GLOBAL MONEY WAR REPORT
DEBASED CURRENCY COMPETITION
SOVEREIGN BOND BREAKDOWN
CENTRAL BANK DISCREDIT

* Monetary Shrapnel
* Looming USGovt Debt Default
* USTreasury Deep Distress
* USDollar Reserve Cracks
* China Buying The World
* European Contagion Hits Italy


HAT TRICK LETTER
Issue #88
Jim Willie CB, 
“the Golden Jackass”
17 July 2011

"The Fed is threatening to stop its Quantitative Easing program at the end of this month. It is just a bluff, because the US government is relying heavily on Fed monetization for all of the debt the US government is borrowing." ~ James Turk

"What we are not going to get is a concession that QE2 has achieved its unintended consequences, namely a lower dollar exchange rate, a higher gold price (meaning weaker confidence in the dollar), slower economic growth, and a higher measured rate of inflation. Those are some of the things that have come out of this experiment. Let us call it by its name, money printing." ~ Jim Grant (after the Bernanke speech on June 22nd)

"Debasement of currency means debasement, among other things, of time. Hence, for someone like me investment of time in maintaining the official reality becomes progressively more expensive and ultimately impossible." ~ experienced Saudi wealthy businessman

"We do not have a precise read on why this slower pace of growth is persisting." ~ Ben Bernanke (the nitwit Ivy League economics professor running the USFed, who has no idea what mayhem he wrecks on the USEconomy)

"It is hard to believe that Bernanke, the presidents of the regional Federal Reserve Banks, and the extensive staff of fine economists throughout the Federal Reserve System do not understand why the economic and systemic liquidity crises persist. If indeed the problems really are not understood, then Bernanke should not be Fed Chairman." ~ John Williams (Shadow Govt Statistics editor)

"Our world will be changed with one mega-flash event which will lead to the ultimate tipping point. Those without their seat belts tightly and securely fastened will not survive what is coming. The complexity of changes in everything and on all levels will be a shock event for most people in the Western World. We are already on the other side of the big divide. There are no bridges to get there. If you want to cross over to higher and dryer lands, you need to swim through very treacherous waters. The lifeboats are constructed with gold & silver ramparts." ~ experienced gold trader consultant

"We have had these fears all the way along. You know at $400 and $500 and $700 and $800 dollar gold, everyone was afraid it was a one-time thing. I do not think it is a one-time thing. It is a secular thing. It is going to carry on for quite a while here until we find some resolution of these problems. And the resolution probably will be some form of default where people just have to expunge debts that cannot be repaid. Therefore you have to be in some asset which will not be affected by that, LIKE GOLD & SILVER." ~ Eric Sprott

"If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered." ~ Thomas Jefferson (worth repeating periodically)

MONETARY SHRAPNEL

◄$$$ WORLD FOOD PRICES CONTINUE TO SPIRAL UPWARD. IF NOT THE USDOLLAR PUSHING PRICES UP, THEN FLOODED PLAINS OR DROUGHT. THE STRAIN IS GLOBAL ON ECONOMIES. CONSUMERS WORLDWIDE ARE AFFECTED. THE FALLOUT WILL INCLUDE STARVATION AND CIVIL UNREST. THE USGOVT CONTINUES TO DISTORT THE CROP OUTPUT, WITH PUBLISHED EXAGGERATIONS AND FALSE DATA, IN AN ATTEMPT TO KEEP A LID ON PRICES. $$$

Food prices are heading back towards record highs. The prospect of a poor sugar harvest has driven the UN food price index to within 1.6% of the record set in February. Food prices rose by 1.3% in June to within easy reach of the recent record high. The United Nations Food & Agriculture Organization (FAO) maintains a food price index based in 55 food items. It increased by 3 points to 234 points last month, a hefty 39% increase over the last twelve months. The proximal cause is Brazil, whose low sugar output sent sugar prices soaring by 14%. The nation is a grand agricultural disappointment, as scattered drought is the norm, probably from Amazon destruction, something never cited anymore. It produces over half the global sugar supply. Effects are felt far and wide globally in kitchens. The United Kingdom consumers must contend with a food price rise of 4.9% year over year through May. The OECD with the UN jointly predicted that food prices would soar by as much as 30% over the next 10 years. Strain on poor nations will be magnified from what has already been seen. The fallout will be a mixture of starvation and civil unrest, much worse than seen in 2011. See the UK Guardian article (CLICK HERE). No mention in the UN price index release is made of the United States, the breadbasket to the world. More distorted crop data came this spring when despite the tens of thousands of flooded farmland acres, the USGovt reported an abundance of planted grains. Last year the USDept Agriculture reported gross distortions on crop output. The practice is to keep a lid on foodstuff prices, and possibly to lay blame on market speculators.

◄$$$ THE DEVELOPMENTS AT THE INTL MONETARY FUND FORETELL OF GREAT CHANGES FOR THE UNITED STATES AND ANGLO BANKERS. GERMANY BACKS THE NEWLY APPOINTED HEAD LAGARDE. BEHINDTHE SCENES, NOTICE ATTACKS, REAR GUARD MOVEMENT, AND A RING FENCE AROUND THE AMERICAN BANKSTERS. IT IS NOT VISIBLE FROM ANY LIGHT SHINED BY THE US-PRESS. RECALL THAT EUROPE HAS DEVELOPED CLOSER TIES TO CHINA, WHILE ALIENATION AGAINST ANGLO BANKERS HAS BUILT UP. $$$

One must almost laugh. On a Wednesday, French finance minister Christine Lagarde was named IMF head. The very next day, Dominique Strauss-Kahn (DSK) was let go from house arrest, then told the evidence seemed inadequate to prosecute against him. Details on the case are not within the scope of this report. The objective apparently was to remove and replace DSK from his post at the IMFund. He had been advocating replacement of the USDollar in trade settlement, using the SDR instead. He had called for usage of a new SDR-backed bond to replace the USTBond in global banking. He had urged bond holders to take losses in sovereign debt bailout deals. The task to replace him instead was executed flawlessly. Again, push aside the details of the case, probably a rape, given his past pattern of similar actions in hotels across the world. So DSK is done. Let's see if Lagarde promotes broader currency basket usage that compromises the Special Drawing Rights concept. Let's see if Lagarde obstructs US & UK initiatives. A couple sources pitched in from Europe to offer some hidden angles. They will not be quoted, too volatile, salty, and dangerous the information. For a certain strain of card carrying prominent bankers, they are given notice. They are not safe any longer and are marked for takedown. Lagarde is a European first and French second, a lethal combination and a challenge for the US to deal with. She has no tolerance for criminal bankers, and acts decisively. She commands the respect of many as a professional, even those from the gold camp of sound money. She defines well the rules of engagement. She is described as an antidote to many leading American figures. Her appointment was a brilliant choice, thus filling a void created by US banker ploy and subterfuge. Word has it she has the 100% backing from Berlin, not only because she speaks fluent German. One contact believes the IMF sequence of events has resulted in the United States being ring fenced. Few know that Treasury Secy Geithner speaks fluent Chinese. He is considering a resignation, most likely due to Chinese creditors telling to pack up and leave. It is early, but it seems the events to depose DSK might have resulted in even more solid opposition to the Anglo banker syndicate.

◄$$$ A GLOBAL TRAIN WRECK IS COMING. THE MAJOR CENTRAL BANKS ARE ENGINEERING THE WRECK. THE MINOR CENTRAL BANKS ARE OBSERVING IT. THE PATH IS OBVIOUS, WHETHER IN DENIAL AT THE HELM OR CHAMBERS ALONG FOR THE RIDE. THE PUBLIC RIDES THE CABOOSE, WHERE THE WHIPSAW OCCURS. IT COMES IN THE FORM OF COST INFLATION. OFFICIAL RATE HIKES WOULD ADD HIGHER COST OF CAPITAL TO HIGHER COMMODITY COSTS, A DESTRUCTIVE MANEUVER TO ADD SALT ON WOUNDS. $$$

The Australian Reserve Bank director Warwick McKibbin offered his opinion of a global train wreck. He is the first central banker to speak out and paint an accurate picture about the financial crisis that worsens each month, and reacts adversely to each policy initiative. He called it a slow motion train wreck that the global economy is facing, in his words. He expects Greece to be only the first nation struck down. He called the crisis to date a mere blip. He is on guard for a bout with price inflation not seen since the 1970 decade. He is concerned about disruption to the important Australia's mining industry. McKibbin pointed out that dozens of European countries had current gross government debts on track to exceed 60% of GDP, government debt is on track to be 200% of GDP, and the USGovt debt is on track to be over 100% of GDP. Several important countries are linked to the USDollar, including China, India, and much of Latin America. Their costs are in US$ terms, but income is often in local denomination, forcing a major squeeze. He s aid, "At zero interest rates that can be sustained, but at 5% interest rates countries have to put aside 5% of their GDP every year just to service the debt. That is not sustainable. Already consumers are not spending and investors are not spending, because of the tax increases that are in prospect. Greece, Portugal, and Ireland do not just need to have their debts written off. They need to have a 30% to 40% depreciation of their real exchange rate. There are two ways to do that: either pull out of the Euro and depreciate by 40%, or have deflation of 40% over the next 12 months. No society can survive having a 40% deflation that is been imposed by the International Monetary Fund and the European Central Bank.'' These are extreme measures that the Jackass has advocated for well over a year.

What the good professor does not address is the staggering impact on European banks, when the PIIGS debt default occurs. The cost of failed policy is price inflation and debased USDollar currency, which results in a uniformly higher cost structure. McKibbin expects a 1970 style inflation episode from all the money created by the USFed and USGovt in an attempt to inflate away the debt repayment obligations. He said, ''In India inflation is 9%, and in China it is 6%. That inflation is pushing up resource prices for now, but it will have to be brought under control with much higher interest rates." He anticipates that price inflation would spread worldwide. He fails to realize, like most inept Keynesian economists, that raising official interest rates would lift the cost of money in addition to the entire cost structure for materials, minerals, and energy. The double impact would be deadly. Rate hikes would kill entire economies and make impossible debt service. What is urgently needed is big bank liquidation, the avoided taboo topic and key to any solution. What is needed is a return of industry from Asia, by whatever means. Curiously and with intriguing imagination, he advocated the creation of an Australia sovereign wealth fund to store mining income while it lasted, set up in a separate account for each taxpayer so the government could not raid it. See the Stuff website article (CLICK HERE).

◄$$$ MORAL HAZARD IS GOING OVER THE TOP. IT HAS BECOME ENGRAINED IN THE ENTIRE POLICY MAKING THOUGHT PROCESS. AVOIDANCE OF SYSTEMIC FAILURE AND CHAOTIC BOND MARKET ACTIVITY IS THE PRINCIPAL PRIORITY, THE RISK ACCEPTED BEING FASTER PRICE INFLATION. HAZARD IS EMBRACED. FINANCIAL MARKETS HAVE LOST THEIR INTEGRITY ALTOGETHER. $$$

Enormous debasement of money has come, as a direct result of policy deemed sacred. The major currencies suffer from grandiose amplification of supply, as new money is either created or borrowed in order to save the system. The list of sacred motives is long, but here are several that will not be reversed anytime soon.

  • The entire group of Western bankers maintain the derivatives market
  • The USGovt will not let the major US banks go into failure
  • The USGovt will cover all losses for Fannie Mae and AIG
  • The USFed will not let the mortgage backed asset market decline badly
  • The Working Group for Financial Markets will not let the stock market decline
  • The Euro Central Bank will not let any PIIGS nation default on its debt
  • The Euro Central Bank will not let Greece default on its debt
  • The Chinese Govt will not let the major Chinese banks go into failure
  • The Chinese Govt will not let property prices decline
  • The Chinese Govt will not let regional debt do into default

The common denominator from the entrenched sacred policies is moral hazard. Simply translated, an investor or institution insulated from risk will manifest an insatiable appetite for risky bets because any potential losses would be covered by the central bank or government. This dynamic is most ugly within the unregulated derivative market, where volumes are staggering, profit margins bring huge profits, but often counter-parties do not even exist. The global financial authorities, whether finance ministries or central banks or global outreach exploitative arms (like IMF & World Bank), have succeeded in preventing a systemic failure. But the heavy cost in propping the sovereign bonds and marquee assets over the past three years has been a profound asymmetric disregard for systemic risk. The situation today is worse than in mid-2008. The victim has been the integrity of financial markets, a direct outcome from exercising of unlimited powers and dangerous quasi-religious faith. Witness the heretic high priests and their ideology of ruin that endlessly props the elite. They use printing money, market intervention, leveraged naked shorting, and nationalizations to maintain asset prices by order. They have ruined their markets, debased their currencies, and seen their sovereign bonds crumble. They have sponsored widespread price inflation in the vital essentials such as food & energy, inviting a global backlash. They have shown favor to the banker elite, while doling out contempt to the masses. The elite receive benefits, while the people contend with higher costs without benefit of higher wages or job security. See the Zero Hedge article (CLICK HERE).

◄$$$ PIMCO ANALYST SEES AN END TO THE CURRENCY WAR. WISHFUL THINKING FROM AN EXCELLENT TEAM, PROOF THEY ARE FALLIBLE DESPITE SOME BRILLIANT EXECUTIVES IN GROSS AND EL-ERIAN. THE CURRENCY WAR IS IN A MIDDLE STAGE. THE WAR IS AN INTEGRAL OUTCOME OF THE GLOBAL FINANCIAL CRISIS, AND A STRONG FACTOR TO INCREASE TENSIONS. RETALIATION AND TARIFFS OR PROTECTIONIST ATTACKS ARE PART OF THE WAR. $$$

Richard Clarida at PIMCO is a blockhead, a short-sighted oaf. Clarida actually believes the currency war is coming to an end. What an incredibly stupid position, evident of blindness to the revolt against the USDollar and its vigorous defense. The various maneuvering by major central banks in interest rate moves, in bond/stock market intervention, in decided import bans, and in altered tariffs create an antagonistic climate. Some analysts call it a race to the bottom, as nations attempt to bring down their currency exchange rates in order to gain export advantages. In doing so, they raise their cost structure. The more perverse description of what the Jackass prefers to call the Competing Currency War is that nations are caught in a pattern of beggar thy neighbor. At PIMCO where such dimwitted analysis could be prevented by basic internal quality control, Clarida spouts his nonsense. He ignores that exchange rates have been the most unstable in years, even in the last few months.

The stormy FOREX markets have gone through a quiet period that in the last week. The FX should be expected to grow more volatile. Check the Japanese Yen, which touched 127 for a veritable breakout and warning signal. The Canadian Dollar is a breath from the 105 level. The only stable range among the major currencies has been the US$ and Euro, nicely corralled between 140 and 148, the managed range. The hedge fund crowd has reacted to the FOREX instability by moving funds out of stocks & bonds and more into currencys, crude oil, and gold & silver, even copper. Such is the effect from the rounds of QE and debt monetization, otherwise known as currency debasement. The currency war is approaching a middle gear, hardly coming to an end, seen in spades with the recent Euro Central Bank rate hike in defiance of the USFed. What a naive perspective! The speculators among the investment community toss gasoline on the currency war, forcing more central bank reactions. Nations must protect their export trade, while the United States at the focal point must inflate or die. No nation can stand still, nor can investment nesteggs.

Clarida believes that the currency wars are coming to an end. This is shallow stuff indeed, that surely Gross and El-Erian would veto before released with a PIMCO seal. The PIMCO outlook for the USDollar sounds more like wishful thinking and prayer on a wing. Clarida said, "In our baseline case we do not see the Dollar being supplanted as the global reserve currency in the next three to five years. If foreign central banks were to decide that they did not want to hold Dollars as a reserve, they would have to hold some other currency. And right now there is not a single viable alternative to the Dollar. Aside from the 60% that I mentioned earlier, global reserves include about 30% in Euros and the rest is mixed. Given current circumstances in Europe, we would not expect the Euro to supplant the Dollar." Oddly, no mention is made of such currency alterantives as GOLD, a new trend evident in Asia. Furthermore, nations are turning more to managed commodity stockpiles and large scale energy and mineral projects in a vast diversification initiative. The world is moving, although slowly, in a deliberate direction away from the USDollar, motivated in revolt increasingly by survival. It is regarded increasingly as toxic, especially since the debt monetization in QE has debased the global reserve currency and caused shock waves. In the process the USFed reputation and prestige has been badly tarnished. They have become an agent of ruin, the weapon being the USDollar. Recall the famous words of Milton Friedman, spoken during an interview on National Public Radio in January 1996. He said, "One unsolved economic problem of the day is how to get rid of the Federal Reserve." He was never seen as a rebel.

A recent Erste Bank report cites the groundwork as being set for a return to real sound money, a movement toward the Gold Standard. The essence of the ongoing heated currency war lies in policy. International capital flows toward countries with good growth prospects and markets with integrity. It flows toward bonds whose central banks are confident enough to raise interest rates only gradually. Certain nations like Brazil have placed capital controls. Others actively intervene in currency markets, like Japan and more subtly Germany, with an eye to maintain economic competitiveness. Clarida claims that central banks in the United States and the United Kingdom are winding down monetary stimulus that has exacerbated the situation. They are only taking a rest before much more, which he fails to comprehend. The potential exists for emerging market currencies to appreciate, whose effects are part of the vicious cycle of exacerbation. The more developed industrial nations realize lower export prices for more sophisticated finished products. That sounds good except that only Germany and Japan would be such beneficiaries, nor the United States or numerous European nations. The US and Western Europe are grand importers. Higher currencies in Brazil or India or China or even Thailand result in higher import costs. The USEconomy is at the door of importing price inflation from Asia, something Clarida seems ignorant of. Amidst all the maelstrom of the jockeying and beggaring is the rise of tensions, which make the Competing Currency War progressively more hostile. Trade wars often turn into hot violent wars. See the Zero Hedge article (CLICK HERE).

FMX offers a good assessment of the currency war. He said, "We think what is happening is almost comical. Most Western governments are in a race to the bottom to get their currencies as low as possible. This is an attempt to cheapen their debt by debasing their currencies. Every time the Euro weakens, the Fed does what it can to strengthen it. One way is by opening swap desks with the European banks to give them all the Dollars they need. Another way is to say the magical phrase QE3. While the timing of this news is in many respects a coincidence (because the minutes are released weeks after the event), we do recognize that Western economies must devalue their debt. We are in a race to the bottom and the Euro is winning, hence the rally in Gold." 

◄$$$ AT LEAST $600 BILLION FROM QE2 WENT TO BAIL OUT FOREIGN BANKS. THE ABSENT BENEFIT TO THE USECONOMY IS AMAZING. RAISING THE COST STRUCTURE RESULTS IN BUSINESS STRESS, JOB CUTS, AND LESS HOUSEHOLD SPENDING. BUT AIDING FOREIGN BANKS DOES NOTHING FOR THE DOMESTIC ECONOMY. THE RELEASE OF CLASSIFIED USFED DOCUMENTS BROUGHT  EMPHASIS TO ULTERIOR HIDDEN MOTIVES IN THE QUANTITATIVE EASING PROGRAMS. THE STATEMENTS TO THE PUBLIC ARE CONSISTENTLY DECEPTIVE. $$$

A solid benefit from the Financial Regulatory Bill has been the release of declassified USFed discount window documents. The releases come in waves to digest the corruption, basic crime syndicate activity. To be clear, without equivocation, a large portion of the private USFed sponsored QE2 program went toward a stealth bailout of foreign banks. The biggest beneficiaries of the central bank bank support during the peak of the credit crisis were foreign banks. The name of Dexia, a large bank in Belgium, gathered the most among all banks. The banks bailed out for their bonds of various types were US-based bank subsidiaries of mostly European financial firms. Recall the sales pitch of the debt monetization program was to stimulate and aid the USEconomy. Poppycock! The motive of QE2 was to prevent a rout on the USDollar from foreign abandonment of USTreasurys and mortgage bonds, done in the US courtyard. The USFed bailout of foreign banks has not stopped, even with the decline in discount window borrowings, or with the unwind of the Primary Dealer Credit Facility. More clarity has come to why US banks have not lent. They were not funded. Their Loan Loss Reserves are being held at the USFed, almost sequestered like a hijack. Duplicity, deception, corruption, and gross incompetence are the calling cards of the USFed. As part of QE2, they re-routed $600 billion in capital from potential borrowers to insolvent foreign financial institutions in the past several months. Behold the hidden European bank rescue operation! Notice the rise in foreign bank cash assets during the QE program duration, a rapid $630 billion increase.

A final punctuation must be brought to light. Over half, twelve in all, of the primary bond dealers for USTreasury auction sales are foreign banks. They include DeutscheBank, Barclays, Royal Bank of Scotland, BNP Paribas, Credit Suisse, Union Bank of Switzerland, Daiwa, and Nomura. To be sure, the surviving Wall Street syndicate banks consolidated and merged, but the US banking system is insolvent. See the Zero Hedge article (CLICK HERE). Even more motive can be inferred from the revelation. A QE3 could be sold as a stimulus to American banks. The main problem is that any new debt monetization program would have no economic stimulus associated. It would merely be bond support to prevent USTreasury auction failures, and to circumvent a rout in foreign sales of USTBonds.

◄$$$ MAJOR DISCREPANCIES EXIST IN RECENT GOLD STATEMENTS FOR THE USGOVT GOLD HELD IN RESERVES. IT IS A PURE FICTION, AND THE LACK OF CONSISTENCY COINCIDES WITH GRAND FRAUD. THE USFED AND USDEPT TREASURY TELL A DIFFERENT STORY. LIARS ARE OFTEN INCONSISTENT, SINCE THE ANCHOR OF TRUTH IS ABSENT. THE CONCLUSION IS THAT ABUSE IS A GRAND POSSIBILITY. $$$

Financial writer Adam Rabie, the head of GoldNews.com in Toronto, has combed through the USFed and USDept Treasury official statements that pertain to US gold reserves. He has found several important discrepancies. Rabie concluded, "There appear to be many gaps in audit work already done. The standing remaining issues are that past audit work was not thorough or of a strict enough standard to ensure against possible misstatement. In short, independent auditors are often not directly involved in the physical audits and rather are admittedly working off numbers provided to them by a potentially biased party. Furthermore, there have been no thorough and complete checks on whether the Treasury's use of their gold stock complies with current legislation, in particular the Gold Reserve Act. In addition, a lack of matching results between Federal Reserve and Treasury financial statements calls into question some possibly obvious and odd errors. Moreover, there still lacks any audit on the Treasury's gold held at the Federal Reserve Bank of New York or the working stock of gold. Lastly, the issue of encumbrances remains as a major possibility of abuse of the Treasury's gold stock and will be difficult to settle without an extensive audit of all historical government financial dealings." Interesting choice of words in his claimed possibility of abuse for the Fort Knox gold bullion. Like it is all gone, leased and sold during the Clinton-Rubin Admin by Wall Street banks, enabled by the Treasury Dept dictation of near 0% lease rates in a grand open door invitation. The Rabie report is headlined "On Auditing the Treasury's Gold" which can be found at GoldNews (CLICK HERE).

◄$$$ USDEPT OF DEFENSE CONTRACTS ARE A GRAND SOURCE OF THE USGOVT BUDGET DEFICITS AND DEBT RUIN. THEY ARE SACRED. THE WAR ON TERRORISM IS PHONY, OFFERING GREAT COVER FOR THE NARCOTICS AND MILITARY SERVICE CONTRACT FRAUD. THE PATRIOTISM CARD IS TIRED BUT EFFECTIVE TO BLOCK CHANGE. $$$

Few even in the gold community realize that the first $1 trillion in USGovt debt came from the Vietnam War in the 1960 decade. Ample military contracts, campaign and lobbyist donations to Senators, easy cost overruns on weapons systems, desire to use experimental weapons (like Agent Orange), and more contributed to the debt. Halting the advance of communism is noble, but seizing the Cambodian Triangle for heroin was an added motive toward capturing a big prize. Gold analysts fail to comprehend that the Bretton Woods gold accord was broken largely from the Vietnam War consequence. To be sure, trade deficits with France were cited as the proximal cause, but a suddenly indebted nation from the war costs provided the over-arching condition and motive to abandon the gold standard. Fast forward to today. The more immediate and powerful cause for the USGovt debt crisis is the spiraling costs from the Pentagon and USMilitary industrial complex. In 2010, the defense budget totaled $663.8 billion, roughly half of the deficit. Contrary to the popular news media reporting, the United States debt debate is not entirely about the choice between raising taxes, closing tax loopholes, lowering Medicare payments, reducing entitlements, or ending ineffective programs. What routinely goes without mention is defense spending, weapon systems spending, veterans treatment spending, whose centerpiece is myriad defense contracts. See the Global Research website for a list that will boggle the mind (CLICK HERE), or the USDept Defense website for contract awards from June 30th alone (CLICK HERE). The perverse wrinkle is the excessive spending by the various USGovt agencies in support of the endless war that provides cost support for the narcotics syndicate enterprise. Some budget cuts might come for the Pentagon, but they will be very small. Later, they will be replaced as off-budget items. The topic of cutting such spending is almost completely non-existent. Those who harp on the topic are quickly branded unpatriotic, soft on terrorism, or unsympathetic to the victims who sacraficed in the war.

LOOMING USGOVT DEBT DEFAULT

◄$$$ A CONSENSUS HAS CRYSTALLIZED WITHIN THE WESTERN WORLD THAT GREECE WOULD INEVITABLY DEFAULT ON ITS DEBT. THE NATION CANNOT HONOR DEBT IN ANY PAYMENT SCHEDULE. DEBTS GROW AND REVENUES SHRINK. THE SAME IS TRUE OF THE UNITED STATES. THE ONLY CERTAINTY IS THE USGOVT DEBT DEFAULT. HOW IT HAPPENS IS ANYBODY'S GUESS. IT COULD BE SOME ROGUE EVENT. IT COULD BE THE BURDEN OF THE BROKEN PIECES WEIGHING ON THE SYSTEM. IT COULD BE A SYMPHONY OF DISPUTING VOICES, AS THE GRAND PERCEPTION CALLS THE AMERICAN LEADERS OF ALL TYPES GRAND LIARS AND EVEN CRIMINALS REGARDING THE FINANCIAL ACCOUNTING AND HIDDEN SLUSH FUND ACTIVITY. $$$

The list of borken pieces weighing the USEconomic and financial system is as long as it is diverse. The following list addresses a systemic failure in progress. The propaganda and secretive movement of illicit funds using countless devices to cover up the gaping wounds, this propaganda gradually is being comprehended by the multitudes. Some call it the 'Gong Show' effect of being pulled off stage, having lost the attention or patience or credibility of the crowd. A USGovt debt default is inevitable. The nation is not immune from arithmetic and powerful forces pulling it apart. A forced debt writedown and partial forgiveness will be in the works before too many more months, my forecast. The forced event will have some overtures, but might hit a climax with actual global negotiations at a conference table in a year or so. The US political, banking, and military leaders will explain that it is in creditors best interests to comply. The result will be abandonment and a formalized revolt by those creditors, resulting in the isolation of the United States in the aftermath. The road in isolation leads deeper into the Third World. The possible factors contributing toward systemic failure and debt default are:

  • USCongress daring the system to declare a debt default
  • a sequence of failed USTreasury auctions
  • foreign creditor boycott in USTreasury auctions with more conviction
  • ruin of several primary bond dealers involved in USTreasury auctions
  • sudden foreign creditor sales of USTreasurys in a recognized dump
  • recognition globally that US financial markets are all totally corrupted
  • USDollar refused for crude oil payments by the Saudis
  • an Interest Rate Swap blowup that exposes the credit derivatives morass
  • a USTreasury Bond market convulsion as yields rise on the 2-year, 5-year, and 10-year bond in reaction to the growing USGovt deficits and galloping USEconomic recession
  • revelation of USTreasury counterfeit practices led by JPMorgan & Wall Street
  • revelations of extreme additions to USGovt debt obligations and debt overruns
  • calculation of the gaggle of additional off-budget deficit costs, led by war costs
  • realization that the USGovt is on the hook for AIG payments on Credit Default Swaps for PIIGS debt default in an uncalculable manner
  • realization that the US housing market is permanently crippled, never to recover
  • comprehension that the USEconomy is gaining momentum in its deterioration
  • European nations booting USMilitary off NATO airbases for narcotics transport
  • recognition of the USFed bankruptcy as ironic victim of ruined mortgage bonds
  • the risk of USFed resignation from its role as central bank agent of the USCongress
  • exposure of deep Wall Street involvement in narcotics money laundering
  • exposure of the USMilitary involvement in HAARP usage and genocide
  • the shutdown of all gold & silver futures contracts at COMEX
  • the entire world deciding to cut off the unlimited credit card for USEconomy, USGovt, and USMilitary in the interest of self-preservation

◄$$$ A SENSE OF URGENCY HAS CREPT INTO THE DEBT NIGHTMARE CHAMBERS. THE RULING ELITE HAVE REACHED THE END OF THEIR ROPE. NUMEROUS FINANCIAL NICETIES ARE LIKELY TO SOON VANISH FOR AMERICAN CITIZENS, THE HARDSHIP BEING SERVED AS WAGES TO THE THIRD WORLD PLUNGE. THE UNITED STATES IS GREECE TIMES ONE HUNDRED. NEXT COMES BROADER JOB LOSS, MORE PRICE INFLATION, CORPORATE & BANK FAILURES, AND THE ARRIVAL OF A WAVE OF CARPETBAGGERS. $$$

Something will occur as a flash point event that will trigger the tipping point. Some guess Iran, others Japan, but my suspected trigger is Italy or Spain coupled at the same time with Greece and Portugal. The command factors could be well marshalled if a natural disaster strikes, since it would touch all domains in the economic, financial, social, and political sphere. The United States will continue to transform into a Financial Iron Curtain, with very difficult conversion of money and great obstacles to transferring funds outside the country. The European sovereign debt crisis has begun to hit the US, the contagion clear to many, but some are blind. Wealth and financial security are in line as targets for some degree of destruction. The chance of a misjudgment or wrong assessment of impact, namely some bad decisions by politicians and bankers, could result in a sudden collapse much like the Lehman Brothers incident in September 2008. External events are also a possible vulnerability. Some events with the Saudis or Libya or Syria could trigger events going out of control in a faceoff with Russia & China. A big bank failure in Italy or Spain could trigger a sequence of nasty financial dominoes that reach London and the United States. A grand Ponzi Scheme is unraveling, whose center is the sovereign debt in general, but whose epicenter is the USDollar and its portable vehicle in the USTreasury Bond. The rotten benefits of the Greenspan Era and Bernanke Patchwork are in full view. The cancer on capital spreads and the black hole of profound losses grows. The extreme measures by the USGovt are in high gear, such as confiscation of federal employee pensions. In 2004, the Jackass proclaimed to family members that not one dime would be seen from my Social Security source. The means testing is almost final, eliminating much of the SS benefits from the wealthy. The forced conversion of 401k pension funds is next. The forced conversion of bank CDs also lies ahead. The tax benefit angle and the FDIC insurance angle will be the leverage applied with draconian force.

A wide variety of removed features from the American landscape could soon easily include such mainstays as an end to home interest deductions, new confiscation taxes on certain windfall gains, crude confiscation of accounts helf by suspected terrorists, restrictions on US gold & silver ownership or purchase, controls on moving private wealth and funds offshore, and other dramatic maneuevers. Liquidity restrictions are coming to bank, stock, and bond accounts, limiting withdrawals. Expect civil disobedience to rise. Many popular federal programs are likely to be phased out quickly. The financial crisis will not see an end to fast rising price inflation, the common cost of currency debasement. A great event is coming to trap USDollars. Those who do not prepare in advance will see the door close very soon, like in weeks or months, not years. The USGovt will undoubtedly take much of the wealth and promised unseen benefits, attack and attach them with its diverse hooks and emergency legislation, and throw them at the unfixable problem. They will buy more time and fix nothing in the process. The greatest transfer of wealth in modern history is in progress, soon to reach a climax. It will go from ruined paper wealth to tangible assets in a svelte wave to take your breath away.

Americans fail to comprehend that the United States is Greece times one hundred, maybe worse. Michael Hudon believes Greece provides a dressed rehearsal for the USGovt debt collapse, as bandaids are applied and foreign carpetbagging soon will follow. Greek Govt is selling off its roads, its land, its port authority, its water and sewer sysetms. Such measures invite harsh reactions from the population. Greece has cut the budget, reduced pensions, canceled projects, and sold large stakes in jewel corporations. Such measures reduce revenues and make the debt burden more crippling. This is precisely the combination Poison Pill (IMF prescription) and asset sale that assures economic implosion. The state of Illinois has been doing the same thing. The state of Minnesota stands ready to make similar moves. It is as though the major forces are attempting to implode the system with internal detonation devices. When writing about the plight of Greece, the words of Hudson apply to the United States as well, "The people are not behind this loan. When we repudiate the Greek debt, you can do one of two things: 1) either you can take us out of the Common Market, the European Union, and you can kick Spain and Portugal out; 2) if you do, we are going to form our own union and this union is not going to pay the debts to you, because no country can be expected to push itself into a generation of depression in order to pay creditors who simply create all this credit to lend to governments on computer keyboards." The anger is growing in both public outcry and analyst prose.

◄$$$ THE UNITED STATES GOVT DEBT TALLY SHOULD INCLUDE THE NEARLY $3 TRILLION IN STATE AND MUNICIPAL DEBT. THE DEBT LIMIT HAS SYSTEMATICALLY BEEN RAISED IN A MARCH TO RUIN. IT IS GROWING EXPONENTIALLY AND KNOWS NO POLITICAL PARTY PREFERENCE. IT CANNOT CONCEIVABLY BE PAID BACK. THE ACCELERATED RISE IN USGOVT DEBT GOES HAND IN HAND WITH THE PONZI RISE IN USTREASURY BONDS. THEY ARE IDENTIFIED BYACCELERATION IN FLOW AND REQUIRE EVER INCREASING FUNDS TO FEED IT. $$$

The official USGovt debt is a big part of the entire calculation. To achieve true accounting on the actual debt burden, one must include the countless American municipalities, such as states, cities, and counties. They face the same deep debts and deficits. The 50 US States have combined topline official debts of $2.7 trillion. Any discussion of USGovt debt must include all levels of government, since public held debt. Easily an additional $1.0 trillion should be added to the total, after inclusion of the several hundred smaller municipalities. The leading poster boy, California alone has debt of $371 billion. Its economy would rank it as the seventh largest in the world. But its debt is greater than all but 21 nations in the world, directly after China at $406 billion and not far behind Greece at $532 billion! See the USGovt Spending website (CLICK HERE). The unfixable nature of the USGovt debt should be emphasized and repeated often. If all corporate and private income were confiscated in tax, the deficit would remain. If all federal offices and functions were ceased, except for Social Security and Medicare, the deficit would remain. Toss in the sacred wars and their off-budget costs, to see the fiasco.

The history of the USGovt debt shows the climb to ruin in scaled heights. Notice its parabolic nature. Since 1940, the debt limit has been raised 75 times, or more than once each year on average. It was first raised from $49 billion to the most recent limit of $14.292 trillion. Nearly all of the debt ceiling increases were called temporary in a sham. The debt ceiling was just $400 billion when the United States abandoned the gold standard in 1971, having since grown over 35-fold. Such is the cost of removing the gold standard as anchor. The debt limit reached $1 trillion in 1981 after the full effect of the Vietnam War was felt. The Reagan Admin then doubled the limit to above $2 trillion. Next, the Bush I Admin doubled it again to $4 trillion in just four years during a powerful recession, and incredibly a single year deficit exceeding $1 trillion easily remembered. Next, the Clinton Admin raised the debt ceiling by another 50% to $6 trillion. Bear in mind the $2 trillion lift to the debt limit occurred during what the revisionist history hacks called the Decade of Prosperity, the supposed best economic times in recent American History. Bring next the Neo-Cons (aka Neo-Nazis) in the Bush II Admin another 50% to the debt limit to $9 trillion. They did their work under cover of the War on Terrorism and during the popping of the stock and real estate bubbles.

The acceleration in debt limit volume was the direct consequence of deep structural problems from easy monetary policy, bitter fruits from the Alan Greenspan tenure, and the Strong Dollar Policy cart pushed by Robert Rubin. Ironically, it is the Rubin Doctrine that formalized kicking the can down the road, the same can that has gone nuclear and oversized. After the global financial meltdown struck in September 2008, the debt exploded to annual $1.5 trillion annual increments. The Obama Admin, despite all rhetoric of change, continued the course, and even saw acceleration of debt onto the collectivist path. The American Politburo grew during the Bush II Admin on the banking side of the table but it mushroomed under the Obama Admin, which added another 50% to the national debt, taking it to $14.292 trillion in just 2.5 years. Many competent analysts suspect that a shock comes to the USDollar (down), the Gold price (up), and to the USGovt debt rating (downgrade) when the next inevitable increase comes to the legal USGovt debt limit. It will likely be lifted to around $16.5 trillion. They will buy another 18 months. More likely is a patchjob to lift the debt limit a few hundred $billion, not enough to carry through the 2012 elections. See the Atlantic magazine article (CLICK HERE).

John Williams of Shadow Govt Statistics summarized the debt default struggles well. He pointed out how the actual numbers cited in the financial press are way off the mark. He said "What they are doing now is the type of thing that has happened a number of times before, although there seems to be more of a serious challenge this time around and risk of an outright default on the US debt. This would be disastrous for the financial system. Indeed it likely would trigger very heavy selling of the US dollar, which would accelerate the inflation process and move us towards the hyper-inflation scenario. The actual deficit, including the increase in the unfunded liabilities for Social Security and Medicare that we go through each year, have us looking at an annual deficit of four to five trillion dollars. So the small cut being proposed of four to five trillion dollars over ten years is not going to do much to bring the system into balance. If you actually have a default in USTreasuries, you destroy the credibility of the dollar, you destroy the financial credibility of the US government. A lot of work has already been undertaken in that area in the last couple of years by the Federal Reserve and by the extremely irresponsible fiscal policies of both parties."

Put the USGovt into perspective of a single household. Imagine a family with total income of $50k per year, but with a $360k credit card balance, adding $90k to the debt balance each year. With foreign creditors stepping aside from the process, it is like the household losing access to some of their 33 credit cards in use. The household cannot find new credit lines. It is seeing some credit lines reduced by dictum. So the solution since mid-2010 has been for the household to print money in the basement and make hokey deposits at the banks issuing the cards, hoping not to invite too harsh a reaction. They march from bank to bank to make the hokey deposits with satchels of freshly printed money, waiting a few hours for the ink to dry, hoping for no smears. They know the game cannot last too many more months. This household is the USGovt in a microcosm, with the figures proportional and the response tactics equal.

◄$$$ THE TOP DEBT RATING AGENCIES ARE POSTURING LIKE LIMP-WRISTED GENTLEMEN, THREATENING TO DOWNGRADE THE USGOVT DEBT IF IF IF, OFFERING MEANINGLESS PERCENTAGE PROBABILITIES OF TAKING ACTION, PUTTING IT ON WATCH, BUT DOING NOTHING. THE WEISS RATINGS DOWNGRADED THEM AGAIN, WITHOUT CONDITION EVEN FOR A PATCH TO THE DEBT LIMIT. $$$

Weiss Ratings, an independent rating agency of US financial institutions and sovereign debts, downgraded the debt of the United States government from C to C-minus. The Weiss downgraded rating for the USGovt reflects a continued deterioration, marred by heavy debt burdens, shaky international stability, and poor economic health. The Weiss senior financial analyst Gavin Magor said, "Our downgrade today is not contingent on the outcome of the debt ceiling debate in Washington. It is driven exclusively by the numbers, which indicate that, in addition to a decline in the long-standing weaknesses we noted three months ago, the United States has already lost the golden halo that helped guarantee liquidity and acceptance of its government securities in global markets." On the Weiss Ratings scale, the downgraded rating equates to a BBB-minus on the scales used by other credit rating agencies, or approximately one notch above speculative grade junk. The main debt rating agencies remain cowards, given to regular genuflections before the syndicate they take payments from. They attempt to manage their risk instead of doing their job, never having recovered from their failure in 2008 and 2009. At that time, thousands of AAA-rated bonds and half a dozen AAA-rated major financial firms saw their corporate debt die.

◄$$$ BEWARE OF POLARIZATION OF THE POLITICAL CAMPS. THE PROSPECT OF REAL PROGRESS IS DIM. SOLUTIONS WILL BE PATCHWORK TO BUY TIME, JUST LIKE WITH GREECE. MEANWHILE THE WAR COSTS ARE SACRED. $$$

At first glance, it seems the Democrats with their insistence on no entitlement cuts, and the Republicans with their insistence on no tax increases, have put themselves in such a polarized position as to render compromise impossible. That position manifests the 5 o'clock fascist tick versus the 7 o'clock marxist tick, in full conflict on the political clock dial. Although close on the hour hand traverse, they are as far apart as Hitler and Stalin. That is the United States today, a bizarre mix of neo-nazis pitted against collectivists, both intent on rubbing out civil liberties. The only thing they hold in common is the deep dependence and devotion to the narcotics monopoly, whose funds keep the Wall Street and money center banks alive like a vast intravenous line. They might be on orders to produce a systemic failure by means of a debt default, an ugly scenario loaded with plausible deniability. Look for the path of least resistance to be taken eventually, which happens to be the path of shallowest solution. No long-term solution is possible, so none will be forged. Expect some attempt to make a mid-term patch on the debt situation. The risk is for a catastrophic situation to arise from unplanned external events, or accidental triggers of contract violations. Even a minor default could start a process that grows out of control quickly. Legal contracts might soon have to be suspended, in a grand national Force Majeure. The reality of a debt default for the USGovt is dire and imminent. Even non-stop Printing Press operations would exacerbate the problem, when many naively believe such operations would prevent a default. Papering over the USEconomy would cause a rapid rise in price inflation and unemployment from business ruin. The practical impact of a debt default is no more credit extended by foreign investors (end of credit line), no more foreign purchase of debt at auctions (pure monetization), and no more exports to US (unavailable letters of credit). The advent of Third World would strike like a nuclear bomb.

Be sure to know that the Afghan War is all about narcotics. In fact, since 2003, when the USMilitary exerted its influence, the heroin output for the tiny special nation grew from around 250 to 300 tons annual to approximately 1300 to 1400 tons annual today. The US contractors have developed a sophisticated vertically integrated business, complete with chemical process plants and delivery systems, aided by bribery of chieftains. The heroin distribution goes through Kosovo and Turkey to NATO airbases in Europe. Few US citizens realize the extreme profitability involved with operations. The revenue generated is between $330 and $350 billion per year. Almost all the costs are covered by the Pentagon budget and other black bag budgets, such as stolen money from Fannie Mae. So costs are covered but profits are entirely for the syndicate. Therefore, the USCongress is instructed not to touch the Pentagon and security agency budgets. They are too profitable, and kickbacks to the Senators and House committee chairs are common. In fact, the Wall Street and big money center banks would collapse without the narcotics funds. A few such banks have already cut deals during prosecution for money laundering in a charade of justice. A recent Wachovia negotiated agreement last year called for a fine of 3/100-ths of a cent per dollar in funds moved. That is a very small business cost, less than post-it paper stickies for office desks and walls.

◄$$$ USFED SPONSORED FACILITIES ARE WORKING OVERTIME TO PLUG THE HOLES LEFT BY CURTAILED QE2. THE VOLUME IS 10 TIMES WHAT IT WAS IN 2008 FOR THE NUMEROUS OFFICIAL USFED LENDING FACILITIES, THE SO-CALLED ALPHABET SOUP. SECURITIES LENDING IS HUGE AND CONTRADICTS THE CLAIMED END TO QE2. THE MORE ACCURATE DESCRIPTION IS THAT QE IS ENGRAINED IN THE MONETARY POLICY AT THE USFED IN ORDER TO PREVENT IMPLOSION. $$$

Securities Lending is officially astronomical and still trending up as the financial markets digest the stated plan to end QE2. The data states otherwise in contradiction. The Daily Securities Lending (shown in green bars) at the current levels effectively provides the same backdoor USTreasury Bond support as Permanent Open Market Operations (POMO). The numerous scattered USFed official lending liquidity facilities are a travesty and grand blemish on central banking. USTBond management is the centerpiece of the American Politburo of central planning, and in this case, emergency room treatment. Money from the marginal spigots form a torrent of funds used to support bond prices and plug holes in the debt writedowns. Expect the red portion from POMO activity to vanish, but for the green portion to rise from the backup lending facilities in compensation. Note the brisk daily activity by the USFed to prevent the implosion of the USTreasury Bond complex. This activity is complemented by massive activity in the Interest Rate Swap arena, the leverage platform. Together they prevent bond market collapse. To put the volume into perspective, Securities Lending averaged $3 to $5 billion per day before 2008. It is now consistently ten times larger!!

◄$$$ JPMORGAN ADDED A COOL $9 TRILLION IN MOSTLY INTEREST RATE SWAP CONTRACTS OVER THE LAST THREE MONTHS FOR THE PURPOSE OF HOLDING TOGETHER THE USTREASURY BOND COMPLEX. THE HIGH TENSION CABLES HAVE PREVENTED AN IMPLOSION. THE ARTIFICIAL BOND DEMAND FROM IRSWAPS IS MUCH LARGER THAN THE MIGRATION FROM STOCKS TO BONDS. THE RUB IS A RISING GOLD PRICE. $$$

As preface, bear in mind that the Office for the Comptroller to the Currency has publicly admitted that the Interest Rate Swap contract has no end user, or more specifically, no declared or identifiable end users (counter-parties) for the product. The IRSwap is a device loaded onto the bond market with heavy leverage that keeps interest rates artificially low. The entire financial market price structures are thus wrong, a badly corrupted market for two decades. Low rates distort the cost of money and thus capital, resulting in a gradual destruction of the entire capital base whose system forms capitalism. The monetary inflation destroys capital while low rates produce asset bubbles. The bubble then bust destroys more capital. That is where the United States is today, a wrecked capitalist economy. Juxtapose these dynamics with the near complete apathy of credit derivatives. Wall Street tells us of their value to keep our system vibrant, strong, and sustaining. In early 2006, President Bush granted for national security reasons the right for JPMorgan and other giant banks to doctor their accounting and disclosure obligations even though publicly traded firms. The obscenely large derivative books are an integral part of the US monetary policy. With the Exchange Stabilization Fund, the Wall Street managers of the USGovt maintain the desired USTreasury yields that suit their needs, purposes, and goals. Refer to the syndicate.

Rob Kirby is an outstanding analyst whose work focuses mainly on the bond market, the gold market, and the derivatives market. His article entitled "Derivatives: A Capital Markets Gong Show" illustrates a big event in the first quarter of 2011 that went unnoticed. The top 25 US commercial banks and trust companies hold a whopping $243 trillion in derivative contracts, which hold together the US financial system like a toxic glue without regulatory eyes. Of these, 82% are Interest Rate Swaps, those devices that with heavy leverage are used to push interest rates low, or wherever they want. They can enable high rates also, if that suits a purpose, like in June 2000, Rubin helped to pop the tech telecom stock bubble as short-term interest rates rose over 6%. He resigned early from the Clinton Admin in order to fully exploit the shorting of the entire S&P500 with leverage as a full-time project. The other large component is the Credit Default Swap, making up 6.1% of the derivatives market. They are insurance for bonds of all types, mainly corporate and sovereign, like Lehman Brothers or Greek Govt debt.

Here is the big story! Between January 1 and March 31 of 2011, the so-called bucket shop of Morgan Stanley increased their derivative book from $42.1 trillion to $51.2 trillion. That is a $9.1 trillion rise in a mere three months. Presume they added mostly IRSwaps. The term Bucket Shop comes from putting the contract paper slips into a bucket, an end of the road since no other party must be satisfied in any contract. A seller needs a buyer and vice versa, but not with such illicit derivative contracts. The USTreasury bubble is difficult to manage, and requires extreme tools and leverage. The IRSwap is such a device, abused to create artificial demand for USGovt debt securities, the USTBonds. The Wall Street Made Men and the parrots on the US financial media try to explain that strong demand for USTreasurys occurs when other sovereign bonds like in Europe are under great strain. If ratios are applied, then around $7 trillion in artificial notional bond demand was created by one firm alone, Morgan Stanley, in a single quarter of activity. Expect more such $trillions to be applied in 2Q2011. This is the biggest portion of demand, an order of magnitude greater than what comes from the migration from stocks into bonds. The unintended consequence of both the artificially low interest rates (ZIRP) and the extraordinary monetary inflation (QE) is fast moving Gold & Silver prices. But the nasty illicit tools wielded by the Wall Street Boyz cannot prevent USTreasury auction failures and USGovt debt default. See the GoldSeek article by Kirby (CLICK HERE). For a solid discussion of Credit Default Swaps, see the King World News interview of Jim Rickards of Tangent Capital and formerly Omnis, the indefatigable analyst whose job it seems is to do interviews (CLICK HERE).

◄$$$ HYPER MONETARY INFLATION DESTROYS CAPITAL, BUT LOW RATES ENCOURAGE ASSET SPECULATION THAT LEADS TO ASSET BUBBLES. THEIR INEVITABLE BUSTS LEAD TO TREMENDOUS LOSS OF ADDITIONAL CAPITAL IN A SWIRL OF WRECKAGE AND RUIN. $$$

Hyper monetary inflation destroys capital, and only indirectly destroys liquidity. It produces liquidity from printed money, to be sure. But that effect is in the financial market. The tangible economic effect is the death of capital from the rising cost structure, and businesses shut down. Plant machinery and business equipment go out of service. They are sold off or simply rot like the steel mills. Profits and discretionary spending are harshly squeezed. The USFed monetary policy is destroying capital from ruined businesses and foreclosed households. The result is lost investment capital going into a death process, otherwise known as business failures and capital liquidation. The business owners invest less in everything downstream because they struggle to survive. The same is true for households, who over time have much less in discretionary spending. Their capital is tied up in the homes, which all too often have gone into foreclosure. The bank puts them in mothballs on the balance sheet or sells in liquidation similarly. The result often is an empty home. The consumers are crippled. But the hyper monetary inflation will continue with QE if not GLOBAL QE because they must prevent USTreasury defaults. Doing so will create more cost inflation, which must be distinguished from price inflation. The latter is more benign, since rising wages help the process. The import trade from Asia will bring the price inflation to the USEconomy. Remember the corrupt bankers and beholden politicos desperately want to avoid secondary inflation effects, namely higher wages. Therefore their desired outcome is systemic collapse, since the cities and communities will not be able to afford the higher costs.

The liquidity shock is horrendous within the USEconomy, bad for businesses, households, and the stock market. That is a big reason why the USFed engages in its Quantitative Easing, to buy USTreasurys and to provide grandiose hidden support for the stock market. But no support comes for households, stuck in foreclosure, stuck with inadequate wage increases, stuck with unemployment checks. The USGovt homeowner aid programs have been a parade of charades. The place to be during the ruinous process, the grotesque deterioration, and massive liquidation phase is MONEY, as in GOLD & SILVER. The collapse of the monetary system is well along, as sovereign debt turns into toxic paper just like mortgages did. Witness the pathogenesis process go up the ladder and attack all forms of paper wealth, the climax being sovereign debt. Fiat funds will chase true money and struggle if not flail until it finds true money. All paper asset investors will find Gold & Silver eventually, some very late. The last round of prominent buyers will be buyers as we sell and enter retirement. The final huge challenge is to find the right yield producing investment to park all that cash from our profitable precious metals sales in a few years. Right now maybe Brazil bond or Iceland bonds, just a guess without extensive research. That research will come in 2015.

USTREASURY DEEP DISTRESS

◄$$$ HUGE ROLLOVER OF $500 BILLION IN USTREASURYS COMES IN MID-AUGUST. THE OFFICIAL DEBT MATURES AND MUST BE ROLLED OVER SOMEHOW. THE PRESSURE ON THE BOND MARKET GAMING IS RAPIDLY ESCALATING. THIS DOES NOT INCLUDE NEW DEBT. OBVIOUSLY A QE3 IS COMING, OR ELSE A USGOVT DEBT DEFAULT OCCURS IN PLAIN VIEW FROM FAILED USTREASURY AUCTIONS. $$$

In the next eight weeks a whopping $500 billion in USGovt debt must be rolled over. It forms a ticking time bomb at a time when the USFed has made its bluff of ending QE2. The end of Quantitative Easing can only happen if a powerful new bidder comes to the fore, beyond the finite diverted flood of funds from the stock market into bonds. The focus of attention by minimizing agents to the USGovt debt default threat point to two factors. First the revenue stream is on the order of $200 billion per month, even with a slowing USEconomy. To be sure, that is a lot of money, but grossly insufficient to cover all expenditures. Second, the interest rates are ridiculously low on short-term USTreasurys, where most of the debt has been financed. They overlook like novices the pressing immediate problem. They miss the magnficent challenge staring the bond market in the face. Unless the maturing USGovt debt can be rolled over on a weekly basis on growing volume, the interest rate does not matter so much. Borderline USTreasury auction failures, even a nasty string of lousy auctions, can work to undermine the process. Some bad press and horrible commentary could lift the interest rate, inviting a disaster in debt finance for the growing burden.

Enter the always forgotten maturing debt argument. A staggering $467.4 billion in USGovt debt matures in the month of August alone. This presents far greater risk to the integrity of the bond market and the credibility of an ended QE2. New debt must be issued, whose proceeds are obligated to repay the maturing debt plus interest due. The USDept Treasury requires market access throughout August to avoid defaulting on maturing debt. The details include about $380 billion in short-term USTBills maturing, plus $90 billion in long-term securities. A quarterly refunding auction is scheduled on August 15th. Furthermore, the centerpiece of debt comes from the basic federal deficits that pile up. On a net basis, an additional $134.3 billion in deficit must be satisfied, arising from debt linked to truncated maturities. See the Zero Hedge article (CLICK HERE).

This debt distress does NOT even address the new fresh USGovt deficits. They must be satisfied with debt securities promptly, bought by market investors or covered by debt monetization, the new specialty dependence from the USFed. Obviously, QE3 will come, the only questions being when and how much pain the bank leaders wish to dole out in order to win political approval for the continued currency debasement and economic destruction. The opinions of clowns like Druckenmiller, who proffer stupidity behind calls to default on debt, are indeed shallow without vision into the future consequences. He might have enjoyed too much cognac in his snifter, wrapped himself in a silk ascot, removed himself high above the unwashed masses. Basic monetary inflation will be the last resort, even if painful, even if more of the same delivered hemlock to cost structures. The nation would continue to have $1.5 trillion in annual deficits to finance, while $500 billion in annual trade gaps must be invested by foreign exporters. The typical USTBond investors will increasingly choose commodity stockpiles, mineral & resource properties, along with Gold & Silver held in reserves. The USDollar rout would be rapid.

◄$$$ USGOVT DEBT ISSUANCE IS READY TO EXPLODE AS SOON AS THE LIMIT IS RAISED. THE FLOOD OF SUPPLY WILL MEET A QE2 ENDING TO CREATE A MASSIVE GAP. THE USFED WILL BE FORCED TO DO BIGTIME STEALTH QUANTITATIVE EASING TO COVER THE SUPPLY. A GRAND BACKLOG IS BUILDING. SEVERAL CHANNELS WILL FEED THE NEW UPCOMING DEBT SECURITY SUPPLY. RAIDED PENSION FUNDS MUST BE REPLACED. MATURING USTBILLS MUST BE ROLLED OVER, LYING IN WAIT. FURTHERMORE, TAX REVENUES HAVE SLIPPED, MAKING THE DEFICITS WORSE. $$$

Prepare for a surge of USTreasury issuance as soon as the USGovt debt ceiling is lifted, apart from rollovers. Strange dynamics are at work with the federal accounting processes. The debt limit was reached in mid-May. Components of the total debt have been shifting. The total marketable debt slowly tracks higher, while federal employee pension accruals decline. The total tally has been remarkably flat at $25 million below the mandated ceiling since mid-May, in deference to the enforced legal limit. The problem is that with an expected $1.5 trillion budget deficit in the calendar 2011 year, the cutback in debt issuance is temporary. When the official debt ceiling is raised, the USDept Treasury will be compelled to issue its usual torrent of debt as before. However, it will have to issue massively more debt securities immediately in order to catch up to the ongoing run rate, and also to put back the funds from the same retirement accounts it plundered for the past six months. The runrate dictates that a whopping $265 billion in debt issuance has been foregone in delays, which must come to market quickly, just waiting to flow. That is the cumulative divergence between the actual and required amounts. The USGovt will be forced to play catch-up, and plug a gap of over two months worth of accrued USTreasury issuance. Check out the arithmetic. The USDept Treasury will have to sell not the typical $100 billion in net debt, but rather at least double that volume in August and September. Worse, this will happen at a time when there is supposedly no QE2 bidder to pick up the enormous excess supply. Obviously QE3 will happen, whether announced and admitted or not. My conjecture is the bankers will lie openly through their teeth, in order to maintain and project an image of responsibility. By nature they are liars and thieves.

Some accounting details to note. The main reason for the total debt stuck without growth is that the USTreasury Bill maturities have not been rolled over. They wait in abeyance. Also, funds have been raised (raided) en masse from the employee retirement funds, which they euphemistically call disinvestment. They must be replaced. All auctions have gone swimmingly as a result. One of the ungainly requirements is that all 2011 deficits must be securitized with events taking place in the year 2011. Hence, expect a dramatic leap in total issuance in the second half of the year before January. To make matters worse, if that is indeed possible, recent tax withholdings have dropped substantially in recent weeks, thus even more debt will have to be financed through debt issuance. The reality of a USEconomic recession jump shifts quickly the deceptive statistical reporting. Some bond experts anticipate the net effect of the upcoming USTreasury flood to be a massive curve flattening. It will be one for the ages. The short-term and mid-term yields will rise, but surprisingly the long end might come down from all the horrendous mauling to the USEconomy and stock market. Tyler Durden points out that a repeat of the residential mortgage backed securities effect could come, like when the USFed dumped its Maiden Lane II package in the open market last year. Prepare for a flood of debt issuance on the short-end, where the rates are near 0%, as soon as the debt ceiling is lifted. See the Zero Hedge article (CLICK HERE).

◄$$$ THE USDEPT TREASURY HAS ITS BACK AGAINST THE WALL. WITH NO MORE PENSION FUNDS TO RAID, THEY MUST CEASE SUPPORT FOR THE EMERGENCY EXCHANGE STABILIZATION FUND. IT IS THE PRIMARY FUND ABUSED TO INTERVENE IN NUMEROUS ARENAS. WHEELS TO COME OFF THE ENTIRE LOCOMOTIVE, AS FINANCIAL MARKET INTERVENTION MIGHT BE CURTAILED. THAT IS, UNLESS AGENCY NARCOTICS FUNDS ARE TAPPED. EXPECT SOME WILD UNPREDICTABLE ACTIVITY IN VARIOUS FINANCIAL MARKETS. $$$

The ESF is a hugely important fund. The USDept Treasury has announced the end to investment in the official Exchange Stabilization Fund. It is running out of funds to raid in order to keep the USGovt going. After pillaging the G-Fund and Civil Service Retirement & Disability Fund (the USGovt retirement funds), Geithner was forced to suspend reinvestment in biggest financial market intervention office on the planet. UnderSecy for Domestic Finance, Jeffrey Goldstein announced on July 15th, "Today, as previously announced, the Treasury Department will suspend reinvestment of the Exchange Stabilization Fund, the last of the measures available to keep the nation under the statutory debt limit." The Exchange Stabilization Fund is abused by the USDept Treasury to manipulate the stock market, the bond market, and the currency markets, at times with indirect CIA assistance. That means narcotics money is drawn from the laundered accounts on Wall Street. Expect more volatile FX market activity, as in faster moving US$, Euros, Yen, British Pounds, and Swissies in the coming weeks, more fireworks but after July Fourth. See the Zero Hedge article (CLICK HERE). To be more clear, the risk of extreme events is fast rising, unpredictable events. It is difficult to forecast the likely directions, when a major slush fund is not available to distort markets.

◄$$$ PRIMARY DEALERS ARE LEFT AS BAGHOLDERS ON SHORT-TERM USTBILL AUCTIONS. THE INDIRECT BID IS NEAR A DECADE LOW, AS FOREIGN CENTRAL BANKS AND OTHER INSTITUTIONS STEP ASIDE AND AVOID THE AUCTION. LOOK EVENTUALLY FOR SOME DAMAGE TO THE DEALERS, WHO ARE BADLY EXPOSED WITHOUT A QUICK HANDOFF OF USTBONDS TO THE USFED FROM THE P.O.M.O. WINDOW. THE LOUSY USTREASURY AUCTIONS WILL BECOME THE NORM. THE PROCESS HAS BEGUN. DEBT MONETIZATION WILL BECOME A FIXTURE WITHIN USFED POLICY VERY SOON. $$$

The USTreasury auctions in late June were miserable. Damage was done. Yields rose, only to be rescued by the conveniently weak June Non-Farm Payrolls report. My belief is that the jobs report was sabotaged to aid bonds by generating bond demand. In recent auctions, a pattern is coming into view. The Indirect Bids are in notable decline. On June 25th, a completed 3-year USTBill auction suffered damage, as the Bid/Cover ratio fell from 3.46 seen in May to 3.08 on the auction date. Worse, the Indirect takedown was a puny 22%, the lowest since February 2008. That is lower than even before the Bear Stearns implosion. As a result Primary Dealers were left holding the bag on this auction, with 64% of the total product going to the Dealer consortium, and the balance or 13.5% going to Direct Bidders. The heightened risk for the dealers is the end to the QE2 open window on Permanent Open Market Operations, which focused in particular on the 2-year USTBill. In the last few months, the average turnaround time has been a mere three weeks for the dealers to scramble and dump the bonds on the USFed through the window. See the Zero Hedge article (CLICK HERE).

Days later, on June 28th a lousy 5-year USTreasury went off poorly. The Bid/Cover ratio fell to 2.59, really poor and the lowest so far this calendar year. On July 1st, a similar rout occurred with a 5-year USTreasury auction. The description by veterans was that the belly of the yield curve was being eviscerated. A tug & pull is at work, with heavy supply forcing yields up, while bidders are scant. On the other side, the bids come from stock investors who perceive the galloping recession. In the last couple weeks, the auction performances have been a little better. It is the Jackass opinion that the threat of deep embarrassment from a failed USTreasury auction will foster broad USFed support for QE3. In fact, the ongoing heavy supply of securitized USGovt debt assures that QE (debt monetization, using printed money to cover the debt issuance) will become a permanent part of their monetary policy. It will actually become Global QE.

◄$$$ CHINA BOUGHT MORE TREASURIES THAN DISCLOSED IN RECENT QUARTERS, PERHAPS IN VIOLATION OF LEGAL STATUTES REGARDING USTREASURY AUCTION RULES. THE USGOVT LIKELY HAS BEEN DUMPING USTREASURY BONDS ON A GRAND SCALE IN HIDDEN SECONDARY CHANNELS. THE BOND VOLUME TO DISPOSE IS TOO LARGE. ANOTHER VIEW PERHAPS MAKES SENSE. THE PROPAGANDA STORY IS BEING FASHIONED IN ORDER TO EXPLAIN AND JUSTIFY HOW THE USTREASURY BOND SALES EFFECTIVELY CONTINUE DESPITE NO USFED QE3 PARTICIPATION. A DISTRACTION IS DESIRED, TO TAKE ATTENTION AWAY FROM THE USGOVT DEBT DEFAULT. $$$

Some very strange developments in the USTreasury market have come to the fore. They address the outsized supply of debt. But they also reveal some potential setup for propaganda to explain why the bond market continues without extreme incidents like auction failure or fast rising bond yields. The USDept Treasury has been busy with rule reform. Apparently, China has been purchasing much more in USGovt debt than was being disclosed, potentially in violation of auction rules. Either the US officials have been eager to assist the process, or eager to avoid ruffling feathers in Beijing. It is unclear. Rarely in a market dominated by naked Wall Street selling (to raise funds for operations) or by outright counterfeit sales (by JPMorgan, whose records were in the World Trade Center), does the USGovt have actual ignorance of activity. My suspicion is that a backdrop is being painted to justify the lack of a USTBond failure, without the heavy emphasis upon QE and its debt monetization.

The US Dept Treasury sells its debt securities to investors in auctions through the Bureau of the Public Debt, in packages ranging from $13 billion to $35 billion. Investors can buy the bonds directly from the Treasury at auctions, or indirectly through the designated primary dealers. A limit exists on the amount any single bidder can purchase to 35% of a given auction. Since 2009, China has been using multiple firms and dealers to buy USTreasuries, thus concealing $billions in auction purchases. Reuters broke the story. The Beijing investors utilized a method called Guaranteed Bidding that forged gentlemen agreements with primary dealers for purchase without official reporting. The bond dealers acted as intermediaries, earning a fee, moving inventory. The dealers have been anxious to find investors, highly motivated not to be bagholders in the latest asset bubble, especially when QE2 is under pretense of termination. The practice kept the true size of Chinese holdings hidden from US view, allowing them to buy controlling stakes at individual auctions. The practice of Guaranteed Bidding is not illegal, but exceeding the 35% limit is. The governing rules dictated within the Uniform Offering Circular, order any party with over 35% of a single auction to reduce to the 35% limit immediately. Violators can be barred from future auctions. Since June 2009, rule changes have forbidden the guaranteed backdoor method of procuring bonds. The key to watch lately has been the Indirect Bidders, typically foreign central banks and sovereign wealth funds acting through the primary bond dealers. The cross-current of confusion comes from the decline in Indirect Bids in recent months, after its proportion rose rapidly following the rule change two years ago. It is now low.

GregS is a veteran COMEX trader very familiar with the USTBond market. He pitched in a brilliant perspective on the Chinese angle on USGovt debt accumulation. He thinks outside the box. He wrote, "Since Tim Geithner was made treasurer, he has made several trips to China. The trips have been to place debt, or at least part of the reason. One must realize how much US debt was short-term, in order to keep the interest expense for the nation negligible, and just as important easily sold. So it is constantly maturing, which presents a great challenge to find investors. A lot debt has matured the last few years. Then add another $6 trillion of new bond issuance over the last two to three years. Essentially they needed to auction virtually the entire debt. Now go a step further. Over the last three or four years, China pushed the duration of all their held USTreasurys under two years, virtually all them. These short-term Treasurys are the most marketable securities in the world, often treated like cash instruments. Even better, investors did not have to sell them to get out of them. They constantly matured, turning to cash. I suspect that the Chinese had big numbers set to mature and had been letting them turn to cash intentionally. Additionally, they were not increasing the volume of Treasurys owned. With that much debt coming due, with that much new debt the USGovt needed to issue, and with domestic sources increasingly unwilling or unable to buy them, particularly at these stupid near 0% rates, it only makes sense that huge private placements were organized. By the way, this was also a big motive behind QE2. The Fed had already been buying a lot, and it was becoming visible before the QE2 was announced and made public. The Fed was to be forced into the open to buy more at auctions. They needed a cover for old amounts, new amounts, which were not being rolled overseas. This is my best guess analysis." Nice suspicious thought process!

So, if the Chinese are in possession of a raft of soon to mature USTreasury debt, the same stress to the USGovt will arise. If not from rollover of old maturing debt, the USGovt will be challenged to handle the gargantuan supply of new debt to securitize and sell. Thus the next QE3 will come without delay, or else auction failures occur, or the USFed is forced into the open field for their sleazy tactics for all to see. However, one must observe a painted background where stories are told of much more USTreasury demand than otherwise is recognized. The many hidden sources of Caribbean or British buying of USTBonds do not usually escape detection. With Chinese buying in greater volume, maybe even in rule violation, the picture is more cloudy. The syndicate wants the confusion and controversy as a distraction to explain avoided USTreasury auction failures. This is all part of the debt default pathway.

◄$$$ QE3 WOULD INSTILL NO ECONOMIC STIMULUS. MANY SUPPOSED EXPERTS BELIEVE IT WILL NOT HAPPEN. THEY MISS THE POINT. QE3 WILL COME SINCE DEMAND FOR USTREASURYS GENERALLY WILL VANISH. NO STIMULUS IS BUILT INTO ANY PROGRAM THAT COMPENSATES FOR ABSENT CREDITOR BIDS. THE FUNDS FILL A BLACK HOLE. THE USFED IS CAUGHT IN A MAELSTROM OF ITS OWN MAKING, STRUGGLING TO PRODUCE JOB GROWTH WITHIN THE MORIBUND USECONOMY, WHILE NOT WISHING TO CAUSE MORE PRICE INFLATION. THE USFED IS WITHOUT OPTIONS, STUCK IN THE POLICY CORNER, AND ITSELF INSOLVENT. $$$

The USFed is caught in its own failed policy outcome. The debt saturation and absent industry have collapsed around their own marbled walls. A tremendous conflict has resulted. The dual mandates of stimulating employment while controlling inflation are in conflict with each another in grand style. The stimulus usually assists business expansion, but not anymore. The national plague is insolvency, for the federal government, for banks, for households. The last Quantitative Easing chapters did not stimulate job growth but they did lead to price inflation perking its ugly head in a noticeable manner. A sinking sentiment is taking root in the US central bank offices that QE3 would be pointless, but nevertheless they might order it anyway. They will clearly begin QE3 in order to avoid a series of highly visible USTreasury auction failures. The bid is not there, unless the US stock market is ruined. The testimony of Bert Ely from Bank Analyst of Ely & Co was shared by the savvy Barry Ritholtz website. Ely repeated what he stated before the House Committee on Financial Services. He said, "There is nothing else the Fed can do. The banking industry, through its deposits at the Federal Reserve, essentially is financing a not insignificant portion of the federal debt as well as the Fed's other assets. We are in uncharted territory. We have never been through anything like this before."

The USFed is holding $1.6 trillion of bank deposits on their balance sheet, the so-called Excess Reserves. Besides those reserves, toxic mortgage bonds and other leveraged worthless mortgage assets have crippled the USFed. The toxic assets never vanished, but instead were gobbled up by the USFed as buyer of last resort. The USFed might have killed itself with banker hemlock in the process. My interpretation does not match many bank analyst views. The Excess Reserves are not excess at all, but rather Loan Loss Reserves transferred to the USFed balance sheet in order to hide the USFed grotesque insolvency. Talk of returning these bank reserves to the scattered member banks has come, in a futile effort to stimulate the USEconomy. Doing so would not lead to more bank lending, since they are on the defensive. The banks continue to face huge losses, like Bank of America and JPMorgan. The loss reserves would be eaten up immediately. Apart from lawsuits, big US banks face massive additional losses from plain mortgage assets. Housing prices are still in decline. Foreclosures still occur. Bank home inventory continues to swell. Worse, the Excess Reserves removal would expose the profound insolvency of the USFed itself, coupled by high leverage. The US central bank will do all it can to save the big banks. Doing so however in any levitation forces its own drowning incident. They are all tired corpulent swimmers weighed down badly. The Too Big To Fail excuse for policy is a horrendous mantra to avoid a solution, to side step the necessary bank liquidations. The mantra is more aptly a patch to cover up multi-$trillion bond fraud by Wall Street banks. Meanwhile, the USFed cannot avoid its own fate. With every new chapter to the financial crisis, the current US Federal Reserve will move slightly closer to its inevitable implosion. See the Yahoo Finance article (CLICK HERE).

The Fed Minutes reveal a division having already formed within the USFed. The line of thinking is alarming, but worth reporting. No stimulus to the USEconomy exists in any debt monetization. The exact opposite occurs, since costs rise as an effect without wage gains, and certainly without job growth. The position change reveals the desperation and ignorance, both. The minutes showed, "Some participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate. Furthermore, if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation. A few members noted that, depending on how economic conditions evolve, the Committee might have to consider providing additional monetary policy stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run." Translation: QE3!! Even if expected to fail!! It is just a matter of time. The result will be to wreck the USEconomy even more, from a cost squeeze on business profits and a drain to discretionary housing spending. As a footnote, the meeting involved occurred on June 21 & 22, well before the miserable June Jobs Report.

◄$$$ THE USGOVT PAYROLL TAX WITHHOLDING DATA IS A HIGHLY RELIABLE INDICATOR. IT SCREAMS RECESSION. THIS SERIES IS THE MOST INDISPUTABLE FOR INDICATING AN ECONOMIC RECESSION. IT IS IN DECLINE SINCE MAY, A TREND TO CONTINUE AND WORSEN. DO NOT EXPECT IT TO RISE, EVEN AFTER QE3 IS ANNOUNCED, NOT IN ANY SUSTAINED MANNER. $$$

Since January 2011, the USGovt federal tax stream from payroll withholdings has spent more time in negative ground than position. Since May, the trend has been down. It indicates clearly that the USEconomy is already in recession. The withholding tax is a great economic thermometer that can be followed in real time on a weekly basis. It is nearly impossible to doctor and distort. The trend from early May through June 23rd tells the story. In recent weeks the change is evident, with this year no longer showing gains versus last year. The graph shows the calculated year to year difference, then adjusted by the official employment cost index annual rate of change. That adjustment makes sense. It has been consistently running around 2%, probably an accurate measure since the labor market is so overloaded with idle workers.

Notice the decline in the linear regression over the course of the year from the 4% slope to around 3% slope. It is shown in the solid blue line forming a belt line. The tax series tended to rise during the QE1 or QE-Lite or QE2. It is doubtful that when QE3 is announced in my opinion whether it will rise in any sustained durability. The myth at work is that the Quantitative Easing initiatives are the nucleus of any economic stimulus. They are not. They cover the absent bids for USTreasurys, as monetary hyper-inflation has taken root in the toxic soil. Witness the USTBond bubble that risks not being fed!!

USDOLLAR RESERVE CRACKS

◄$$$ THE USDOLLAR IS SLIDING IN THE ROLE AT ASSET HELD IN FOREX RESERVES. ITS RESERVE CURRENCY STATUS IS WIDELY QUESTIONED. IN A SINGLE DECADE, THE US$ SHARE OF RESERVE ASSETS FELL BY OVER 11%, A HUGE AMOUNT. IN ONE YEAR, THE SHARE FELL BY 1% MORE. THE DISCUSSION IS COMMON TO MOVE GLOBALLY TOWARD A BASKET OF CURRENCIES, A MULTI-CURRENCY SYSTEM. IN THE MEANTIME, THE JAPANESE YEN, AUSSIE DOLLAR, AND CANADIAN DOLLAR ARE RELIED UPON MORE. $$$

The United States Govt resists steadfastly and at times violently the removal of the USDollar from its privileged position. The bankers wish to continue economic activity on a coerced credit card. They wish to continue bond fraud, even counterfeit. They wish to regulate their own criminal activity with total impunity. They wish to command an endless war on a foreign payment of costs, or no reckoning of costs. However, the revolt continues in opposition. The USDollar share of global reserves continues to decline, and its reserve status has been called into question. An Intl Monetary Fund report was released in late June, at the end of 2Q2011. The Composition of Official Foreign Exchange Reserves (COMFER) lists reserves held at central banks in 33 developed economies and 105 emerging and developing economies. Further confirmation came that the USDollar is gradually losing its reserve status. The USDollar slipped. The Euro slipped. But the Japanese Yen, the Aussie Dollar, and the Canadian Dollar gained. Gradual diversification is happening. Gaping USGovt deficits, profound bond fraud, protection of big US insolvent banks, and outright hyper monetary inflation by the USFed to cover the deficits have contributed to the USDollar decline in reserve standing. China was not part of the sample, curiously or intentionally. The US currency is the object of lost confidence globally, as its share of the reserve assets continued to slide in the fourth quarter of 2010. An intriguing effect is evident. The USDollar DX index lost 4% in the quarter, the exact amount reduced in global bank reserves in that time frame.

The US share of allocated reserves fell by the end of 1Q2011 to 60.69% from 61.53% in Q4 2010. Central Bank reserves decay would have been steeper if China was included in the sample. The decline has been signicant over the last decade, a full 10% less. One year ago, the greenback share stood at 61.64%, almost one percent reduction in the past year. In 1Q2001, ten years ago, it stood at 72.3%, an 11% reduction in the past decade. No longer is the greenback dominant. Nations are scurrying to diversify, in an act of self-preservation and bank system survival from a leveraged cancer. In local discussions and at conferences such as the G-20, talks are held about a move toward a multi-currency system, which the US and UK leaders attempt to stall and sidetrack. The USDollar remains first among peers, but times are changing. The global financial crisis has altered banking practices in a profound manner. Emerging and developing nations accumulated foreign reserves in high volume during the first quarter. Capital flow from the older economies has been huge. The data is shocking. While richer older nations added $65.5 billion in reserves, of those $1.6 billion in US$ terms, emerging markets added $366.3 billion, of those $65.8 billion in US$ terms. The diversification happens immediately upon arrival in US$ packages to be converted.

The Japanese Yen was a primary beneficiary of emerging market diversification. Emerging market nations are storing reserves more and more in the Japanese Yen. Either a rising Euro or the toxic Euro-based sovereign debt has deterred investment of reserves. Their central banks accumulated $6.6 billion in new JPY reserves in the first quarter, lifting the allocation to 2.9%. The Canadian and Australian Dollars were other beneficiaries, whose share climbed to 5.8% from 5.1% in 4Q2010. Emerging markets spot the European crisis unfolding in full glory. They have moved out of the Euro, where its share fell to 28.2%. But globally the Euro share rose to 26.6%, up a tiny amount. Nomura analysts reason that central banks reacted to the Euro strength as an opportunity to move into the Yen and other currencies. One can infer that the Yen is seen as a mature currency (yet it yields nothing on bonds), and the two other Dollars are resource currencies with strong national commodity supply. Expect the data in July to show less affection for the Euro, given the contagion has spread finally to Italy, and given the downgrade of Greece, Portugal, and Ireland to junk status. The COMFER report produced by the IMF continues to support the thesis that the USDollar is losing its reserve status. In a very gradual process of erosion, central banks rely upon stable allocations but they clearly depend less and less on the greenback. See the Forbes article (CLICK HERE).

◄$$$ CENTRAL BANKERS EXPECT THE USDOLLAR TO LOSE ITS GLOBAL RESERVE ROLE. THE SHIFT IS MORE FROM PRACTICAL FACTORS. THEY STRIVE TO SURVIVE AND MUST WORK TO PRESERVE ENTIRE FOREIGN FINANCIAL SYSTEMS. THEIR BANKING STRUCTURES ARE AT RISK OF COLLAPSE. THEY ARE FINDING THE GOLD RELIGION SLOWLY, BUT TOO LATE. $$$

The USDollar will lose its status as the global reserve currency. A UBS survey reveals that over half of central bank reserve managers anticipate the USDollar would be replaced by a portfolio of currencies. They collectively control more than $8 trillion. They have one foot in reality, the other is a foggy fantasy pool since their timeframe is the next 25 years. More like three to five years at most. The global banking sysetm is fracturing and in fast decay. Hear the loud outcry of dissatisfaction with the USDollar as a reserve currency. They react adversely to the absent USGovt budget controls, compounded by the USFed huge expansion of its balance sheet. The negative trajectory of the United States financial system is the cause of great concern. China has the largest hoard of reserves. From January through April, the Beijing reserve managers invested three quarters of the $200 billion expansion in non-US$ assets, according to Standard Chartered estimates. A multi-polar currency world is being planned, obstructed, but inevitably will arrive. Recall Robert Zoellick of the World Bank, who last year proposed a new monetary system involving a number of major global currencies, including the USDollar, Euro, Yen, British Pound, and Yuan, augmented by Gold.

The same UBS survey foretells of a growing role for Gold bullion, as 6% of reserve managers claimed the biggest change in their reserves over the next decade would be the addition of more gold. Moreover, contrary to previous years, none of the managers intended to sell gold in the next decade. Central banks are busily adding to Gold reserves, finally finding some hint of religion. Amazingly, the reserve managers predicted that Gold would be the best performing asset class over the next year. They pointed to sovereign debt defaults as the chief risk to the global economy. They implicitly regard GOLD AS MONEY. Bernanke is the class stooge among this select crowd.

◄$$$ THE EURO CENTRAL BANK DEFIED THE USFED AND CONTINUES TO PART POLICY WAYS WITH THE USFED. THEY ORDERED ANOTHER INTEREST RATE HIKE. THE EURO WILL BE WELL SUPPORTED BY SPECULATORS. THE USDOLLAR IS MORE ISOLATED. $$$

The Euro Central Bank has chosen to follow the path to focus upon price inflation. In the first week of July, the ECB hiked the official interest rate by 25 basis point to 1.50%. It is the highest level since March 2009, establishing a divergent path from the US Federal Reserve. That makes two hikes since the spring months began, The US central bank has been stuck in following the path to focus on growth. Actually the more precisely interpreted directive is the USFed is committed to avert rapid deterioration and financial implosion, as debt finance is impossible with a higher rate, emphatically so. My forecast in 2009 was that the USFed would be dead last among the major Western central banks to hike rates. True, correct forecast, except that the Bank of England is equally crippled and stuck in a policy corner. The USFed will indeed be last to hike rates globally. The ECB head Trichet sounded a strong vigilance mode to contain price inflation. Curiously, such tighter monetary policy supports the Euro currency, which in turn keeps prices down throughout the EU Economy. In the US, the ultra-loose reckless monetary policy pushes up the entire price structures, mostly on the cost side, actively promoting an acceleration in the economic deterioration. The outcomes in these two major industrial economies is starkly in opposition. The USEconomy is likely to encourage Gold investment as business and labor market conditions degrade one level worse in coming months. The European Economy is likely to encourage Gold investments as price inflation racks the continent, even though conditions sustain themselves. The exception is Southern Europe where PIIGS roam, the full load of swine feces strewn too far and wide to make possible the growth of much but we eds.

◄$$$ JIM GRANT POINTS OUT THE RISK IN EUROPE OVER MONEY MARKET FUNDS BASED IN USDOLLARS. THE MUNICIPAL BOND MESS IS ACTIVELY IGNORED. THE MONEY MARKET MESS IS COMPLETELY OFF THE RADAR. ITS SEIZURE IS ASSURED, AS SOON AS A SIGNIFICANT DEBT DEFAULT OCCURS, REGARDLESS OF ITS SIZE. $$$

Jim Grant is one savvy bank analyst. He has raised a very important topic which he expects will be the focus of attention in the near future. The extensive US money market exposure in Europe could quickly enter a seizure if a major liquidity run hits Europe. Such a run is most assuredly to come. Grant said, "The money market mutual funds have nothing to do in this country because rates are zero. Funds go to Europe. So money market mutual funds investors are taking quite ponderable risks for about a 0% return. These funds are yielding a few basis points only. But to get those few basis points, these funds are crossing the Atlantic right smack dab in the middle of the European banking crisis. This is a prime example of the unintended consequences of this massive intervention by our central bank [the USFed]." A massive pitfall has been built, whose damage will come, all in time. The Wall Street meltdown in September 2008 will be small compared to the bank failure string that will befall Europe. The greater vulnerability comes because the system has endured the major shock in 2008 and insolvency has set in deeply. When the next shock comes, the money market will be victim, the object of seizures. Everyone is arriving at the consensus conclusion that Greece will ultimately default. The money market will join the shadow banking systems with grand seizures. In the shadows lie a mountain of derivatives just waiting to blow up. The bank failures will set off Credit Default Swap payouts. Some counter-parties are long gone, unable to pay out. See the Zero Hedge article (CLICK HERE).

CHINA BUYING THE WORLD

◄$$$ CHINA IS BUYING UP EUROPE. GIVEN THE DEEP DISTRESS TO SOUTHERN EUROPE, THE CHINESE ARE INVESTING IN TROUBLED P.I.G.S. SOVEREIGN DEBT AS A BEACHHEAD. FOLLOWED ARE DIRECT INVESTMENTS IN ASSETS, THEN INFRASTRUCTURE PROJECTS. WHILE RUSSIA EYED THE EUROPEAN PRIZE, CHINA CAPTURED IT ALONG WITH THE PERSIAN GULF AND BRAZIL. DO NOT OVERLOOK THE POTENTIAL FOR CHINA TO CONVERT P.I.G.S. SOVEREIGN DEBT INTO GOLD BULLION. THE UNITED STATES WILL BE INCREDIBLY ISOLATED IN THE CURRENT DECADE. $$$

A scramble is on for winning Europe. The grand prize in the last decade has always been Europe. With trade friction at a near fever pitch with the United States, Europe has an open door turned East. The scramble involves vast purchases by China of European sovereign debt, and big investments in targeted European companies to reinforce the debt purchase leverage. Beijing is exploiting Europe's open market for public procurement. Simply stated, China is buying up Southern Europe. According to the European Council on Foreign Relations policy brief, the process involves three steps. The first is referred to as bond diplomacy, where China purchases bonds from unstable European countries like Spain and Greece, whose sovereign debt faces ruin. Included are top-level bond buys linked to downstream leverage. The next step is direct investment in European countries to shore up the initial asset purchases. According to the ECFR, the total Chinese investment in Europe back in 2006 was about $1.3 billion. From October 2010 to March 2011, they stepped hard on the accelerator. During that six-month timeframe, Chinese firms and banks committed an additional $64 billion, over half of the total foreign direct investment flows into Europe since early 2008. The third and last step is Europe's public partnership programs to support the entire efforts. European taxpayers have subsidized grand infrastructure projects, where Chinese companies enter into contracts in Europe to build roads, railrways, and public buildings funded by the European Union.

In an example of bond diplomacy, China bought Greek Govt bonds as a quid pro quo for a 35-year lease on the key Piraeus harbour, along with a deal to finance the purchase of Chinese ships in June 2010. They will soon capture the elite Geek shipping industry. At issue is the full tally of Euro reserve holdings by China, since so many deals have intricate aspects. The troubled European nations compete with each other to such an extent for Chinese business, that they diminish their leverage and often do not cut the best deals. But the partnership will prove more lucrative and beneficial than deals with the United States, which would demand arms sales & shipments or cooperation in narcotics money laundering with the banks. See the ECFR article (CLICK HERE).

Some erroneously believe China is swapping US$-based toilet paper for Euro-based toilet paper. Very wrong! It might be a better description to say China is spending their toilet paper, rather than transferring it, as they buy assets and invest in infrastructure that locks in the next decade of trade dominance. The Chinese are buying port facilities, commercial buildings, industrial plants, shopping malls, toll roads, and more. China is solidifying their position with Europe as a destination for finished products, just like with the Persian Gulf. The port facilities and shopping malls will be loaded with Chinese products in container vessels and store shelves. China uses its USTBond future toxic paper to establish trade fronts in Europe and the Persian Gulf. Witness prudent asset conversion, while the US struggles with bank failures, home foreclosures, debt monetization, market interventions, and endless war, hardly anything constructive. Quite the stark contrast! Also, never forget that PIIGS sovereign debt will be converted later into gold bullion. People who dismiss the future prospects of China are dimwitted. To be sure, they have domestic challenges like with bank exposure and regional overhang of debt.

◄$$$ CHINA WILL CONTINUE TO BAIL OUT INSOLVENT EUROPEAN COUNTRIES. ENTER CHINA AS THE NEW INTL MONETARY FUND LOOKALIKE. THE COMMITMENT COMES FROM THE BEIJING LEADERS. PREMIER WEN ACTUALLY CLAIMED NOT TO PURSUE A TRADE SURPLUS. NONSENSE, SINCE IT BRIMS WITH POWER. $$$

Chinese leaders have promised to bail out insolvent European nations that face trouble in borrowing. If the trend continues, the Intl Monetary Fund will be eclipsed in function. Simply stated, China is the new IMF. A different effective interpretation is that China is helping to prevent the Euro Central Bank from launching an outright unsterilized monetization episode. The United States is deeply committed to debt monetization, the grand fountain of price inflation on a global scale. The Chinese initiative to purchase PIIGS debt enables Europe to avert some price inflation effects, and thus reduce the imported inflation from European sources to hit the domestic Chinese Economy. The currency effect is a direct devaluation of the Chinese Yuan versus the Euro currency and an indirect devaluation versus the USDollar. Clever strategy. In the process, the IMFund gradually is being relegated into some degree of obscurity and irrelevance. Newly named head Christine Lagarde has some good motives. She will be challenged to find worthwhile ways to contribute, even while the organization is being rendered obsolete.

Chinese Premier Wen Jiabao offered up some distraction in platitudes, if not empty rhetoric. In a speech at a Longbridge factory of MG Motors in Birmingham England, he said China had no intention of pursuing a trade surplus. Instead, the emerging industrial giant wanted balanced sustainable trade growth. He reiterated his pledge to lend to European countries experiencing trouble in the credit market. China will achieve balanced trade only when it has a near equal wage structure in the labor market, which will not happen in our lifetimes. See the Zero Hedge article (CLICK HERE).

◄$$$ CHINA PLANS TO BUY HUNGARY WITH ITS LUNCH MONEY. IT WILL ADD TO ITS PORTFOLIO OF EUROPEAN BONDS FOR FUTURE LEVERAGE PURPOSES. $$$

The European Bailout project pursued by China continues to expand. Premier Wen Jiabao poses as the white knight, or yellow knight more accurately. China has set sights on Hungarian Govt bonds. Witness the thrusts forward into Europe more deeply, heading to the eastern periphery, having captured the southern periphery. If truth be known, one Hat Trick Letter source serves actively as advisor to the Chinese wealth managers. In 2010, he urged them to purchase PIIGS debt at a discount, and to demand Gold & Silver delivery from the COMEX. They heed his counsel still. He informs the Jackass periodically of certain developments. China will soon add to its collection of Greek, Portuguese, Spanish, and Irish debt in the investment portfolio, to be used later in leveraged trade deals. They talk about work toward expeditious recovery and stable growth in Europe, but the benefits reside on both sides on the deals. They extend their global reach, to turn into dominance. The next stage will be banking dominance, but only after the US, UK, and European banks suffer the inevitable decline and breakdown from the failed sovereign debt, that might also include USGovt and UKGovt debt. See the Zero Hedge article (CLICK HERE).

◄$$$ BUT CHINA HAS A MASSIVE PROPERTY BUBBLE PROBLEM. IT EXTENDS FROM RESIDENTIAL TO CONDOMINIUM, FROM COMMERCIAL TO GIANT PROJECTS. THEY BOAST SOME EMPTY SMALL CITIES, NEWLY BUILT. CHINESE MUNICIPAL DEBT IS STAGGERING, THE STUFF OF BUBBLES, LATER TO REQUIRE BAILOUTS AND AID PACKAGES LIKE THE REGIONAL GOVERNMENTS RECEIVED IN MAY. THE DAGONG DEBT RATING AGENCY MIGHT OFFER SOLID RATINGS FOR FOREIGN ASSETS, BUT NOT FOR ITS OWN INSIDE CHINA. $$$

The scattered municipalities of China, especially in the far western provinces, have a debt problem, a big debt problem. The city of Loudi has attracted attention, a city of 4 million in the Hunan province, since it funds an Olympic sports complex. It lacks the activity to finance itself, certainly no Olympic game venue. The project is typical among the outposts in the Middle Kingdom. The project cost $185 million, guaranteed by land valued at $1.5 million per acre. Such rich valuation is on par with rich US suburban property, like Boston, Chicago, or San Francisco. In contrast, Loudi residents command an average $2323 annual income. The Loudi City Construction Investment Group plans to use 21% of the proceeds from its bonds issued in March for the stadium complex and the rest to build a new highway, water treatment facilities, and a park. The site of a lush green countryside, Loudi will be a main stop on a high-speed railway spanning more than 1200 miles from Shanghai in the east, stretching to Kunming in the west, near the Myanmar border. The city is one of scores across the country building roads, commercial centers, and subways after being urged to spend liberally by the Beijing planners, in response to the 2009 global recession. The Loudi story is typical, one repeated across all of China.

It might be a growing city, but Loudi is saddled with a debt it cannot pay off. City officials live in a fantasy land, as they value their 18 tracts of land at almost four times what a similar plot sold for in May. In the northeast city of Cangzhou, the man in charge of the assets financing a port expansion cannot locate the land his company posted as collateral for a 1 billion Yuan bond sale. In a spending spree in Yichun, a district on the Russian border covered by ice much of the year, is supported by promises of future land sales that officials acknowledge may never materialize. In total, more than 400 billion Yuan (=US$62 billion) of municipal bonds have been sold since 2008. Such packaged debt is part of the estimated 14.2 trillion Yuan in local borrowing outstanding, equal to $2.20 trillion. Much depends upon forecasted land prices not linked to reality. Efforts by the central government to cool the property market so far have had no effect on the local projected values. The models remain intact, a fantasy.

Local governments have set up more than 10,000 financing vehicles in the past decade to bypass laws that prohibit direct loans. One third of them do not have sustained cash flow to service their loans, China's banking regulator claims. The similarities with special purpose vehicles and other structure finance gimmicks in the United States to hide toxic repackaged mortgages from bank balance sheets are clear, stark, ominous, and increasing. China is playing with fire in scattered camps, sure to result in grand central government bailouts like what were announced last month for regional debt offloads. The roughly $500 billion debt package reload acted much like grants and guarantees, an official grand debt backfill. In time, Chinese TARP Funds will be devised. Fortunately for them, they possess over $3000 billion in a war chest. They will need it.

Land values have fallen by 30% across China, according to Credit Suisse. Stephen Green of Standard Chartered in Hong Kong said, "It is a huge myth that land sales are going to be able to even support the interest payments, let alone the principal payments." Their research staff has concluded that at least 4 to 6 trillion Yuan of local government loans (=US$620 to US$930 billion) will ultimately not be repaid by the projects. Moodys Investors Service estimates overall local government borrowing at 3.5 trillion Yuan more than the 10.7 trillion Yuan stated in a national audit published June 27th. Banks cannot restructure all the local government loans on their books, says Moodys analyst Yvonne Zhang in Beijing. Recapitalizing the banks by the central government will slow growth in the world's second largest economy, says Vincent Chan at Credit Suisse in Hong Kong. Another analyst Jinsong Du at Credit Suisse in Hong Kong forecasts the default of a great many local governments. The effects would further reduce their appetite for USTreasurys and European debt, Fitch Ratings said in a June 28th report.

The Dagong Global Credit Rating company from Beijing rates the Loudi bonds at a lofty absurd investment grade, one level higher than USTreasurys. They contradict their own undeservedly high debt rating. A Dagong report from December 2010 said, "The city's ability to balance the general budget is decreasing, and the results of the sales of land use rights will impact the company's ability to invest and do construction." Not promising! They justify high ratings to the bonds because the central government has said infrastructure debt will be repaid by local authorities from the rapid anticipated growth in local fiscal revenue. Doubtful! The Loudi investment firm had a negative operational cash flow of 187.1 million Yuan (=US$29 million) in the first half of 2010, when it borrowed 284 million Yuan. Not a good ratio! Beijing-based China International Capital ( CICC) is a responsible outfit, an investment bank. It gives Loudi its third lowest rating, a speculative or non-investment grade. The local bond expansion is in response to Beijing cutbacks in funded loans. The central government turned off the spigot for many bank loans. That propelled a six-fold increase in bond sales this year versus three years ago, according to CICC. About one-quarter of China's municipal debt is guaranteed with land sales revenue, Auditor General Liu Jiayi said June 27th. See the Bloomberg article (CLICK HERE) and the Business Insider feature on Loudi (CLICK HERE).

EUROPEAN CONTAGION HITS ITALY

◄$$$ THE EUROPEANS ARE ON THE VERGE OF A SHOCK WAVE FROM BANK FAILURES DUE TO ALL THE P.I.G.S. GOING DOWN TO THE SLAUGHTERHOUSE. WITH PORTUGAL DOWNGRADED TO JUNK, ITALY SUFFERING A CARDIAC EVENT, AND ATTENTION TURNING TO SPAIN, THE SOVEREIGN DEBT PICTURE LOOKS HORRIBLE AND GROWING WORSE. NEXT IS SPAIN. THE WHOLE OF SOUTHERN EUROPE IS FALLING APART RAPIDLY. IT IS NOT FIXABLE. $$$

Europe is entering a new chapter, where the larger nations are in focus. Their debt burden is horrible also. Given their size, Italy and Spain represent a threat to the big banks in Europe, and to all Western banks. The past week was critical as a turning point. The Euro Central Bank called an emergency meeting on a Sunday. One can guess that the contagion to Italy is foremost on their minds, way too big practically to bail out in a manner like Greece. The United States has no concept of reaching a meaningful budget accord with any semblance of staying power for more than just two or three months. And China saw its trade surplus double for June to $22.3 billion. Their war chest of reserves has grown to an amazing $3.197 trillion, enough to cover a multitude of sins and sinkholes. The US trade gap will grow again in June, just like in May, not from economic gains and strong volume demand but from higher costs of the imports. The statistical effect will be to pull down the US GDP in the second quarter. See the Reuters article (CLICK HERE).

The focal point of the European sovereign debt crisis is about to shift to Italy, and with much more force and urgency. Italy aint no Greece! It will cause major shock waves. To date the forefront has been the Greek Govt debt default, which is inevitable. The assured outcome is their default, whose impact will be enormous across Europe, England, and the United States. Some of the big banks will topple. Add much more thrust to the impact of the European sovereign debt woes, as Italy and soon Spain will be measured for impact crater size. The PIIGS debt millstone was compounded by Portugal being downgraded to junk, and by Ireland downgraded to junk. All three (Greece, Portugal, Ireland) will default on their debt eventually with some schedule on delays. The past bailout packages were bank rescues, not solutions, pure window dressing before the assured defaults and heavy damage. The Euro Central Bank is the bag holder. In the last week, the shock finally hit Italy, whose financial markets have begun to show the deep damage if not panic. If Italy experiences even a cardiac event, so will Spain. The whole of Southern Europe is falling apart rapidly. For a nice discourse on the insolvent EuroCB, see the 21st Century Wire article by Andrew McKillop (C LICK HERE).

The EuroCB is insolvent and in total ruins, just like the USFed. If either Italy or Spain succumbs to the sovereign debt crush, it is game over for European banks. The weight of the fallout would deal an extremely powerful additional blow to both UK and US bank centers in my opinion. Remember the USGovt covers the AIG guarantees on CDSwaps, which might be handled with secretive Printing Pre$$ money without incident relative to the debt limit since part of the shadow banking system. A highly reliable German banker source offered an assessment. He wrote, "The Western bankers have reached the end of the rope. It will be interesting to identify the flash point event that will trigger the tipping point. My guess is a massive natural disaster a la Japan. It works so well since it touches all domains and command factors in the economic and political sphere." He is saying that the the Western banks are in ruins, but some event is coming, maybe planned. The blame could be placed on Japan for its natural trigger, or some other similar natural disaster. My belief is that the PIIGS will be blamed for the banking system collapse. Focus will be on their lousy economic performance, their false accounting, their past tendency blatantly not to pay taxes, their customs for leisure, and even corruption.

◄$$$ ITALY IS FRONT & CENTER SUDDENLY, AS GREECE HAS RECEIVED A BANDAID WITHOUT A TOURNIQUET. THE MAGNITUDE OF ALL THINGS ITALIAN IS GRAND. THE NATION'S FINANCIAL ABSCESS HAS BEEN LURKING UNDER THE SOUTHERN EUROPE SURFACE FOR A YEAR. THE CONTAGION HAS JUMPED ACROSS THE AEGEAN SEA FROM GREECE TO ITALY. AMAZING IT TOOK THIS LONG. THE MILAN FINANCIAL MARKETS HAS BEEN ATTACKED, AND WILL SUFFER REGULAR FUTURE ATTACKS. BLOOD IS IN THE WATER. $$$

The bankers of Europe have been scrambling to deal with the Italy contagion fallout, which has jumped from Greece. The resigned conclusion of an inevitable Greek Govt debt default has raised the risks in the Italian debt situation justifiably. The Euro Central Bank called an emergency meeting to discuss solutions for Italy. They are worried sick about the newest PIIGS nation entry onto the chopping block, which cannot be isolated. The total Italian sovereign debt accounts for a whopping 17% of all European debt, leaps larger than Greece. Worry has hit over a grand contagion that will quickly in my view go out of control. Big European banks will topple. The bond vigilantes might be dead and extinct in the United States, but not in Europe where they actively apply machetes to bond valutions. The flash trade lunatics have set their sights on Italy in the past several weeks. See the Sigma X trading vis-a-vis Italy.

Bond auctions have a way of forcing the issue, as investors retreat and bond yields rise quickly to bring attention. The story is not a potential contagion to Italy. The nation of Italy has already been infected with the financial virus. Credibility of the Goldman Sachs alumnus Draghi is fast being tarnished. He recently boasted that Italian banks would pass the next more durable stress test. No way! What comes next is the sudden topple of sovereign debt in Southern Europe as it teeters. The Euro common currency cannot survive a massive bailout of ei ther Italy or Spain. The device for damage is the same as that applied to Greece. Vigilantes are dumping Italian debt and buying up every CDSwap insurance contract available tied to Italy. Gaze upon a fantastic chart that gives comparisons to the individual PIIGS nations and the size of their debt problems. This is a great 3-D chart, where the size of the bubble reflects the nominal debt volume. The vertical axis is total debt insurance, while the horizontal axis is the debt/GDP ratio. All nations in crisis to date with debt distress and bailouts pale by comparison to Italy and Spain.

◄$$$ THE TRIGGER FOR THE EMERGENCY MEETING BY THE EUROCB BANKERS WAS THE SUDDEN SELLOFF IN ITALIAN FINANCIAL MARKETS ON FRIDAY JULY 8TH. ITALY IS BIG AND CANNOT BE IGNORED. CONTAGION HAS SPREAD. $$$

The rising level of fear has led to growing consensus that Italy could be next to suffer in the crisis. It is plainly obvious. They have the highest sovereign debt ratio relative to its economy in the entire EuroZone after Greece, at 110%. By year end, a bailout of Italian debt will be discussed. Except this time, the crux of the matter will be that no bailout of the required size is possible. The biggest direct impact might be on the Gold price in Euro terms. The official stability fund is grossly inadequate, and every banker and analyst knows this fact. The details of the ruthless rout in Milan again centered on the UniCredit collapse, the biggest bank in the nation. Its shares fell by 7.9% on that rugged Friday alone. The results of more stress tests on European banks was released on July 15th, and several prominent banks failed. The leading Italian stock index (Milan Stock Exchange Index) fell a powerful 3.5% on that Friday, which is like 500 points to the Dow Jones Industrial Index. Their economy is moving toward recognized recession. Chaos has entered the Roman chambers. See the Zero Hedge article (CLICK HERE), and bond yield info (CLICK HERE), and Milan stock index (CLICK HERE).

 

Italy is a very significant nation in Southern Europe, along with Spain. Details highlight the size. The populations are large, with Italy at almost 60 million and Spain at 50 million. Italy at 1.5 trillion Euros has more debt than Germany. Its debt/GDP ratio is over 100% and rising, the result of numerous economic swoons in the past decades and a considerably greater degree of disruption, including politically. Over 50 political parties exist, including one for gay truck drivers (my favorite anomaly). More dangerously, Italy has the biggest amount of net notional Credit Default Swap contracts outstanding. The nation shaped like a boot is too big to ignore, whose economy is triple the size of Greece, Portugal, and Ireland combined. The 2010 GDP of Italy was $2.1 trillion, which ranked it #8 in the world. Italy is the continent's third largest economy behind Germany and France. Last week was a turning point. The Italian Govt bond yields rose sharply, as money fled fast and furious. Big bond losses have resulted, and more importantly, big bank airpockets and sinkholes have been created. The Milan stock market in the last month has fallen hard, over 10%, mostly in the last two weeks. Big losers were Unicredit (down 20%) and Intesa (down 16%). The Italian Govt debt insurance went bonkers, to forewarn of immediate crisis. Its Credit Default Swap rose 13 basis points to 3.025% on Friday. Their debts continue to rack up. The government deficit in 1Q2011 was 4.6% of GDP. For a couple years, Italy has been declared by hack analysts to be much stronger than Greece. The Jackass has disagreed all along the path littered with such denials. While its ratios are better, the sheer volume of the debt involved makes it equally risk filled as Greece.

◄$$$ CONTAGION HAS SPREAD TO THE CORE OF ITALY AND THE FENCES OF SPAIN, WHERE 6.3 TRILLION EUROS IN COMBINED DEBT INFECT THE ALREADY BURDENED SYSTEM. THE BAILOUT FUND IS DOWN TO 600 BILLION EUROS. ITALIAN PRIME MINISTER BERLUSCONI HAS ADDED RISK TO THE MIX BY DISMISSING HIS FINANCE MINISTER DURING THE CRISIS. THE FINANCIAL MARKET ROUT IN ITALY HAS CHANGED THE PERCEPTIONS FOR THE CONTINENT. GREECE SOON WILL BE THE SMALLEST CORNER OF THE DEBT CRISIS AS IT MUSHROOMS ACROSS ALL OF SOUTHERN EUROPE. RISK CARRIES ACROSS THE BORDERS TO ALL OF EUROPE. EVEN PENSION FUNDS AND FINANCIAL FIRMS ARE AT GREAT RISK, EQUAL TO PENSIONS AND BANKS IN TOTAL EXPOSURE. EVERYTHING WILL BLOW UP TOGETHER ON THE NEXT BIG ROUND OF CRISIS IN THE LARGER NATIONS IN SOUTHEN EUROPE. $$$

Italy and Spain must pray for a miracle. It will not happen, since the debt burden is weighty and their economies are transforming into outright recession. Once more the European debt crisis has metastasized, the cancer moving to Italy. The risk of systemic contagion is acute, in my view regardless of what the financial authorities do. Even if they take immediate and dramatic action, the banking systems of Italy and then Spain will be detonated. The Euro Central Bank head will soon come to realize that the financial crisis is an order of magnitude worse than a year ago when the tiny nations of Greece and Portugal fell on their faces. Ireland completed the picture of the small fry nations. The time has come for the Big Pasta of Italy and the Big Enchalada of Spain to hit the center stage. The small PIIGS nations were the prelude to the main event on stage. Soon to be engulfed will be Spain and Italy, whose combined 6.3 trillion Euro public and private debt cannot be bailed out or patched over. Their debt rescue would take multiples of the official emergency stability fund.

The bond market is the thermometer that indicates the cancerous fever. Bond yields on Italian 10-year bonds hit a high of 5.76% last week, a level never seen since the Euro current was launched. The practical implications are immediate, as the Italian Treasury must roll over 69 billion Euros in August and September. The Italian Govt debt due between July and end 2011 totals 175 billion Euros, whose financing simply will not happen. Italy must find buyers for a staggering 500 billion Euros in new securities by the end of 2013. The PIIGS debt situation will blow up in the next several months, the fuse in Italy. The interest cost on the entire mountain of Italian Govt debt totaling 1.84 trillion Euros will rise so fast as to cause sudden default challenges. Bailout rescues like the shoddy patchwork in Greece are nowhere possible. The pattern evident in the bond markets of both countries is repeating verbatim what was seen in Greece, Portugal, and Ireland before each careened into insolvency. The cross border risk is enormous. France owns $472 billion of exposure to Italy and another $175 billion to Spain, according to the Bank for Intl Settlements. So expect the contagion to reach France in the next several months when the fuse is lit. In all, foreign bank exposure to Italy alone is a staggering $867 billion, of that $257 billion from US banks, the assets surely not to go bad entirely.

Losses will come from strange US corners, like AFLAC. They apparently invested in some ducks that could not fly in banks from Greece, Ireland, and Portugal. They swallowed $610 million in bad grass clippings. The bulk was in Portugal, whose impact was $450 million. The impact will be additional AFLAC corporate debt to cover the toxic European assets. Other US financial firms surely have many similar toxic droppings to eat through balance sheets. But hefty writedowns are due to come whenver firms make the move toward responsible accounting. The European sovereign crisis is loudly entering a new phase with contagion reaching the larger economies. The damage will make global headlines bigger than Greece ever did.

Italian Premier Silvio Berlusconi has added chaos to the stage. He is trying to push out Finance Minister Giulio Tremonti, the proponent of deep spending cuts to control the budget deficit. He is the sole figure in his cabinet respected by global bond vigilantes. One must applaud the comedy that has always been Italian politics. They make great theater. Berlusconi said, "He is not a team player, and thinks he is genius and that everybody else is a cretin." For spice, Tremonti is living free in the Roman house of a political ally recently arrested on corruption charges. Journalist Massimo Giannini in La Repubblica is more harsh. He wrote, "The government ceased to exist months ago. What other country would allow itself the suicidal luxury of offering cynical markets such a spectacle of political disintegration and institutional decay at a time when Europe is destabilized by Greece's sovereign debt and haunted by contagion? We have a band of poltroons dancing under the volcano, and the volcano is about to erupt." To answer, Belgium has had no government either for a solid year, but they do not spice the dance floor with buffoons. Notice the Belgium Govt debt enjoys a tame CDSwap insurance cost in the chart above.

German bankers have balked in obvious hesitation at rescuing Greece in huge public disputes visible across the Atlantic. The Germans must next buy or guarantee Italian and Spanish debt. In no way will such an event happen. They reluctantly stepped in the Rubicon, but this time they will not cross the river. The next round of the destructive bond tale will fracture German politically. The Euro Central Bank has compounded the problems and stirred a fog. They hold fast to the notion that monetary policy can be separated from other emergency operations. To add great stress, the interest rate hike to 1.5% essentially kicked Spain in the teeth. The one-year Euribor rate is used to price more than 90% of Spanish mortgages, which must rise in unison obediently. The EuroCB has pushed the Spanish banks over the cliff, assuring their attention in the news, complete with market routs. Resentment abounds. Ever since the Greek Govt debt tragic play was acted before the curtain, Spain has been largely ignored. They have managed to keep ridiculously falsified balance sheets on their books. However, it will make headline news very soon, as its mortgage crisis ratchets up two notches, courtesy of the EuroCB. The Spanish Caja banks are a mess. They are simply government sponsored entrerprises waiting to be nationalized. A great challenge will be even to kick the can down the road for at least six months. The can is in the weeds. But Spain owns its own toxic debt. So its pathogenesis will be more internalized, like a nightmare of price inflation.

Two graphs are highly illustrative. Notice the wide array of European banks with exposure to Italy in the first column. The cross-border debt volume from Italy is four times the exposure to Spain. Almost every big bank in Europe has some exposure, as damage will be dealt broadly. The volumes in the little PIIGS nations are tiny by comparison. Cross border exposure and public pension exposure is huge, equal in magnitude to the banks. The non-bank private exposure consists of financial firms and hedge funds. They hold twice twice as much risk as the banks themselves, incredibly. Furthermore, to claim that the PIIGS sovereign debt collapse is strictly a European problem is extremely shallow. But that is the nonsense promulgated by the hapless clueless myopic USFed. The USGovt owns AIG and its colossus of Credit Default Swap obligations, which will soon be triggered for massive payouts. Citigroup owns $31.1 billion in Italian debt. Bank of America has $7.1 billion at risk, while JPMorgan and Morgan Stanley account for another $8 billion. Other Wall Street banks undoubtedly hold CDSwap obligations also. When Greece defaults or when Italy or Spain appeals for a bailout, the plug will be pulled on the Western banking system chain link of explosives. They will blow up. If patched, the sheer magnitude will result in a jimjam of acute price inflation an order of magnitude greater than the effect of the QE1, QE-Lite, and QE2 programs. Europe is soon to blow up. That is why Gold in Euro terms has broken out convincingly. Money is fleeing paper and seeking metal. See the UK Telegraph article (CLICK HERE).

◄$$$ THE EUROPEAN BANK BAILOUT FUND IS GROSSLY INADEQUATE TO HANDLE EITHER ITALY OR SPAIN, BOTH OF WHICH HAVE A DATE WITH THE GRIM REAPER OVER THE SOVEREIGN BOND DEEP DECAY. EVEN IF DOUBLED TO $2 TRILLION, THE FUND WILL SEE ONLY A DOWN PAYMENT. THE EXPOSURE WITH THE RIPPLE EFFECT TO EUROPEAN BANKS IS MUCH GREATER. THE CRUNCH FROM ITALY AND SPAIN WILL EXPOSE AND RIP HUGE HOLES ON EUROPEAN BANK BALANCE SHEETS. $$$

All principal parties conclude the European bailout fund is insufficient to rescue Italy alone. It must be doubled to over $2 trillion as the next mere down payment. The German newspaper Die Welt boldly reported that the European rescue fund will be insufficient for the next bailout. They wrote, "The existing rescue fund in Europe is not sufficient to provide a credible defensive wall for Italy. It was never designed for that." A minimum of 1.5 trillion Euros will be needed just to keep the game going of musical Ponzi sovereign chairs. The Euro Central Bank must decide, but the proposal was hatched by Nout Wellink of the Dutch Central Bank. The European Financial Stability Fund (EFSF) is soon to be drained, and its refill is not certain. The Germans balked at much smaller amounts over Greek aid. To contribute more in a redouble effort would topple the entirety of German politics. The German taxpayers have zero additional appetite to fund the failed monetary experiment that has been heavily reliant on their direct savings and guarantees. The austerity measures and adopted plans have proved to be exactly what the Jackass described them to be a year ago, patch jobs and poison pills. The resistance might come directly from the Euro Central Bank. They are pushing for more flexibility and creativity in rescues, calling for quick action. Their position was written, "The European central banks are no longer willing to buy bonds of other states. This should enable the Treasury rescue package." Dissension within the EuroCB has been noted, and key figures are ignored. The battle royal remains between the central bank and the Bundesbank whose entourage includes the German political leaders. See the Zero Hedge article (CLICK HERE).

◄$$$ THE EUROPEAN COMMISSION HAS REACHED TOTAL DESPERATION. THEY WISH TO PROHIBIT DEBT RATING AGENCIES FROM DOWNGRADING SOVEREIGN DEBT IN THE MIDDLE OF RESCUE PROGRAMS. THEY WISH FOR LACK OF TRANSPARENCY TO BE FOLLOWED BY A RATING BLACKOUT. $$$

The EU Commissioner Michel Barnier is actively pursuing a policy that would prohibit debt rating agencies from rating the sovereign debt of nations in rescue programs. How absurd! Barnier is in charge of the competition group of the clownish fops at the European Union. Brussels has become a sideshow forum of demogagues. So these bankrupt nations masquerading as solvent should be given a pass. How absurd! The nations on the receiving end of the EFSFund aid should be immune from scrutiny, even if they falsify their books, even if they engage in corrupt concealment of debt loads, even if they permit bank bond fraud, even if they have gobs of skoffers who do not pay taxes. How absurd! In the weeks or months leading to the great European bond and bank bust, Barnier wishes to remove the doctor's judgment on the patient condition. How absurd! Europe approaches the abyss, with Italy or Spain to push the continent over the edge. The word abyss is openly used in leading newspapers. Other publications openly use the phrase cardiac arrest. A farce on stage has been played with Greece and Portugal, which cannot be continued with Italy and Spain, since too large. See the Global Economic Analysis article (CLICK HERE). Also, see another article from the same source that compares the various record high European Govt bond spreads (CLICK HERE).

◄$$$ IRELAND HAS JOINED GREECE AND PORTUGAL IN OWNING JUNK RATED DEBT. YET STILL THE EURO CENTRAL BANK CONTINUES TO ACCEPT P.I.I.G.S. DEBT AS VIABLE COLLATERAL FOR LOANS. THEY ARE THE BAGHOLDER, JUST LIKE THE USFED. $$$

Moodys finally cut the Irish Govt debt rating to junk, putting pressure on the European bankers. The crux of the impact is the lost status of investment grade. Investment firms like pensions and mutual funds cannot own junk assets according to their charters. But the Euro Central Bank maintains the fantasy of value, or else it is willing to turn its liquidity pool into a cesspool. The ECB still accepts the junk PIIGS debt as collateral for loans in a travesty before the world. They commit suicide in full view. So Ireland has finally joined Portugal and Greece as the third EuroZone nation to have its credit rating reduced to below investment grade. The European Union finance ministers struggle to contain the sovereign debt crisis as it worsens. The effect of the Greek bandaid non-solution was a quick contagion to Italy, more scrutiny of Spain, and the spread of junk debt ratings. The concept of sovereign debt cut to junk is amazing and precedent setting. Moodys Investors Service cut Ireland to Ba1 from Baa3, citing the probability that the country will need additional official financing and for investors to share in losses before it can return to the private market to borrow. Keep in mind that the Irish Govt received a bailout last year, having swallowed the IMF/EU poison pill reluctantly. Irish bonds have been dropping almost every day since the downgrade. Ireland has been locked out of bond markets since September. In time, Italy will be locked out of the bond markets also, then Spain.

The penalty for not even attempting to forge a viable solution is contagion. It will bring down all the PIIGS nations, no doubt. Ireland, along with the Portugal and Greece, will not be able to return to the market next year. They will die a financial death slowly, and sink into the cesspool. Moodys attempted to qualify the poison pill consequences. They praised the spineless Dublin gang for their strong commitment to fiscal consolidation, even conceding they delivered on the terms of its bailout. But they admit the implementation risks remain significant. Translate that to mean the poison pill has worsened the Irish economic condition, assuring amplified deficits in the next few quarters, and rendering a collapse as extremely likely. Poison pills do that. They force deep budget cuts, heavy government worker layoffs, reduced pension payments, canceled projects, erosion in infrastructure, and a general miserable climate where the private sector follows suit in cutbacks and retrenchment. The Irish Govt 10-year bond yield has risen to 13.65%, the premium over German bunds up to almost 11 percent. See the Bloomberg article (CLICK HERE).

The lockout from bond markets means a basement backdoor from the EuroCB for printing money must be found as last resort to monetization of debt, which is exactly what Ireland has been doing. In fact, if one takes a given four-month period of time in late 2010, annualizes the debt monetization amount, then multiple by 60 to account for the population ratio with the United States, then Ireland is expanding its monetary base by over $3 trillion at an annual US-like pace. So bond lockouts translate to hyper monetary inflation. The Troika of the Euro Central Bank, the Intl Monetary Fund, and the European Commission have no solutions. They are a collective Dr Kevorkian, the doctor of death who operated in the United States in assisted suicides. Eventually the Euro Central Bank will refuse any more loans against these three sovereign bonds. Their current acceptance of them as collateral is a grotesque practice certain to end very soon. In the next few weeks, a few big European banks will emerge as the Continental Lehmans. Up to 20% of the European banking system is but acidic toxic putrid paper. The stress tests are a sham in redux.

◄$$$ THE SECOND FARCE OF EUROPEAN BANK STRESS TESTS HAS BEEN CONDUCTED. THE RIGGED RESULTS ARE OUT. DRAGHI PROMISED THAT THE IMPORTANT BANKS WOULD PASS. $$$

Many European banks continue to hide their bad debt tied to property as well as their impaired sovereign debt. The second farce has been completed, a vain attempt to bring credibility to a sinking financial structure across the continent. Goldman Sachs agent Mario Draghi promised the success of the stress test, thereby undermining its legitimacy from the start. Eight banks failed, including five from Spain, two from Greece, and one from Austria. They include ATEBank, CAM, Volksbanken, EFG Eurobank, and UNNIM. The criteria for the stress imposed in the model was a 15% stock market decline and recession of 0.5% suffered. No apparent criterion included elements of reality, such as Greek Govt bonds or Portugal Govt bonds entering a default, or Spanish banks finally writing down some 20% losses from mortgage assets. Remember that within two days after the last stress test, several key Irish banks failed. They all passed the test. Thus the sham.

◄$$$ AXEL WEBER WAS HARSHLY CRITICAL OF THE GREEK BAILOUT STRATEGY. IT PATCHES OVER THE BANK EXPOSURE WHILE OFFERING NO SOLUTION WHATSOEVER. THEREFORE THE CRISIS RETURNS WITH GREATER VENGEANCE EVERY FEW MONTHS. HE POINTS TO NO LASTING SOLUTIONS. $$$

Given that Axel Weber is no longer interested in the Euro Central Bank head post, he can speak more freely. In his first interview since leaving the Bundesbank and the governing council of the Euro Central Bank in April, he offered an opinion on rescue bailouts. The former Bundesbank chief has offered strong criticism of the sovereign debt rescue strategy and implementation. Weber said Europe needs to consider guaranteeing the entire outstanding Greek Govt debt because the only viable alternative for Athens is a messy default that would be more costly and risk sparking broader financial turmoil. He assumes the existence of solution short of default, interesting! Always a banker, if not one of the great bankers of the century, he defends the redemption of bank assets, even though toxic and worth far less than book value. He might change his position after Italy appeals for a much larger bailout. He criticized the response to the crisis so far for merely addressing the Greek Govt immediate funding needs, but without offering any credible long-term resolution for reducing the great debt burden. He should direct his criticism at the IMF for their poison pill mail order business. Weber hinted at the inevitable recession that the current pathwork of bailouts has produced. See the Wall Street Journal article (CLICK HERE).

The austerity plans imposed are reckless, since they worsen the situation and assure recession. The solutions have been a processing of patches that focus on symptoms. It is a little surprising to hear Weber not admit the futility of the Greek Govt debt cause, along with the other PIIGS nations too. No lasting permanent solution can be offered, since none exists short of debt default and massive big bank liquidations. Weber clearly sees the nightmare of bank failures coming. He must be vividly aware that the German people do not wish to support the wrecked peripheral nations any longer. The latest Greek bailout is packaged much like the absurd doomed MLEC that was promoted to alleviate the toxic subprime mortgages. The shoddy patchjob is more like a clumsy MLEC with a PIIGS mask. In the latter months of 2007, Wall Street thought to fashion a super structured investment vehicle, at the time designed to shore up several hundred $billions of toxic subprime debt, to be tucked away off the bank balance sheets like private Fannie Maes. The concept failed the smell test, but has been revived in Europe to handle the Greek stench. The Master Liquidity Enhancement Conduit was a Bad Bank in the back yard to facilitate short-term refinancing needs, with the hope of cutting off the downward spiral that momentum assured within the abandoned toxic bonds.

◄$$$ SPAIN CONTINUES ITS FANTASY OF BANK ASSET VALUATIONS WITHOUT MARKDOWNS. THEIR BANKS ARE HIDING OVER $70 BILLION IN IMPAIRED REAL ESTATE LOANS. AN ENORMOUS DAY OF RECKONING IS COMING TO THE GREAT ENCHALADA IN EUROPE, AS A SINKHOLE IS SOON TO SHOW ITSELF. THE EVENT COULD BE SIMULTANEOUS WITH A CRISIS SURGE IN ITALY. THE SPANISH BANKS REQUIRE 20 TO 30 BILLION EUROS AT MINIMUM TO IMPROVE RESERVE RATIOS. THE LACK OF TRANSPARENCY WILL OBSTRUCT THEIR EFFORTS TO TAP FINANCIAL MARKETS. $$$

El Confidencial reported gross bank asset losses not yet realized, citing a report by the Boston Consulting Group. In summary, Spanish Banks are hiding over $70 billion in impaired real estate loans. The private Spanish savings banks, called the Cajas, are protected sinkholes, much like Fannie Mae was, but without the $trillion fraud network of schemes. Nevertheless, the Cajas are a sinkhole that puts the entire Spanish banking system at risk, which in time will result in heavy damage. The system effectively pulls bad home loans out of mortgage bond pools, and places them in the Cajas. The practice was done to make bonds eligible for Euro Central Bank loans, basic redemptions. The Spanish financial system is as hollow as a oversized castinet, but the toxic paper is limited in crossing borders. In a sham among Credit Default Swap contract rates, the Spanish Govt CDSwap should be trading 2 or 3 times higher than it current value. The Spanish Govt bond yields are also unrealistically low, not reflecting the risk. The reputable Boston outfit (where the Jackass once applied for a job in 1980) estimates that Spanish banks require between 20 billion and 30 billion Euros in additional capital, and that the FROB bank rescue fund could end up taking control over 20% of the banking industry. Watch the second European Stress Test find all Cajas to be adequately capitalized, like last year, even though they are collectively insolvent to the extreme. That turned out almost to be true, as only Caja3 failed the formal test.

Some details from the El Confidencial exposure are worth citation. The Spanish financial sector has unrecognized real estate losses. Add further 180 billion Euro losses reported to the Bank of Spain, according to the Boston Consulting Group. The property breakdown includes raw land, homes foreclosed, delinquent builder credit, and delinquent mortgages. Additional provisions are needed to provide for 30 billion Euros in the capitalization process. BCG estimated that 35% of toxic Spanish bank assets will need to be covered, a jump from the currently recognized 27% estimate. A future assessment warned of an equity gap in the next two to three years. They brought into question whether banks will be in a position to tap the financial markets in order to improve their reserves ratios. Transparency of asset quality, actual equity, and economic projections will determine the outcome. The concept of a Bad Bank has arisen, a popular notion serving somewhat as a panacea and mirage solution. See the Zero Hedge article (CLICK HERE).

◄$$$ MOODYS HAS WARNED OF A SEVERE GREEK BANK CASH SHORTAGE DUE TO ACCELERATING DEPOSIT FLIGHT. WITH OR WITHOUT AN EXTERNAL BAILOUT, GREECE IS IMPLODING. THE RIOTS TAKE A TOLL TOO. FUNDS ARE FLEEING, LIKE TO SANCTUARIES IN SWITZERLAND. THE EUROCB HAS CREATED A DEPENDENT CRIPPLE. ECONOMIC DECLINE AND UNDER-CAPITALIZED BANKS ASSURE MORE MOVEMENT TOWARD A COLLAPSE WITHOUT SOLUTION. $$$

Severe Greek Bank cash shortage is in progress, as deposit flight has accelerated. The Greek banking system can retain the unwarranted access to the Euro Central Bank funding window, but that cannot stop reality from striking at domestic confidence. Enter the plague of bank deposit removal. The rate of attrition in domestic deposits invites disaster. The Greek dependence upon the ECB funding has grown desperate and clinging, much like a heroin addict on his knees, pulling as the dope pusher pant legs. The decline in customer deposits adds great stress to the Greek banks, whose capital levels will quickly vanish altogether. The outflows amounted to 8% by the end of June, sure to worsen. They have been declining since late 2009, while outflows in May and June accelerated. Depositors are driven to move funds elsewhere, like in Switzerland. The cash burn effect from the recession is another important factor in the bank capital erosion. The Greek Economy is expected to decline by 3.8% this year. Something like half of the recent deposit decline is due to a steady drawdown by businesses and households so as to compensate for lower income. Keep in mind that a hundred thousand daily demonstrators are not busy at work, nor paying taxes.

Based on circulated reports, depositors are losing confidence rapidly. They have also been transferring funds abroad, converting deposits into gold coins, and stuffing cash into bank safety boxes. The only obstacle for such flight from endangered banks is capital controls. Do not expect for Swiss banks to refuse incoming funds, even if dirty. Deposits have declined by 35% or more in the last 18 months, which would crush any national banking system, taking it to its knees. We are witnessing a national bank run. The volume of ECB funds merely compensates for the funds removed from the system. This is no solution, but rather a transfusion process that leaks blood as fast as it is directed in the intravenous drip. The latest available data shows that at the end of April 2011, overall ECB funding stood at 87 billion Euros, equal to at least 21% of the total banks liabilities, compared to 59.4% for deposits. The only stability lies in the deep funding dependence on the Euro Central Bank. An addict, cripple, and orphan has been created. See the Zero Hedge article (CLICK HERE).

Thanks to the following for charts StockCharts,  Financial Times,  UK Independent,  Wall Street Journal,  Zero Hedge,  Business Insider,  Calculated Risk,  Shadow Govt Statistics,  Market Watch.