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Daily Digest - Feb 17

Tuesday, February 17, 2009, 12:26 AM
  • 2008 federal budget deficit was $5.1 trillion, not the $455 billion previously reported by CBO
  • U.S. Government GAAP Accounting Federal Budget Deficits (Chart)
  • Rules often fail us - Financial failures equate to more rules from the toolbox...
  • Legislature adjourns with no budget; governor prepares to lay off 10,000
  • Simon Johnson & Bill Moyers (Repost for anyone who missed it)
  • Capitalism Needs a Sound-Money Foundation
  • Bank of England will buy gilts to boost economy
  • U.S. trade deficit shrinks 4 percent in December
  • Bernie Madoff - Impossible for a violation to go undetected (Video)
  • Feedback loop
  • Hat Tips to CM, Katherine, Denny, PineCarr (pressed for time, didn't credit each article)

Economy

2008 federal budget deficit was $5.1 trillion, not the $455 billion previously reported by CBO

Worldnetdaily reports:

The real 2008 federal budget deficit was $5.1 trillion, not the $455 billion previously reported by the Congressional Budget Office, according to the "2008 Financial Report of the United States Government" as released by the U.S. Department of Treasury.

The difference between the $455 billion "official" budget deficit numbers and the $5.1 trillion budget deficit cited by "2008 Financial Report of the United States Government" is that the official budget deficit is calculated on a cash basis, where all tax receipts, including Social Security tax receipts, are used to pay government liabilities as they occur.
I believe I correctly backed into that $5.1 Trillion number below (drop me a comment if anyone interpreted this differently).

U.S. Government GAAP Accounting Federal Budget Deficits (Chart)

Rules often fail us - Financial failures equate to more rules from the toolbox..

Legislature adjourns with no budget; governor prepares to lay off 10,000

Reporting from Sacramento -- With lawmakers still unable to deliver a budget after three days of intense negotiations, Gov. Arnold Schwarzenegger prepared to lay off 10,000 government workers and his administration said it would halt the last 275 state-funded public works projects still in operation.

The projects, which cost $3.8 billion and include upgrades to 18 bridges and roads in Los Angeles County to protect them from collapsing in earthquakes, had been allowed to continue as others were suspended because the state was running out of cash.

Simon Johnson & Bill Moyers (Repost for those who missed it)

Capitalism Needs a Sound-Money Foundation

Let's go back to the gold standard.

If the very idea seems at odds with what is currently happening in our country -- with Congress preparing to pass a massive economic stimulus bill that will push the fiscal deficit to triple the size of last year's record budget gap -- it's because a gold standard stands in the way of runaway government spending.

Under a gold standard, if people think the paper money printed by government is losing value, they have the right to switch to gold. Fiat money -- i.e., currency with no intrinsic worth that government has decreed legal tender -- loses its value when government creates more than can be absorbed by the productive real economy. Too much fiat money results in inflation -- which pools in certain sectors at first, such as housing or financial assets, but ultimately raises prices in general.

Inflation is the enemy of capitalism, chiseling away at the foundation of free markets and the laws of supply and demand. It distorts price signals, making retailers look like profiteers and deceiving workers into thinking their wages have gone up. It pushes families into higher income tax brackets without increasing their real consumption opportunities.

Bank of England will buy gilts to boost economy

Mervyn King said the Bank would start buying commercial paper this week, and would most probably move on to full-scale quantitative easing, which involves buying securities but printing money to pay for it, before long.

In a further surprise, Mr King said the Bank was prepared to buy government debt in an effort to bring the economy back on track - something which, so far, neither the Federal Reserve or European Central Bank has embarked on.

He said: "The projections imply that further easing in monetary policy may well be required. That is likely to include actions aimed at increasing the supply of money in order to stimulate nominal spending," adding that the Bank would consider buying gilts - government bonds - as part of the scheme.

The news - alongside a Bank economic forecast which was far more pessimistic than many City analysts - sent the pound careering downwards against other currencies.

U.S. trade deficit shrinks 4 percent in December

WASHINGTON (Reuters) - The U.S. trade deficit shrank 4 percent in December, as the global financial crisis cut U.S. imports and exports for the fifth consecutive month, a U.S. Commerce Department report showed on Wednesday.

The $39.9 billion trade gap was the smallest since February 2003, but bigger than a consensus estimate of $36.0 billion from Wall Street analysts. The December shortfall followed a much bigger contraction in the trade gap in November.

U.S. imports of goods and services fell 5.5 percent in December, following an 11.9 percent drop in November, as businesses and consumers cut back on spending in the face of mounting economic woes.

Imports of autos and auto parts were the lowest since May 1999. Another big drop in the average price of imported oil to $49.93 per barrel, the lowest since December 2005, helped push the overall import tally lower.

U.S. exports of goods and services fell nearly 6 percent for a second month in a row, as the financial crisis took a bite out of foreign demand. Overall U.S. goods exports were the lowest since October 2006, and auto and auto parts exports were the lowest since November 2004.

Bernie Madoff - Impossible for a violation to go undetected (Video)

Feedback loop

last we left eastern europe, the rumblings of an emerging market crisis of the sort last seen emanating from the thai baht in 1998 were growing loud. now we return to find systemic collapse imminent. zero hedge, the telegraph and the financial times all report.

in some respects a comparison to 1998 isn't valid, as western banks were nowhere near as systemically compromised by the collapse of east asia as they are about to be by the former soviet bloc states along the eastern border of the eurozone. as befits the truly global nature of this crisis, a chain reaction feeding from states like ukraine through austria and italy to the heart of western capitalism looms.

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34 Comments

Davos's picture
Davos
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Re: Daily Digest - Feb 17

 

cwbus080930.gif

miranda's picture
miranda
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Rules often fail us - Financial failures equate to more rules

Davos - thank you for posting this link!

This is a wonderful talk that i am trying to get all my friends to watch.

Lots more interesting ideas on this site, by the way...

http://blog.ted.com/2009/02/the_real_crisis.php

csstudent's picture
csstudent
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Re: Daily Digest - Feb 17

I got to this link followng the first one you gave:

http://1.bp.blogspot.com/_8rpY5fQK-UQ/SZmygEvV6XI/AAAAAAAAF5w/nN52a6Vlg8w/s1600-h/5.1.png

In the figure on the left, they have an entry for "Postemployment Liabilities" of 549.8 billion dollars.  What is this and why is it added to the -1000.9 of the net operating cost to generate the federal deficit for that year?  Is that just money collected from social security and medicare?

Thanks. 

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Re: Daily Digest - Feb 17

Regarding Moyers' interview of Simon Johnson, as was briefly noted, Mr. Johnson serves as a Fellow at the Peter G. Peterson Foundation, an organization dedicated to the premise of privatizing and, effectively, abolishing Social Security. Mr. Peterson, an investor/billionaire, repeatedly argues that as HE doesn't need Social Security, he shouldn't have to fund it in any way. He also rather conveniently avoids acknowledging that the Social Security fund is constantly raided to prop up failing government projects and is then, remarkably, criticized for being insolvent. I find Simon Johnson's call for privatization, rather than nationalizaton, rather suspect. We would be wise to question the false populism of economic insiders who continue base every argument on the premise that government is inefficient and wasteful and should, therefore, be kept out of the banking business. Is there any appreciable difference—in the eyes of the ever more burdened taxpayer—between bureaucratic waste and privatized greed? I'd have enjoyed seeing Dean Baker sitting to Mr. Johnson's left and being afforded an opportunity to counter some of his claims:

http://www.commondreams.org/view/2009/02/17-3

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Russian stocks tumble, trading suspended

Anybody know how this may affect us?

Russian stocks tumble, trading suspended after market plunged 9.4%

NEW YORK (MarketWatch) - Russian stocks tumbled Tuesday, prompting the RTS and the Micex stock exchanges to suspend trading for one hour at 4:05 p.m. Moscow time. The dollar-denominated RTS stock index plunged 9.4%, while the ruble-denominated Micex stock index fell 9.6%. The decline in Russia followed a tumble in oil prices and declines on global stock markets. In New York, the Market Vectors Russia ETF (RSX: 1.11, -1.99, -15.2%) , which tracks the Russian markets, tumbled 14.4%.

http://www.marketwatch.com/news/story/Russian-stocks-tumble-trading-suspended/story.aspx?guid={8FB99F30-712D-4980-A861-8C070365C221}

SkylightMT's picture
SkylightMT
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Re: Russian stocks tumble, trading suspended
jeb781 wrote:

Anybody know how this may affect us?

Russian stocks tumble, trading suspended after market plunged 9.4%

NEW YORK (MarketWatch) - Russian stocks tumbled Tuesday, prompting the RTS and the Micex stock exchanges to suspend trading for one hour at 4:05 p.m. Moscow time. The dollar-denominated RTS stock index plunged 9.4%, while the ruble-denominated Micex stock index fell 9.6%. The decline in Russia followed a tumble in oil prices and declines on global stock markets. In New York, the Market Vectors Russia ETF (RSX: 1.11, -1.99, -15.2%) , which tracks the Russian markets, tumbled 14.4%.

http://www.marketwatch.com/news/story/Russian-stocks-tumble-trading-suspended/story.aspx?guid={8FB99F30-712D-4980-A861-8C070365C221}

 I couldn't get this link to work. Any other links?

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flavian's picture
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Re: Daily Digest - Feb 17

You look like open-minded guys so I'll give it a try.

I've been reading Schiff's columns, viewing crash course, albert bartlett presentations and many more in the last year. So the ideea is that I know this crisys inside out and at some time I got bored of reading bad news.

And I tried another approach... :)

Have any of  you heard about Matthew Ward or Suzanne Ward ?

Article 21 may 2008 long way before US elections

Attention is being given around the globe to the United States
presidential candidates. Despite the rigged primary elections to favor
Hillary Clinton and John McCain’s supporters waffling because he
himself waffles, soon it will be glaringly apparent that Barack Obama’s
greater popularity among voters will be sustained. Thus free will
choices of the majority have been made and now, without influencing
those choices one whit, we can reveal that in the energy field of
potential, Obama’s momentum always was unstoppable

 Article 27 july 2008 long way before october financial crash

3.
The word from the White House, that the economy is basically sound,
rings hollow when economists in the States and other countries are
being quoted with conflicting assessments. Published statistics
alone—although rosier than the actual figures of unemployment,
inflation, home foreclosures, losses in the retail sector and small
businesses going under—are clear evidence of a national economy in dire
straits. This is having a worldwide boomerang effect as other nations
are seriously impacted by the US debt and the shrinking value of the
dollar. When that boomerang returns to US shores, the Federal Reserve
will become known for what it is, a privately owned banking consortium
that is one of the main causes of the national debt; and, like the
entire world economy, which long has been rotten to the core, “the Fed”
is collapsing under the untenable weight of avarice, deceit and
corruption.

4. You have the great advantage of knowing that what is occurring is reformation—the
current global system is imploding and a new system based in honesty
and established on a sound foundation will replace it. In a change of
such magnitude, it is natural that people who don't know what is
transpiring are deeply concerned, and while leaders-at-the-ready will
take every step to minimize confusion and expedite implementing
changeover procedures, there will be hardships during the process. To
tell you that everything will go perfectly smoothly would be both
dishonest and a great disservice because the months ahead will present
difficulties to many.

flavian's picture
flavian
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Re: Daily Digest - Feb 17

And now think about it a little.

If you were in president's place and you wanted to do good for the people.

What would you do ?

You have just inherited a fucked up situation. The bankers are still there. The wall street is still there. The population wants measures and does not understand yet the crysis fully. The debt is crushing you. The sistem is clearly colapsing. The congress and FED are keeping your hands tied up.

What's the fastest way to end it ? The house is a wreck, the fire is burning. Add a little gas and it goes in flames faster. This way you end it sooner and are able to raise a new one much faster.

Don't get fooled. Mainly the banks and wall street gets burned.

Yes, the little people will feel some pain. Yes, there will be collateral damage.

But the factories remain, the houses are there, the office buildings don't go anywere, the crops are still on the fields, the people that work and live and eat each day remain in place. Only the "paper money" and those that speculated with them get burned. A lot faster and with much less pain for the others.

Perfect plan if you ask me... ;)

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Re: Daily Digest - Feb 17

From my point of view, this could start any day now...

Actually, it might have already started.

I don't want to speak to soon, but there's something in the air. We'll se till friday how it goes.

But right now DOW is close to last year's minimum, down 5% last week and 3% more today already.

And GOLD is close to it's anytime max, up from last month's average  of 900-920. It reached 940 friday and 970 today.

Things start to look veeeery interesting... :)

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Damnthematrix
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Re: Daily Digest - Feb 17

"Reporting from Sacramento -- With lawmakers still unable to deliver a
budget after three days of intense negotiations, Gov. Arnold
Schwarzenegger prepared to lay off 10,000 government workers and his
administration said it would halt the last 275 state-funded public
works projects still in operation.

The projects, which cost $3.8 billion and include upgrades to 18
bridges and roads in Los Angeles County to protect them from collapsing
in earthquakes, had been allowed to continue as others were suspended
because the state was running out of cash."

THIS got me thinking......  what would happen if a severe earthquake was to hit California right now?  Fugedabowdid?

Mike 

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Re: Daily Digest - Feb 17

"
If you were in president's place and you wanted to do good for the people."

Simple.

Cancel all the debts, and close all the banks.

Mike 

flavian's picture
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Re: Daily Digest - Feb 17

"Cancel all the debts, and close all the banks."

That is exactly where we are heading now... faster and faster... :)

CB's picture
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Re: Daily Digest - Feb 17

http://www.nytimes.com/2009/02/18/nyregion/18foreclose.html?hp

Quote:

Resisting Home Evictions Becomes a Group Effort

Published: February 17, 2009

As resistance to foreclosure evictions grows among homeowners, community leaders and some law enforcement officials, a broad civil disobedience campaign is starting in New York and other cities to support families who refuse orders to vacate their homes.

The community organizing group Acorn unveiled the campaign with a spirited rally on Friday at a Brooklyn church and will roll it out in at least 22 other cities in the coming weeks. Through phone trees, Web pages and text-messaging networks, the effort will connect families facing eviction with volunteers who will stand at their side as officers arrive, even if it means risking arrest.

“You want to haul us out to jail? Fine. Let the world see how government has been ineffective,” Bertha Lewis, Acorn’s chief organizer, said in an interview. “Politicians have helped banks, but they haven’t helped families in the way that it’s needed, and these families are now saying, enough is enough.”

At the onset of the foreclosure crisis, the problem was regarded by some as one of a homeowner’s own making, the result of irresponsible decisions made by families who chose to live beyond their means. But as foreclosures spread across the country, devastating even solidly middle-class communities, the blame has slowly shifted to the financial companies that made questionable loans and have received billions of dollars in federal aid to stave off collapse.

In recent months, a budding resistance movement has grown among Americans who believe they have been left to face their predicament on their own — and the Acorn campaign is an organized expression of that frustration, Ms. Lewis said. Instead of quietly packing up and turning their homes over to banks, homeowners are now fighting back.

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Re: Daily Digest - Feb 17

On the http://www.pbs.org/moyers/journal/02132009/watch.html.

What I don't understand is that for someone with so much understanding of the present US systemic mess, his solution is to cut it to bits then carry on. Is this just tunnel vision again?

Don

_____________________________________

7 billion people can be wrong, very wrong

CB's picture
CB
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Re: Daily Digest - Feb 17

From analysis from last October:  http://www.leap2020.eu/End-of-2008-The-world-enters-the-decanting-phase-of-the-global-systemic-crisis-Anticipations-over-2008-2013-for-six_a2756.html

Quote:

End of 2008: The world enters the decanting phase of the global systemic crisis - Anticipations over 2008-2013 for six groups of countries experiencing very different evolutions

- Excerpt GEAB N°28 (October 16, 2008) -

The global financial crisis, which went through a major tipping point in September 2008 as anticipated by LEAP/E2020 last February (1), is only the detonator of the global systemic crisis. The financial and monetary chaos of the past months were only the triggers of a series of economic, social and political crises that will from now on give the pace to the last phase of this global systemic crisis. The most severe consequences - in human, social, economic and political terms - are still ahead of us, not behind. In this October edition of the GEAB (N°28), we therefore chose to establish the anticipatory schedule of the so-called « decanting phase », i.e. a phase along which the outcome of the crisis begins reshaping the global system (2). Our studies thus enabled us to make anticipations for the 2008-2013 period and for 6 groups of countries differently impacted by the 4 specific sequences of this phase: financial crisis, economic crisis, social crisis and political crisis.

Indeed, if the first three phases of the crisis were common to the whole planet because they affected the same global system inherited from 1945 and 1989, the fourth phase takes place very differently according to the country and to the specific impact of the crisis for each country. The shock was common, but the trajectories will be different from now on. In fact they constitute the process of reorganisation of the global system and prefigure the new equilibriums that will appear in the coming decade.

According to our researchers, the scale of the impact phase of the crisis' outcome on the various countries of the planet commensurates with their degree of resistance to the explosion of the « financial detonator » that went off one year ago. The more a country is « immune » to this financial shock, the better it will cross over the crisis. LEAP/E2020 has therefore studied the situation for the main countries and regions of the world along 7 precise criteria enabling to measure their degree of « immunity » to the « financial detonator ».

. Share of the economy dedicated to the financial sector
. Share of the economy dedicated to services
. Level of household debt
. Quality of financial system and household assets
. Relative amount of public debt (municipalities and social systems included)
. Relative amount of external debt (trade and payment)
. Share of capital-based pensions on overall pension fund system.

Based on these criteria, our team was able to identify 6 major groups of countries hardly related geographically but with similar profiles.

To make the results of their study easier to read, LEAP/E2020 has decided to present them in a visual way by means of:
. a geographical map of the world highlighting these groups in six different colors
. a temporal chart of the 2008-2013 period, showing our anticipations of the duration for each of the 4 specific sequences of that decantation phase: financial crisis, economic crisis, social crisis and political crisis.
Some more detailed explanations follow each graphic. (check out the graphics by following the link above)...

Have a look at the graphics and then think of an overlay of military strength and expenditures and centers of financial power.

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US Credit Rating to Be Downgraded

Has the downgrading of the US's credit rating been discussed?  I thought the bolded section below was interesting.   

US, UK Credit Ratings Look Set to Be Downgraded
The credit rating agency Moody’s has said that the UK and US credit ratings were being “tested”. In a novel and somewhat bizarre departure, Moody’s has split various “AAA” sovereign countries into three categories based on their strength in weathering the economic storm, denoting Ireland and Spain as the weakest with the UK and US somewhere in the middle and Germany, France, Canada and the Scandinavian nations at the top.

This will in time be seen as gimmickry. Standard and Poor’s have already downgraded Spain to AA+ and did not create sub grades within the credit rating system.

Some have criticized Moody’s for being “unfair” to Ireland, Spain, the UK and US and have argued that these agencies previously gave almost everybody good ratings, and underestimated risks, but were now going to the other extreme.

This is errant nonsense and the unfortunate fact is that Moody’s, the other credit rating agencies and the vested interests in the financial services industry continue to underestimate risks, as they have done for months and years.

Given the massive deterioration in the public finances and economies of these nations, by right they should be downgraded and unfortunately in the coming months they will inevitably be downgraded.

But Moody’s and all the rating agencies realize that this would compound an already disastrous financial and economic crisis. Many pension funds internationally have mandates or investment guidelines to only invest in AAA rated government bonds and if these countries bonds were downgraded, they would be forced to sell those bonds en masse. This would likely see a crash in the already very overvalued government bond markets and see long term interest rates rise quickly and sharply.

Source: http://news.goldseek.com/GoldSeek/1234530000.php

 

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SkylightMT
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Re: Daily Digest - Feb 17
flavian wrote:

I don't want to speak to soon, but there's something in the air. We'll se till friday how it goes.

I have the same feeling. Had it since last Thursday. Before, it was just a lot of speculation on what could happen. Now it feels like maybe its happening.

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Re: Daily Digest - Feb 17

Flavian and SkylightMT

Surely the only thing that would get considerable public attention is a bank holiday. But we have seen that they are prepared to print as much money as necessary to stop this happening. So is there something else that could be the cause of your unease?

Don

__________________________________________

7 billion people can be wrong, very wrong

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Re: US Credit Rating to Be Downgraded
jeb781 wrote:

Has the downgrading of the US's credit rating been discussed?  I thought the bolded section below was interesting.   

Jeb,

According to the Glen Beck show last night, instead of downgrading the US to AA+, they have created a new rating of "AAA with chance of default".

Richard

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Re: Daily Digest - Feb 17

YESSSSSS!  I knew this would start....  the revolution has begun.

We've actually been discussing this in our Transition Town meetings in preparation for Australia catching up to the USA.  One of us will likely be foreclosed in the next few months, and we are planning to uproot for sale signs to begin with....  we'll play it by ear.

Can't wait to forward this to our group...

Mike 

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Re: Daily Digest - Feb 17

re: Madoff video - I'm still laughing at the guy at the end who says, "This is great, we've gotten rid of all the corrupt people". I can only hope for that guy's sake, he wasn't a Madoff client.

The maestro, err, one of the masterminds of the collapse, Greenspan, speaks:

Quote:

“Given the Japanese experience of the 1990s, we need to
assure that the repair of the financial system precedes the onset
of any major fiscal stimulus,” he said.

http://bloomberg.com/apps/news?pid=20601087&sid=a1VL7sNIBt9g&refer=home

 

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Re: Daily Digest - Feb 17
Damnthematrix wrote:

"
If you were in president's place and you wanted to do good for the people."

Simple.

Cancel all the debts, and close all the banks.

Mike 

Mike,

You're nothing if not consistent. Wink

When first we chatted last year, back when you were riding around on your mower thinking deep thoughts, I never dreamed that, in a relatively short time, you might find your wish coming true.

Life isn't dull is it, mate?

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Re: Daily Digest - Feb 17

See the latest post from:  http://www.leap2020.eu/GEAB-N-32-is-available!-4th-quarter-2009-Beginning-of-Phase-5-of-the-global-systemic-crisis-phase-of-global-geopolitical_a2805.html?PHPSESSID=1084a572b237fae89f1af9f7c4e12398 -- just came out on February 16.  A new report is posted on the 16th of every month.  Here is an excerpt from this link: 

"According to LEAP/E2020, there is only one very small launch window left to prevent this scenario from shaping up: the next four months, before summer 2009. Practically speaking, the April 2009 G20 Summit is probably the last chance to put on the right tracks the forces at play, i.e. before the sequence of UK and then US defaults begin (2). Failing which, they will lose their capacity to control events (3), including those in their own countries for many of them; and the world will enter this phase of geopolitical dislocation like a “drunken boat”. At the end of this phase of geopolitical dislocation, the world will look more like Europe in 1913 rather than our world in 2007."

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Re: Daily Digest - Feb 17

This will be the year of bankruptcy | ajc.com

Quote:

It has to happen. As painful as it is.


And there is no magic wand or legislative action or Federal Reserve printing press that can make it all right.

The laws of economics are stronger than any policy. They are similar to the laws of nature. You can build levees strong enough to hold back the ocean for a while, but sooner or later, you’ll discover why it isn’t wise to live below sea level on the coast.

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Re: Daily Digest - Feb 17

" Flavian and SkylightMT


Surely the only thing that would get considerable public attention is a
bank holiday. But we have seen that they are prepared to print as much
money as necessary to stop this happening. So is there something else
that could be the cause of your unease? "

Yes, but it would be nice to notice the moment it all starts going ONLY down.

The DOW closed last night at 7552 veeery close to it's last year minimum of 7449.

The traders are scared and you can see that from the rising price of gold.

What are the chances that we can avoid a collapse like we did last october ?

They are getting slimmer and slimmer by the day.

See the attached graph to get the ideea... :)

 

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Re: Daily Digest - Feb 17

fujisan.........is the The Atlanta Journal-Constitution 'main street media'? If so.......WOW!

I hope the msg is getting out there, but the article seems way to honest for MSM.

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Re: Daily Digest - Feb 17

Denny, I've no idea. I live in Belgium... That's an opinion, probably not 'official'.

The Associated Press: Guadeloupe strikers block roads, close airport

AFP: Guadeloupe protesters shoot three police officers

Note: a man was killed in Guadeloupe, but I could only find an article in French:

Un homme tué par balle à proximité d'un barrage en Guadeloupe - Société - Le Monde.fr

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Re: Daily Digest - Feb 17

EU's Kroes urges global approach to toxic assets | Motoring | Reuters

Quote:

Kroes said one way to tackle toxic assets would be to get regulators to require full disclosure from all banks, enabling them to direct their efforts to the most urgent cases.

...

"Guarantees, recapitalisation and the treatment of impaired assets are necessary, but they are not sufficient. Tough decisions on restructuring or possible managed liquidation need to be made, and they need to be made very fast," Kroes said.

My comment. We start hearing some "realistic" message from some EU official. But Neelie Kroes is only in charge of competition.

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CB
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Re: Daily Digest - Feb 17

The mess in Eastern Europe discussed: http://blog.atimes.net/?p=601

Quote:

The giant sucking sound

February 17th, 2009
By
David Goldman

The battering of Eastern European credits and contagion in Western European sovereigns and financials with significant East European exposure validates my November warnings that the US administration’s borrowing spree would create a black hole in financial markets overseas. The US Treasury market rallied massively while sovereigns disintegrated.

I warned that the US could not borrow a trillion and a half dollars without shifting capital flows away from the weakest sovereign markets in a programmatic essay last November 15. The threat of an Eastern European credit collapse and the nearly quarter-trillion exposure of Austrian banks to Eastern European names has pushed the cost of 5-year credit protection against Austrian default to LIBOR +227 basis points today, from +100 on January 7. Bank of America, by contrast, trades at +205. The difference is that the market believes that B of A, solvent or not, is under the protective umbrella of the US Treasury. .....

.....(table of credit spreads omitted)

What has changed during 2009 is that the worst damage is being felt among issuers considered impregnable only weeks ago. Austria and Ireland still carry a AAA rating, while Abu Dhabi is rated AA and Bahrain is rated single A. It isn’t the shakier sovereigns but the solidest ones that now are in jeapordy.

I reiterate that the greatest danger to the US economy is NOT the subprime market, whose worst-case scenario already is more than priced into the securities universe, but the collapse of weaker sovereigns as the Treasury’s $2 trillion borrowing requirement creates a vortex that sucks the world’s capital into the US.

 and a followup comment posted:

Quote:

A follow up: here’s a good description of the mechanism by which funds are taken from emerging markets from Michael Hudson:

The new twist is a variant on the IMF “stabilization” plans that lend money to central banks to support their currencies – for long enough to enable local oligarchs and foreign investors to move their savings and investments offshore at a good exchange rate. The currency then is permitted to collapse, enabling currency speculators to rake in enough gains to empty out the central bank’s reserves. Speculators view these central bank holdings as a target to be raided – the larger the better. The IMF will lend a central bank, say, $10 billion to “support the currency.” Domestic holders will flee the currency at a high exchange rate. Then, when the loan proceeds are depleted, the currency plunges. Wages are squeezed in the usual IMF austerity program, and the economy is forced to earn enough foreign exchange to pay back the IMF.

As a condition for getting this kind of IMF “support,” governments are told to run a budget surplus, cut back social spending, lower wages and raise taxes on labor so as to squeeze out enough exports to repay the IMF loans. But inasmuch as this kind “stabilization plan” cripples their domestic economy, they are obliged to sell off public infrastructure at distress prices – to foreign buyers who themselves borrow the money. The effect is to make such countries even more dependent on less “neoliberalized” economies.

Latvia is a poster child for this kind of disaster. Its recent agreement with Europe is a case in point. To help the Swedish banks withdraw their funds from the sinking ship, EU support is conditional on Latvia’s government agreeing to cut salaries in the private sector – and not to raise property taxes (currently almost zero).

The problem is that Latvia, like other post-Soviet economies, has scant domestic output to export. Industry throughout the former Soviet Union was torn up and scrapped in the 1990s. (Welcome to victorious finance capitalism, Western-style.) What they had was real estate and public infrastructure free of debt – and hence, available to be pledged as collateral for loans to finance their imports. Ever since its independence from Russia in 1991, Latvia has paid for its imported consumer goods and other purchases by borrowing mortgage credit in foreign currency from Scandinavian and other banks. The effect has been one of the world’s biggest property bubbles – in an economy with no means of breaking even except by loading down its real estate with more and more debt. In practice the loans took the form of mortgage borrowing from foreign banks to finance a real estate bubble – and their import dependency on foreign suppliers.

So instead of helping it and other post-Soviet nations develop self-reliant economies, the West has viewed them as economic oysters to be broken up to indebt them in order to extract interest charges and capital gains, leaving them empty shells. ......

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gregroberts
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Re: Daily Digest - Feb 17

The gold-to-oil ratio is at ten-year highs – a single ounce of gold can now purchase 22+ barrels of WTIC crude. But what does it mean?

http://seekingalpha.com/article/121134-what-do-gold-to-oil-and-gold-to-silver-ratios-say

Greg

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gregroberts
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Re: Daily Digest - Feb 17

 John Williams Shadowstats.com "Go long scotch!"

Greg

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Malden
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Posts: 27
Re: Daily Digest - Feb 17

Davos says: Inflation is the enemy of capitalism, chiseling away at the foundation
of free markets and the laws of supply and demand. It distorts price
signals, making retailers look like profiteers and deceiving workers
into thinking their wages have gone up. It pushes families into higher
income tax brackets without increasing their real consumption
opportunities.

 

I know it was with good intentions, but the truth is just opposite. The main enemy of capitalism is DEFLATION and DEBT "MONEY" (using fractional reserve banking). Please read a book "The Lost Science of Money" by Stephen Zarlenga. Inflation is just a "bogy-man" to distract people`s attention from real problems.

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Davos
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Posts: 3620
Re: Daily Digest - Feb 17

Hello Malden:

Just to clarify, I didn't say that, this was said by Ms. Sheldon in the article I posted, which was actually a hat tip. As for my personal beliefs, just skimming the 2 statements I'd say that the govt.'s and CB's love inflation that capitolist proffit from it but eventually the debt kills them like overdosing on anything.

Take care 

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