Fund backstop and reverse policies..."

If A Global Recession Is Not Looming, Then Why Are Bailouts Flying Around As If The End Of The World Is Coming?

"I have learned that watching what people do is much more important than listening to what they say. Back in 2008, financial authorities in the United States insisted that everything was gone to be okay. But we all know now that was a lie. Well, right now financial authorities in the U.S. and Europe are once again trying to assure us that everything is under control and that we are not headed for a global recession. Unfortunately, their actions are telling a very different story. All over the world, bailouts are flying around as if the end of the world is coming. Governments and central banks are stepping in with gigantic mountains of money to prop up bond yields, major banks and even stock markets. What we have seen over the past few months has been absolutely unprecedented. So why are such desperate measures being taken if everything is going to be just fine? Unfortunately, debt problems are never solved with more debt, so these bailouts really aren't solving anything. We are still headed for a massive amount of financial pain. It would just be nice if the authorities would quit lying to us and would actually admit how bad things really are.
Today it was announced that the European Central Bank has agreed to make $638 billion in 3 year loans to 523 different banks. Never before (not even during the last financial crisis) has the ECB loaned so much cheap money to European banks at one time.

This move by the ECB made headlines all over the globe. CNBC is calling them "ultra-long and ultra-cheap loans"..."


Wednesday, December 21, 2011

The New International Economic Disorder

"A new economic order is taking shape before our eyes, and it is one that includes accelerated convergence between the old Western powers and the emerging world’s major new players. But the forces driving this convergence have little to do with what generations of economists envisaged when they pointed out the inadequacy of the old order; and these forces’ implications may be equally unsettling.
For decades, many people lamented the extent to which the West dominated the global economic system. From the governance of multilateral organizations to the design of financial services, the global infrastructure was seen as favoring Western interests. While there was much talk of reform, Western countries repeatedly countered serious efforts that would result in meaningful erosion of their entitlements.
On the few occasions that such resistance was seemingly overcome, the outcome was gradual and timid change. Consequently, many emerging-market economies lost confidence in the “pooled insurance” that the global system supposedly put at their disposal, especially at times of great need.
This change in sentiment was catalyzed by the financial crises in Asia, Eastern Europe, and Latin America in the late 1990’s and early 2000’s, and by what many in these regions regarded as the West’s inadequate and poorly designed responses. With their trust in bilateral assistance and multilateral institutions such as the International Monetary Fund shaken, emerging-market economies – led by those in Asia – embarked on a sustained drive toward greater financial self-reliance.
Once they succeeded in overcoming a painful crisis-management phase, many of these countries accumulated previously unthinkable levels of international reserves as precautionary cushions. They extinguished billions in external indebtedness by generating and sustaining large current-account surpluses. And they increased the scale and scope of domestic financial intermediation in order to reduce their vulnerability to external storms.
These developments stood in stark contrast to what was happening in the West. There, unprecedented leverage, massive debt creation, and a seemingly infinite sense of credit entitlement prevailed. Financial excesses become the rule rather than the exception, facilitated by financial innovation and the erosion of lending standards and prudential regulation.
Suddenly, the world turned upside down: “rich” countries were running large deficits and, in some cases, tipping from net creditor status to net indebtedness, while “poor” countries were running surpluses and accumulating large stocks of external assets, including financial claims on Western economies..."


Unreliable housing statistic of the day

"How many existing homes (as opposed to new homes) were sold between 2007 and 2010? The job of counting such things is outsourced to the National Association of Realtors, which up until yesterday said that the number was 20,629,000. Today, however, it released revised figures, saying that the true figure is 17,680,000 — a difference of 3 million homes. At an average of say $250,000 apiece, that means the economy saw $750 billion less in economic activity, over those four years, than the NAR had given us to believe. That’s real money.
Here’s the NAR’s official chart of the old and new numbers:
In one sense, this shows that the housing slump was much worse than we were told. But in another sense, what we’re seeing here is fewer people selling their homes at a loss. And what that says to me is that it’s going to take a very long time yet before we get a healthy, clearing housing market..."


Why the Global Shortage of Safe Assets Matters

"...The second reason the assets shortage matters is that it creates a Triffin dilemma for the producers of safe assets. The original Triffin dilemma says that a country with the reserve currency of the world has to produce more money than is needed domestically to meet the global demand for it. This, however, requires running current account deficits that over time may jeopardize the very reserve currency status driving this dynamic. Francis Warnock summarizes this paradox nicely:
To supply the world’s risk-free asset, the country at the heart of the international monetary system has to run a current account deficit. In doing so, it becomes more indebted to foreigners until the risk-free asset ceases to be risk-free.
Now apply this reasoning to the U.S. government that currently seems to be the preferred producer of safe assets for the world. If it is to meet the excess demand for safe assets it must run a larger budget deficit, a point made recently by David Andolfatto:
[G]iven the huge worldwide appetite for U.S. treasury debt (as reflected by absurdly low yields), this is the time to start accommodating this demand. Failure to do so at this time will only drive real rates lower.
But running larger budget deficits over time may jeopardize the safe-asset status of U.S. treasury debt, the very thing currently driving the insatiable demand for it. The global economy thus faces a Triffin dilemma for the U.S. treasury, its go to safe asset..."

White House’s Krueger: Lack of Demand Holding Back Economy

"A lack of demand is causing the weak economy rather than uncertainty over taxes, regulation and economic policies, according to Alan Krueger, the chairman of President Barack Obama‘s Council of Economic Advisers.
By attacking the argument that uncertainty is holding back economic growth, Krueger is trying to punch a hole through one of the main criticisms Republicans have of President Obama’s economic policies: that a burst of regulations and regulatory uncertainty in general are crushing job growth and hurting the economy. Republicans and business groups have long complained that the Obama administration’s regulation of everything from air quality to Wall Street is heavy handed and hampering growth..."


Italian Bank Chief Explains Why Italian Banks Won't Buy Italian Sovereign Debt

"Despite the potential for a "carry trade" -- using cheap ECB money to buy high-yielding sovereign debt -- this remains a huge problem.

From Citi's Steven Englander, commenting on the post-LTRO selloff:

One dose of cold water were comments from the Italian Bank Association that EBA rules won’t permit Italian banks to buy sovereign debt – this is a complete reversal from reports yesterday that indicated that Italian bank collateral would benefit from government guarantees in going to the ECB and lead to incremental Italian bank buying of sovereign debt.

Everyone realizes this remains a problem: As long as the debt is viewed as a "risky" asset that counts against balance sheet health, banks are discouraged from buying it, even with the fat yield..."


Reform of the international monetary and financial system

"According to the architects, the latest financial regulations are designed to reduce the risks from large global capital flows – a key driver of the global crisis. But this column argues that such reforms do not go far enough and that the increasing risk of a second global financial crisis stemming from the Eurozone debacle re-emphasises the need for more changes..."


The future of international capital flows

"Will international capital flows play a lead role in the next global crisis? This column summarises a new Bank of England study that provides simulations of gross and net capital flows between now and 2050. It shows that however great the challenges policymakers may now face, there are many more to come.

The experience of the past decade has demonstrated the challenges that international capital flows can pose for financial stability. Between 2002 and 2007, annual gross international capital flows rose from 5% to 17% of world GDP, and the network of cross-country financial linkages became increasingly complex (Hoggarth et al. 2010). Net international capital flows also rose sharply over this period, with global current-account imbalances (the sum of global deficits and surpluses) doubling from 3% to 6% of world GDP. The build-up of global imbalances was one of the preconditions for the recent financial crisis. And the increased interconnectedness between countries’ financial sectors associated with large gross flows created channels through which the initial shock could spread around the world.
As remarkable as the pre-crisis growth in international capital flows was, the collapse post-Lehman was yet more dramatic. Gross global cross-border capital flows plummeted to less than 1% of world GDP in 2008, with severe implications for both advanced economies – especially those with large, open financial sectors – and many emerging-market economies that had hitherto accessed funding from abroad. In these respects, the scale and volatility of international capital flows were crucial determinants of the depth and breadth of the crisis which followed Lehman Brothers’ demise..."


Did S&P Just Telegraph An Imminent French Downgrade?

"Just hitting the tape are these quite perplexing headlines out of Bloomberg:


Odd - because it is S&P who would be doing the downgrading. Cue downgrade rumors."


Monday, December 19, 2011


"The tightness in dollar funding continues to be a major problem for a number of EU banks. Much of it is driven by US money market funds not rolling their commercial paper (CP) holdings issued by eurozone banks. As CP matures, European banks have to find alternate sources, which is proving to be difficult.
Yahoo Finance: “It is utter madness … When we see big names paying 300 basis points over overnight rates for dollars you know something is wrong,” said the head of money markets at a bank in London, who asked not to be named.
The non-US financial institutions’ commercial paper outstanding continues to dwindle:
This demand for term dollar funding keeps putting upward pressure on interbank lending rates as banks want to charge increasingly more to part with dollars for longer than overnight:
The ECB has responded by tapping the Fed Liquidity Swap Facility this week in the amount not seen since 2009 in order to provide dollars to numerous eurozone banks..."


"I have to admit that the news flow certainly hasn’t improved in recent weeks. While domestic economic data remains somewhat strong it’s impossible to notice that the world around us appears to be increasingly unstable. My two chief foreign concerns in 2011 were China and Europe. The economic situations in both regions are tenuous at best. Nonetheless, I still think you have to view the 2008 recession as one long recession as opposed to falling for the idea that we recovered and are now at risk of relapse into new recession.
As I’ve long stated, the balance sheet recession never ended. All that happened was that the government came in and papered it over with massive deficit spending. To predict new recession is to misunderstand the macro dynamics at work here. The key remains government spending and understanding the exogenous risks. In a fragile economy like ours where the consumer continues to de-leverage, we have to be increasingly aware of what could tip us from mild growth into severe downturn. The obvious risk is austerity which has exposed the true depth of the balance sheet recession in many European countries (something we predicted would occur in both the UK and Europe).
But many prominent economists don’t agree with this general macro notion and I can’t say that I don’t take their opinions to heart. After all, I am largely alone in a camp that is essentially saying “it’s different this time” – certainly not something I feel comfortable with. Among those calling for renewed recession is John Hussman whose opinion is always worth taking into consideration. In this week’s missive he continues to build the case for his recession call:
“To extend the evidence beyond our own measures and ECRI’s analysis, the chart below presents data (through October) from the Organization for Economic Cooperation and Development, an international quasi-governmental agency that sets international standards on a wide range of economic policy issues. The OECD publishes its own set of leading economic indicators on developed and developing countries. Notably, we’ve never observed deterioration to the extent that we presently observe, except when the U.S. was in or entering a recession.”


A Quick And Dirty Look At Japan's Nearly ¥1 Quadrillion In Debt

"Scouring through the news screens, we nearly fell of the proverbial chair after reading the following Bloomberg headline paraphrasing a Nikkei report: "Japan May Buy Chinese Govt Bonds, Nikkei Says....Japan is seeking to diversify forex funds and strengthen economic cooperation with China by helping make yuan more international. Japan may purchase a total of $10b worth in stages." Naturally, there are two interpretations: the ugly one is that Japan, the 3rd largest holder of US debt after the Fed and China, is considering gradually abandoning the dollar or, as the term is better known in polite circles "diversifying." The second one, and the far more amusing one, is that Japan will somehow bail out China by providing the much needed credit money that will translate into GDP (at a sub 100% ratio of course, because as is well known by now the world has reached the stage where one unit of debt generates less than one unit of incremental growth). The reason why this is amusing is because as the chart below shows, Japan's debt is now a hair's width below ¥ 1.... quadrillion. And yes, ignore the fact that the demographic squeeze in Japan is already forcing households to proceeds to monetize the largely domestically held debt. So, we wonder, where will the JGB debt curve go next in the deflationary basketcase that is Japan? As for where it has been, see below..."


2 Year Bond Auction Sees Lowest Foreign Interest Since February 2008

"Following last week's stellar auctions, this week's issuance trio has started off with a whimper. While Tim Geithner managed to sell $35 billion in 2 year notes today at a near record low rate of 0.24%, the details were very unimpressive. Because not only did the Bid To Cover decline from last month's record 4.07 to a modest 3.45, in line with the last 12 auction average, it was the precipitous drop in Indirect Bidding, aka foreign interest, that was most notable: at just 21.65% this was the lowest Indirect Take Down since February of 2008. Which means Dealers had to take on a majority of the auction. Which they did at 63.66% of the total. Naturally, this will not be a surprise to many: after all according to the latest TIC data, Chinese bond holdings tumbled in October to the lowest in a year, Russian holdings collapsed, and courtesy of the Fed's weekly custodial account updates, we know that foreigners have been selling tens of billions in US paper in the past several weeks. Slowly, the US is becoming the same ponzi scheme that it accuses Europe of being whereby Dealers buy up paper, and immediately repo it back to the Fed and other conduits. In other words, once the European repo market freeze crosses the Atlantic, then it will get very interesting very fast..."


Sunday, December 18, 2011

EU Banking Crisis: Towards the "Leveraged Breakup" of Euroland?

"The Fed’s third quarter audit data shows a total system debt of 355% and of GDP, in spite of so-called de-leveraging. It is down from the second quarter’s 375% of GDP, but up from 264% a dozen years ago. Financial sector borrowing fell almost 50% in the quarter but non-financial debt increased while financial debt fell – a push so to speak. Unfortunately most of the debt growth emanated from Washington. That growth was $557 billion, of at a 14.1% annualized rate. Of course, what the federal government is doing is the antithesis of what they should be doing. Will these borrowings and debt continue, of course they will..."


Global Economic Crisis: The U.S. An Insolvent and Ungovernable Country

"As announced in previous GEABs, in this issue our team presents its anticipations on the changes in the United States for the period 2012-2016. This country, the epicentre of the global systemic crisis and pillar of the international system since 1945, will go through a particularly tragic in its history during these five years.
Already insolvent it will become ungovernable bringing about, for Americans and those who depend on the United States violent and destructive economic, financial, monetary, geopolitical and social shocks. If the United States today is already very different from the "super-power" of 2006, the year the first GEAB was published, announcing the global systemic crisis and the end of the all-powerful US, the changes we anticipate for the 2012-2016 period are even more important, and will radically transform the country's institutional system, its social fabric and its economic and financial weight.
At the same time, every December, we evaluate our anticipations for the year just ended. This exercise, too rarely practiced by the think tanks, experts and media (1) is a tool enabling our subscribers (2) as well as our researchers to verify that our work retains a high added-value and and is in direct contact with reality. This year our score improved slightly and LEAP/E2020 attained an 82% success rate in its anticipations for 2011.
In addition we also detail our recommendations on foreign currencies, gold, stock exchanges and the consequences of the United Kingdom’s marginalization within the EU (3) on the Pound, Gilts and UK debt and we set out some advice on developments of the American institutional system (4).
In this public communiqué we have chosen to present an excerpt from our anticipation on the changes in the United States for the 2012-2016 period.
But before addressing the American case, we wish to review the situation in Europe (5).
From the non-dislocation of Euroland to the dislocation of the United Kingdom
As anticipated by our team, the EU summit in Brussels on 7 and 8 December last has led to two key events:
. the further integration of Euroland with an acceleration and strengthening of budgetary and financial integration and the initiation of a fiscal integration (6). The Eurozone governments, led by Germany, have confirmed their willingness to go right through to the end of this process, unlike all the Anglo-Saxon and Eurosceptic discussions which, for the last two years, predicted that Germany would abandon the Euro. At the same time, they have refused to follow the path of the Fed and the Bank of England by refraining from running the printing press (Quantitative Easing) as long as budgetary discipline is not achieved within Euroland (7). The clear failure of QE in the US as in the UK (8) confirms the relevance of this choice which will allow the issue of Eurobonds at the end of 2012 (9)..."


G4 Central Balance Sheets /European Contagion

“A picture is worth one thousand words.” We present 13 pictures to describe the title subject, on our website,
Scroll to the two chart stacks. In the first, we reflect changes in the balance sheets of the G4 central banks. The G4 central banks are the Bank of England (BOE), the Bank of Japan (BOJ), the Federal Reserve (FED), and the European Central Bank (ECB). Other central banks are important; however, the G4 comprises the four central banks managing the currency blocks of nearly 85% of the capital markets that trade in the world. Other large capital markets are linked to one of them. Therefore, China’s central bank is not shown, because China manages its currency exchange rate via a peg to the others.
If you capture the G4 transactional changes, you get most of the financial impacts of the world. Paging though the G4, one sees the following information leap from the charts. The central bank balance sheets of the BOE, BOJ, and ECB have all recently increased in size. That of the FED has not. In fact, the FED’s balance sheet is actually slightly smaller than it was a few weeks ago.
Why is two weeks so important? Two weeks have elapsed since the central banks announced a coordinated activity on November 30th. Notice how those balance sheets have expanded; note also where they have expanded. We have color-coded the various compositions of both assets and liabilities of each balance sheet. The recent growth in total assets of the four central banks is clear.
The one central bank balance sheet that did not grow is that of the United States’ central bank, the Federal Reserve. Notice what happened in the last few weeks when the others expanded and the FED did not. The US dollar actually started to strengthen against other currencies, particularly the euro. As we have been writing and stating for some time, there is a relationship between the foreign exchange markets and changes in the exchange rates among and between the currencies, and the actions of the central banks involved with those currencies. We see the reaction in the foreign exchange market almost at once. A central bank takes an action, makes a statement, initiates a policy – whatever the case may be – and the foreign exchange markets readjust the ratios among and between the currencies. That is apparent in the past two weeks, and it is apparent in an examination of those four central bank balance sheets.
Cumberland has stacked the four central bank balance sheets so they can be flipped easily by any interested party. We will update them regularly. The other stack of charts shows the “good” countries and the “bad” countries in the Eurozone. And it shows the spreads of interest rates between the good countries and the benchmark German 10-year sovereign debt instrument, known as the “bund”, and the spreads between the bad countries and the bund. Notice how the spreads peaked in almost every case a few days prior to the November 30th announcement of the change in central bank policies. We speculate that someone somewhere got wind the policy change was coming and may have made themselves a lot of money on that trade..."


MF Global Collapse Reveals Systemic Risk

"As has been the case so many times, the details of this debacle are found in the regulatory changes lobbied for — and recieved — by Corzine and the MF Global legal crew. In researching this column, I discovered several deeply disturbing facts.
Here’s an excerpt from the column:
1. What MF Global did with client monies was “technically” legal (though it probably violated the spirit of the law).
2. Britain’s leverage loopholes provided a back door for U.S. firms such as Lehman Brothers and MF Global to “re-hypothecate” client assets — and leverage up.
3. As a result of MF Global’s lobbying, key rules were deregulated. This allowed the firm to use client money to buy risky sovereign debt.
4. In 2010, someone from the Commodities Futures Trading Commission recognized these prior deregulations had dramatically ramped clients’ exposure to risk and proposed changing those rules. Jon Corzine, MF Global’s chief executive, successfully prevented the tightening of these regulations. Had the regulations been tightened, it would have prevented the kind of bets that lost MF Global’s segregated client monies.
5. None of MF Global’s Canadian clients lost any money thanks to tighter regulations there.
6. Little noticed in this affair is (once again) the gross incompetency of the ratings agencies. Had they not been maintaining “A” ratings on Spain and Italy, MF Global could not have made its disastrous bets there..."

Wolf Richter: Political Realities Threaten To Split The Eurozone

"...German Chancellor Angela Merkel and Sarkozy are pushing hard to get the text finalized and agreed to by March—before the French election. But it won’t be binding at that stage, and Hollande could do what he vowed in writing he’d do.
Growth is his mantra. Not austerity. While he considers reducing deficits an imperative, “nothing serious will be possible without growth; it’s the big missing element in the agreement.”
Democracy is “the other big missing element.” Going around the European Parliament as well as national parliaments and granting the European Court of Justice final say over national budgets, as the agreement calls for, “would be unacceptable.”
And this: “The Eurozone must arm itself with a veritable financial force de frappe”—the term for France’s land-, sea-, and air-based nuclear strike force. Out: the bazooka. In: maximum force. Specifically, he wants effective means to impact the financial markets:
• A much more aggressive ECB (while “respecting its independence”).
• Much more powerful bailout funds to “discourage speculation.”
• Eurobonds to spread the risk “of at least part of our debt.”
• Interventions by the European Investment Bank (owned by member states, it lends out €50 billion a year to support weaker regions and various projects).
• A larger European budget with new sources of revenues, particularly a financial transaction tax, to drive industrial policy.
Practically every point of his plan (except for the financial transactions tax) violates Merkel’s dictate. Barring a miracle, Germany is unlikely to fall in line with his desires. A handful of other countries might side with Germany and form a bloc.
Britain, on the sidelines after last week’s debacle, vehemently opposes any kind of financial transactions tax, as well as other points on his list. Already, David Cameron seems to be trying to form alliances with other countries that support his views.
And the war of words between France and Britain is heating up. Finance Minister François Barois shot the latest salvo today when he said on Europe 1, a nationwide radio network, that “one prefers to be French rather than British,” and then he went on to disparage Britain’s economy.
If this scenario were to play out, the Eurozone could crack into groups of countries: one clustered around Germany, another around France, with a few countries perhaps falling by the wayside. The EU too might fissure as Britain and a few other countries drift away. But Hollande is on the campaign trail, and a lot of rhetoric gets bandied about. If indeed he wins the presidency, it is possible that he will back off a confrontation with Germany, as Sarkozy has largely done. It is also possible that he will try to bring Britain back into the fold, though that seems unlikely."



"Most U.S. portfolio managers seem to view the EU sovereign debt crisis as they would a pesky mosquito that refuses to fly away. If only the mosquito would leave, the asset managers could concentrate on the U.S. where the economy is said to be showing so much improvement and stocks are incorrectly perceived to be cheap. Unfortunately, that is not the case. The EU crisis is part of a developed world credit crisis brought on by too much debt that must be deleveraged, a process that will take many years in both the EU and the U.S. It should clearly be realized that the EU debt problems are not going away soon, that it will impact the U.S. and that the U.S. economy has its own serious problems as well. In addition, there are signs that the global economy is slowing down as well..."


Chart of The Day: The Currency Collapse After A Euro Breakup

"The Euro Zone debt crisis has certainly kept the credit rating agencies busy in the news headline. On Friday, 16 Dec. Moody's downgraded Belgium's credit rating by two notches to Aa3 with a negative outlook, citing concerns over soaring borrowing costs, economic growth as well as the health of Belgium's banking sector after the demise of Dexia.

Fitch Ratings also lowered France’s credit outlook and put Spain and Italy, alongside Ireland, Belgium, Slovenia and Cyprus, on downgrade review, citing Europe’s failure to find a “comprehensive solution” to the debt crisis. S&P already on 5 Dec. placed the ratings of 15 euro nations on review for possible downgrade, including six AAA rated countries Moody’s also noted on 12 Dec. that it will review the ratings of all euro countries in the first quarter of 2012.

All these downgrades and rating warnings are not only putting further pressure on the debt crisis now going on for 2+ year, but is also sharpening the picture of a possible breakup of the Euro Zone.

MarketWatch reported that the latest monthly survey of about 200 major institutional investors with about $600 billion under Merrill Lynch/Bank of America Securities revealed that nearly half of all institutional money managers now fear a partial break-up of the euro zone. Investment houses like Merrill Lynch and Barclays Capital have in recent weeks issued various reports discussing that very scenario as “The euro zone financial crisis has entered a far more dangerous phase,” lamented analysts at Nomura.

The Telegraph published a graphic depiction of the effects on European exchange rates of a Euro break-up forecast by ING that sees an immediate fall in individual currencies in 2012. (See Charts Below)..."

Chart Source: The Telegraph, 16 Dec. 2011