EU austerity policies risk civil war in Greece, warns top German economist Dr Sinn

Greece’s austerity measures cannot prevent default and will lead to a breakdown of the political order if continued for long, a leading German economist has warned.

Hans-Werner Sinn, head of Germany's prestigious IFO Institute, said it was impossible to cut wages and prices by 30pc without major riots. Photo: EPA

“This tragedy does not have a solution,” said Hans-Werner Sinn, head of the prestigious IFO Institute in Munich.

“The policy of forced 'internal devaluation', deflation, and depression could risk driving Greece to the edge of a civil war. It is impossible to cut wages and prices by 30pc without major riots,” he said, speaking at the elite European House Ambrosetti forum at Lake Como.

“Greece would have been bankrupt without the rescue measures. All the alternatives are terrible but the least terrible is for the country to get out of the eurozone, even if this kills the Greek banks,” he said.

Dr Sinn said Greece is an entirely different case from Spain and Portugal, which still have manageable public debts and can bring their public finances back into line with higher taxes.

“Greece would have defaulted in the period between April 28 and May 7, had the money not been promised by the European Union,” he said, describing the failure of the EU’s bail-out strategy to include a haircut for the banks as an invitation to moral hazard.

“There should be a quasi-insolvency procedure for countries. Creditors have to accept a haircut before any money flows for rescue plans, otherwise we’ll never have debt discipline in the eurozone,” he said.

Greek society has so far held together well, despite a wave of strikes and street violence in the early months of the crisis. However, unemployment is rising fast and political fatigue with such austerity policies typically sets in the second year.

Under the rescue deal, the eurozone pledged €80bn of new loans at 5pc interest and the International Monetary Fund offered a further €30bn.

The joint bail-out was hoped to safeguard Greece against the pressure from global capital markets for two and half years, but the relief rally proved short. Spreads on longer-term Greek government debt have surged back to crisis levels of about 800 basis points, implying a high risk of default.

“We are in the second Greek crisis right now, today,” said Dr Sinn.

Greece is undergoing what amounts to an IMF austerity package but without the IMF cure of debt restructuring or devaluation that usual for a country with a spiralling public debt and a chronic loss of competitiveness.

The IMF says Greece’s debt will rise to 150pc by 2013-2014 even if Athens complies fully, a strategy viewed as self-defeating by several ex-IMF officials. There is a strong suspicion that the real objective is to bail-out North European banks with heavy exposure to Southern Europe, rather help Greece.

Dr Sinn said the Germany is now was super-competitive after clawing back 18pc in competitiveness during its long slump. “We’re in a new phase of history. The toggle switch has turned and we are going to see a mirror image of the last 15 years. This time it is Germany that will have an internal boom,” he said.

Germans will not recyle their savings in the Club Med region. They will invest at home.

Marijuana better than pharmaceuticals at treating chronic pain, improving mood

(NaturalNews) Experts from different persuasions often argue about the alleged benefits of using marijuana for pain relief, but a new study out of McGill University Health Centre (MUHC) and McGill University (MU) has conclusively found that cannabis, the genus name for marijuana, is better than pharmaceutical drugs at relieving chronic neurological pain, and without all the harmful side effects.

Appearing in the latest issue of the Canadian Medical Association Journal, the study reveals that tetrahydrocannabinol (THC), the active ingredient in marijuana that gives it psychoactive and analgesic properties, is linked to relieving chronic pain, improving mood and inducing better sleep in those with severe neurological pain.

Patients who took a single inhalation of marijuana smoke three times a day experienced moderate pain reduction within just a few days. The effects were more pronounced with marijuana containing ten percent THC versus varieties with less than ten percent.

"This is the first trial to be conducted where patients have been allowed to smoke cannabis at home and to monitor their responses, daily," explained Dr. Mark Ware, lead author of the study, Director of Clinical Research at the Alan Edwards Pain Management Unit at MUHC, assistant professor of anesthesia in McGill University's Faculty of Medicine and neuroscience researcher at the Research Institute of the MUHC.

"The patients we followed suffered from pain caused by injuries to the nervous system...and which was not controlled using standard therapies," he went on further to say. "This kind of pain occurs more frequently than many people recognize, and there are few effective treatments available. For these patients, medical cannabis is sometimes seen as their last hope."

For legitimate chronic pain caused by post-traumatic and post-surgical injuries, marijuana can be a safer alternative than prescription medications. As always, though, it is important not to abuse marijuana for non-therapeutic purposes.

Sources for this story include:

Washington Faces Possible Armageddon Unlike Any Since Civil War

The U.S. debt crisis represents a unique, unparalleled, and unimaginable convergence of circumstances yet, despite the utter gravity of our plight, nothing is being done to change our course. Washington must either muster the courage — and the support of the people — to accept the pain and make the sacrifices of a lifetime … or face the downfall of America. Words: 938

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from Martin Weiss’ (http://www.moneyandmarkets.com) original article* for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Weiss goes on to say:

The United States government and its agencies have, by far;
1. the largest pile-up of interest-bearing debts ($15.6 trillion),
2. the largest accumulation of unsecured obligations (over $60 trillion),
3. the largest yearly deficit ($1.6 trillion) and
4. the greatest indebtedness to the rest of the world ($4.8 trillion)… of any country in the world.

In proportion to the size of its economy, one important country, Japan, does have more debt than the U.S. Unlike Washington’s debts, however, nearly all of Japan’s are financed by its own citizens — loyal, long-term savers who are far less likely to pull out in a storm.

Despite the utter gravity of our plight, nothing is being done to change our course. To whit …

Consequence #1: Higher Interest Rates
Due to the avalanche of government borrowing to finance the deficit, there is no power on Earth that can avert sharply higher interest rates.

Consequence #2: Higher Bond Yields
All long-term bonds — whether issued by other government agencies, corporations, states, or municipalities — will also collapse, driving their yields through the roof because, when Uncle Sam has to pay more to borrow, they inevitably have to pay more as well.

Consequence #3: Higher Mortgage Rates
Rates on mortgages and car loans will surge. Why? For the simple reason that they’re also tied at the hip of long-term Treasury rates. If you want to take out a 30-year fixed mortgage (now close to 5 percent) on a median-priced home ($178,300), and you can afford a 10 percent down payment just …
a) a 1 percent rise in rates will drive your monthly payment from $861 to $962 [that's $1212 a year!]
b) a 2 percent increase will drive it to $1,068 [that's $2,484 a year!!) ...
c) and the kinds of rate increases possible in a bond-market collapse could drive it to levels only Midas could afford. Worse, if you go for variable-rate mortgages, balloon mortgages, or other now hard-to-get alternatives, the impact of surging interest rates will be even more traumatic.

Consequence #4: Stagnant Recovery
The fledgling recovery in housing and auto sales — the pride and joy of Washington's bailout brigades — will be toast.

Consequence #5: Lower Long-term Bond Yields
Institutions and individual investors holding piles of lower yielding long-term bonds will get killed which includes:
a) the U.S. households stuck with $801 billion in Treasuries, $979.5 billion in municipal bonds, plus a whopping $2.4 trillion in corporate bonds
b) banks and credit unions holding $199 billion in Treasuries, $228 billion in munis, $1.066 trillion in corporate bonds and, worst of all, $1.408 trillion in government agency (and GSE) bonds
c) insurance companies buried in Treasuries ($196 billion), munis ($444 billion), agency bonds ($469 billion) and a TON of corporate bonds ($2.180 trillion) and
d) private pension funds, state and local governments, and even their employees' retirement funds [which are] all loaded with similarly vulnerable bonds.

Not all of the [the above] holdings are of the long-term variety, but most are, and investors and institutions who own them, on behalf of millions of retirees, will suffer shocking declines in the market value of their portfolios. [In addition,] they could suffer a chain reaction of defaults, gutting their income stream and, worst of all, they now have some reason to fear the de facto default of the biggest debtor of all — the government of the United States of America. I doubt very much we will see THAT happen but two events are very possible, even likely, [namely]:
1. America will lose its triple-A rating
If the Wall Street rating agencies don’t have the moral fiber to announce downgrades, the marketplace will do it for them.
2. Our leaders will face an Armageddon unlike any since the Civil War.

Like California and Greece … like every household and any company … our government MUST cut back and accept the rest of the consequences:
#6: Declining home values
#7: Falling stock prices
#8: The end of the recovery
#9: And many, many more [dire consequences]!

Washington… will no doubt seek every [possible] alternative and try every other trick [to avoid either of the above scenarios] but, alas, no printing press can run faster than our foreign creditors can sell their U.S. bonds. No one will bail out America.

Ultimately, there is NO choice. Washington must either muster the courage — and the support of the people — to accept the pain and make the sacrifices of a lifetime … or face the downfall of America. Yes, we MUST bite the bullet!

http://www.munknee.com/2010/08/10709/

Heavy in dollars, China warns of depreciation

China on Friday offered a rare glimpse into its foreign exchange reserves, confirming that they are overwhelmingly allocated in dollars, while a central banker said the mountain of cash could face depreciation risks.

The Chinese government's currency reserves, the world's largest such stockpile at $2.45 trillion, are held roughly in line with what was described as the global average: 65 percent in dollars, 26 percent in euros, 5 percent in pounds and 3 percent in yen.

The report in the China Securities Journal, an official newspaper, cited unnamed reserve managers.

The allocation of Chinese foreign exchange reserves is considered to be a state secret, but analysts have long estimated that about two-thirds are invested in dollar assets.

Separately, Hu Xiaolian, a vice governor with the People's Bank of China, warned that depreciation loomed as a risk for foreign exchange reserves held by developing counties.

"Once a reserve currency's value becomes unstable, there will be quite large depreciation risks for assets," she wrote in an article that appeared in the latest issue of China Finance, a Chinese-language magazine published under the central bank.

She reiterated China's long-standing discomfort with a global financial system dominated by a single currency in the dollar.

"The outbreak and spread of the global financial crisis has highlighted the inherent deficiencies and systemic risks in the current international currency system," she said.

"A diversified international currency system will be more conducive to international economic and financial stability," she added.

To that end, developing countries must speed up reform of their financial markets, and China would work to promote greater cross-border use of the yuan, she said.

DIVERSIFICATION

There have been signs in recent months that Beijing has stepped up the pace of diversification of its foreign exchange reserves away from dollar assets.

Chinese net buying of Japanese debt has surpassed 1.7 trillion yen this year, far surpassing its record of 255.7 billion yen in 2005. [ID:nTOE67802Z]

China has also raised holdings of South Korean bonds by 2.48 trillion won ($2.11 billion) in the first seven months of this year from 1.87 trillion won at the end of last year. However, Chinese investors only started buying South Korean bonds in the middle of 2009. [ID:nTOE67I05M]

At the same time, China has slightly cut back its vast holdings of U.S. Treasuries, from $894.8 billion at the start of the year to $843.7 billion in June, according to the most recent data. China remains the biggest single holder of U.S. government debt. [ID:nN16255591]

But analysts have also warned against reading too much into the apparent shifts in the flow of cash from China. Like any investor with commercial interests in mind, Beijing has shown a readiness to shift its strategy depending on what it sees as good buys at the time.

The China Securities Journal laid out the prospects for a shift back to the dollar in the near term.

"It is unlikely that China will increase purchases of Japanese bonds in the coming months because the yen might weaken at any time," the newspaper said.

"China is very likely to increase purchases of U.S. Treasuries in September. The possibility for China to buy more Korean bonds can't be ruled out," it added.

(Editing by Ken Wills)

Eugenics: Professor David Marsland Calls for Forced Sterilization, Human...

UPDATE 2-Taxpayers likely to face initial loss on GM IPO-sources

Treasury to sell first shares below break-even-sources

* 61 pct Treasury sale could take several years-sources

* Taxpayer break-even is around $70 bln GM market value (Adds details on government stake, GM Q2 results, pension shortfall)

By Clare Baldwin, Soyoung Kim and Kevin Krolicki

NEW YORK/DETROIT, Sept 3 (Reuters) - The U.S. government is likely to take a loss on General Motors Co [GM.UL] in the first offering of the automaker's stock, six people familiar with preparations for the landmark IPO said.

Subsequent offerings of the government's holdings may be profitable depending on how investors trade the newly listed stock, the sources said.

But the question of whether taxpayers are ultimately made whole on GM's $50 billion bailout could be left open for years, the people said.

It could take more than three years for the Treasury to sell down its remaining stake in GM after the IPO, one person said. That would push a final accounting into the next presidential term.

A decision to price the initial GM shares below the cost to taxpayers would follow the usual Wall Street practice of giving the first investors in a new stock a discount, but it could also help allay investor concern in the face of the slow recovery of the U.S. economy and flat auto sales.

Preparations for GM's IP0 remain confidential. Both GM and the U.S. Treasury have declined to comment, citing restrictions by U.S. securities regulators.

The Obama administration has pledged to exit its investment in GM as quickly as possible while holding out the prospect that taxpayers could ultimately be paid back in full.

Treasury spokesman Mark Paustenbach declined to comment. GM spokesman Tom Wilkinson also declined to comment.

GM plans to begin a roadshow for its IPO immediately after the Nov. 2 U.S. midterm congressional elections, paving the way for a stock debut on Nov. 18, sources have said. [ID:nN01172283]

GM in August filed paperwork for an IPO that could potentially be worth as much as $20 billion, making it one of the biggest IPOs of all time.

The U.S. Securities and Exchange Commission is now reviewing the automaker's S-1 filing.

Analysts and potential investors have projected a market value for GM of between $50 billion to around $90 billion, based on projections for the automaker's cash flow, comparisons with rival Ford Motor Co (F.N) and trading in bonds in the old GM which are convertible into shares in the new company.

A market value at the high end of that range would be above the roughly $70 billion in market capitalization that GM needs to achieve for the U.S. government to break even on its $43 billion remaining investment in the automaker.

But IPOs typically price at a discount of 10 percent to 15 percent to theoretical fair value to reward investors for taking a risk on a new issue and pave the way for future stock floats. In tough market conditions, that discount can be even larger.

"You have to sell people on the notion that there is an upside to what they are buying," one of the sources said.

Another of the sources said the discount could be as much as 20 percent on the GM IPO compared with the U.S. Treasury's break-even point.

Preparations for the GM stock offering remain in the early stages. A number of the sources cautioned that the size and value of the deal and the size of the stake to be sold by the U.S. government have not been determined and will not be set for weeks.

GOVERNMENT STAKE IN 'GOVERNMENT MOTORS'

The U.S. government pumped $49.5 billion worth of taxpayer money into the automaker and took nearly 61 percent of its common stock.

GM has paid back $6.7 billion in debt to the Treasury and returned another $700 million in interest and dividends. The U.S. government also holds $2.1 billion in perpetual preferred shares in the automaker.

That leaves the government with a roughly $40 billion investment in the GM common stock that will debut in an IPO along with a new class of preferred shares that will convert into common shares under a mandatory provision.

In the days leading up to GM's August S-1 filing, Republican Senator Charles Grassley asked a special Treasury Department watchdog for an analysis of the GM IPO and how much money would be returned to taxpayers.

In its pitch to potential investors, GM will tout its global reach, recent gains in quality and pricing in its home market, and its sharply lower cost of operations after its 2009 bankruptcy, sources have said.

GM's $1.3 billion second-quarter profit was its biggest since 2004, when industry-wide U.S. sales were near 17 million vehicles compared with the 11.5 million sales rate of August.

But GM will have to address investor concern that growth in industry car sales in the U.S. in the second half of 2010 and into 2011 will likely be slower than analysts had expected just a few months ago.

At the same time, GM will have to confront a pension shortfall that remains a liability from its pre-bankruptcy operations.

GM eliminated about $40 billion in unsecured debt and other obligations in bankruptcy, but the automaker still needs to address a pension shortfall estimated at about $26 billion.

A successful IPO would be a political victory for the Obama administration and would help GM distance itself from critics who dubbed it "Government Motors" after its bailout. (Reporting by Clare Baldwin and Soyoung Kim in New York and Kevin Krolicki in Detroit; editing by Carol Bishopric)

No defence left against double-dip recession, says Nouriel Roubini

The United States, Japan and large parts of Europe have exhausted their policy arsenal, leaving them defenceless against a double-dip recession as recovery slows to ‘stall speed’.

Nouriel Roubini said the US growth rate was likely to fall below 1pc in the second half of the year

“The US has run out of bullets,” said Nouriel Roubini, professor at New York University, and one of a caste of luminaries with grim forecasts at the annual Ambrosetti conference on Lake Como.

“More quantitative easing (bond purchases) by the Federal Reserve is not going to make any difference. Treasury yields are already down to 2.5pc yet credit spreads are widening again. Monetary policy can boost liquidity but it can’t deal with solvency problems,” he told Europe’s policy elite.

Dr Roubini said the US growth rate was likely to fall below 1pc in the second half of the year, despite the biggest stimulus in history: a cut in interest rates from 5pc to zero, a budget deficit of 10pc of GDP, and $3 trillion to shore up the financial system.

The anaemic pace compares with rates of 4pc-6pc at this stage of recovery in normal post-war recoveries.

“We have reached stall speed. Any shock at this point can tip you back into recession. With interbank spreads rising, you can get a vicious circle like 2008-2009,” he said, describing a self-feeding process as the real economy and the credit system hurt each other.

“There is a 40pc chance of double-dip recession in the US, and worse in Japan. Even if it is not technically a recession it will feel like it,” he added.

Hans-Werner Sinn, head of Germany’s IFO Institute, said the US would have to purge its debt excesses the hard way.

“The bitter truth is that there is no way out of this with monetary and fiscal policy. They will just have to see their living standards go down. I see a decade of difficulties for the US,” he said.

Dr Sinn said the US the market for mortgage securities (CDOs) had collapsed from $1.9 trillion in 2006 to just $50bn last year, leaving the US property market reliant on federal agencies.

“The world is simply not willing to buy these dubious financial products again. Germany is leaving, China is no longer there, and Japan is pulling away. The US system of mortgage finance is on government life support and that cannot drive a sustainable upswing,” he said.

Harvard Professor Niall Ferguson said the US has exhausted fiscal stimulus given warnings from the Congressional Budget Office that interest payments as a share of tax revenues will reach 20pc by 2020 and 36pc by 2030 without drastic retrenchment.

“The fiscal crisis seems to be out of control. The 'big crossover’ is approaching when the US spends more on debt service costs than on security, and historically that is the tipping point for any global power,” he said.

Mr Ferguson said the “Chimerica” marriage of recent years is on the rocks. China is no longer willing to fund the US Treasury bond market, cutting its share of holdings from 13pc to 10pc of the total debt stock.

While China must find ways to recycle its trade surplus and hold down the yuan, it is doing this by stockpiling commodities, buying hard assets around the world, or rotating into Asian bonds.

Dr Roubini said US companies have plenty of cash but are boosting profits by a policy of “slash and burn” on labour costs. “We’ve lost 8.4m jobs and if you include the loss of hours worked it is equivalent to another 3m. We need to generate an extra 450,000 jobs every month for three years to get it back,” he said.

The US non-farm payrolls data released on Friday was better then expected but still showed a net loss of 54,000 jobs.

Dr Roubini said average public debt in the rich countries would rise to 120pc of GDP by 2015 in the rich countries, leaving no scope for a further fiscal stimulus. If they push their luck, they too risk the sort of bond crises seen in Southern Europe this year.

In the US, the fiscal boost has faded, switching to tightening over coming months The lift from the inventory cycle is finished. Capex spending by companies has held up well, but this slowed sharply in July. Housing is already in a double dip. The last support for the US economy is consumption, barely growing at 1pc.

“All we did was kick the can down the road and stole demand from the future,” he said.