Saturday, March 6, 2010
‘Colbert Report’: Greece, Frightening
Sure, Goldman Sachs CEO Lloyd Blankfein once crowed that his firm was “doing God’s work,” but, as Stephen Colbert points out here, Blankfein never actually specified which God he was talking about. Perhaps it was Hades, Greek god of the underworld. Given the state of the Greek economy, that may not be too much of a stretch. —KA
Colbert Nation:
| The Colbert Report | Mon - Thurs 11:30pm / 10:30c | |||
| Greece’s Economic Downfall - Scheherazade Rehman | ||||
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UN to produce bullion coins as world currency
The announcement by the United Nations this week that it will license the minting of silver and gold bullion coins bearing the UN logo may be the button that launches metal prices into orbit.
In its wide-ranging report this fall, the UN Conference on Trade and Development (UNCTAD) stated that the system of currencies and international banking practices within today’s economies were inadequate, and responsible for the present economic crisis. The report advocates that the present monetary system, wherein the dollar acts as the global reserve currency be re-examined “with urgency”.
The UNCTAD Report was the first time a major multinational institution had forwarded such a suggestion or measure, although a number of countries, including Russia and Brazil have supported replacing the dollar as the world’s reserve currency. China’s central bank chief Zhou Xiaochuan has mentioned that the dollar could become a basket of currencies instead.
The UN commission dismissed such a widening, saying a multiple-country system “may be equally unstable, and not transparent.”
The panel is seeking more monetary balance for developing countries, and a means for them to retain their reserves and domestic savings independent of foreign agencies and arrangements.
Panel Chair US economist Joseph Stiglitz, a Nobel economics laureate, has made plain that there was “a growing consensus that there are problems with the dollar reserve system. Developing countries are lending the United States trillions dollars at almost zero interest rates when they have huge needs themselves,” Stiglitz stated.
“It’s indicative of the nature of the problem. It’s a net transfer, in a sense, to the United States, a form of foreign aid.”
A report contributor, Detlef Koffe, concluded that “Replacing the dollar with a bullion currency would solve some of the problems related to the potential of countries running large deficits and would help stability,”
US Fed spokesperson Patrick Paulsen acknowledged that there could be some strong reaction in the US to the global currency, and that it would “…be viewed as a step toward a New World Order. But those same people have probably lost patience with the money-changers as well.”
He clarified that he would “…nonetheless anticipate that the western currencies will continue to depreciate, given Asia’s ascendancy in trade and manufacturing, to find their own value and enable their economies to compete. This is a UN perogrative we cannot and should not control, it’s returning to what we had with Bretton-Woods.”
The UN decided to provide a “public option” savings currency, whereby currency mints will be licensed to mint two kinds of bullion coins the size of the 1€ coin – the Uno (silver ~$5) and the Oro (gold, ~$500). The names were adopted from the book “The Humanist”, which foresees the UN being better funded by 2015 via its licensing fees, expected to be 10-15%.
The coins have a marker chemical in them that enables their authentication and processing by modified retail ATM and exchange machines in Europe, which will be distributed globally. Any licensee, public or private, can produce such bullion coinage under contract. The United Nations is doing no more than what most countries do already, except that the value of its coins will reflect their bullion weight.
Armand Dufour of the European Bank welcomes their introduction. “People have enough Fiat currency options, government and banks cannot intrude on bullion coins – they will have their own inviolable value.”
He does have one concern, however. “If we see a dismounting from the US dollar, as is inevitable in the main view, there will be a strong move to the Oro, which may drive its price up to the point where governments will not allow its circulation; they will try to isolate it.”
“That’s when the fun begins.” he said.
Source: Before It’s News
Brits Pounded As Debts, Deficits Hit Home. Next Up: Us!
Boy are things getting ugly in the U.K. The British currency, the pound, is getting crushed. The price of long-term British debt securities, called gilts, is heading down. And the cost of default insurance on the country’s debt is rising steadily.
My takeaway: This is but a preview of what’s to come here in the U.S.
Why the Crisis Is Coming
To a Head in the U.K.
Britain’s finances are in shambles. The country’s budget deficit is running at more than 12 percent of gross domestic product, roughly the same as in Greece. In fact, for the first time, the country recorded a whopping $6.7 billion deficit in January … much worse than the $3.9 billion SURPLUS economists were expecting.
The U.K. government is planning to sell $349 billion in debt this year, the most ever, to cover its deficit. But demand is flagging, with foreign investors dumping the most U.K. sovereign debt in nine months in January and yields generally rising.
Then a few days ago, the crisis came to a head. The catalyst: New polling data that threw the British political outlook into chaos. Polls showed that the Conservative Party’s lead over the Labour Party shrunk to its lowest level in more than two years.
It now appears that neither party could come out of spring elections with a clear majority, leaving the U.K. with a “hung” parliament. That would make it much more difficult for the government to reduce the nation’s debts and deficits.
 |
| Investors are becoming more afraid of British debt. |
With all of that, it’s no wonder …
- The British pound plunged six days in a row, its longest series of declines since October 2008.
- The yield on 10-year U.K. government debt recently hit 4.27 percent, compared with a low last fall of 3.44 percent.
- The cost of protecting against a British debt default in the credit default swap market surged to more than 101 basis points, or $101,000 per $10 million of debt. That’s up from around 44 bps in the fall.
Striking Similarities …
You don’t need a Ph.D. in economics to see the striking similarities between the situation in the U.K. and the situation here in the U.S. …
- Our debt situation is totally out of control, with the national debt on track to double over the next decade to almost $19 trillion.
- Our budget picture is a mess, with $8.5 trillion in deficits projected over the next 10 years.
- Our foreign creditors are starting to sell our bonds, with China alone dumping $34.2 billion of Treasuries in December, the most ever.
And politically, we’re facing the same gridlock and inaction as the U.K.
Just look at the deficit commission nonsense …
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| “The sovereign debt crisis is subprime all over again.” — Bill Gross, manager of the world’s largest mutual fund. |
President Obama had to create an 18-member panel by executive order because Congress voted down an earlier proposal. Since it’s a presidential commission, Congress can just ignore any findings. And those findings won’t even be released until December 1, for purely political reasons (that’s after the mid-term Congressional elections).
Lastly, just like the U.K., we have bailed out, backstopped, or otherwise taken over so many institutions and segments of the capital markets that our own balance sheet is getting shakier and shakier.
As PIMCO Chief Investment Officer and “bond guru” Bill Gross just noted in a monthly commentary:
“If core sovereigns such as the U.S., Germany, U.K., and Japan ‘absorb’ more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee. The Kings, in other words, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle.”
Bottom line: We’re running this country’s finances off the rails. And just like in Greece … Ireland … Spain … and now the U.K., it’s going to come back to haunt us.
So consider dumping your long-term U.S. bonds, and buying some gold as a hedge against global debt and deficit problems. Or if you’re more aggressive, check out a service like my Crisis Opportunity ETF Trader, where my subscribers are positioned to profit from this unfolding fiscal nightmare.
Until next time,
Mike
GREAT PETROL RIP-OFF
THE massive scale of Britain’s petrol tax rip-off is revealed today in new research.
It shows that recent Government tax hikes have clobbered motorists here up to five times harder than those in Europe.
Tax on unleaded petrol has shot up 13.5 per cent since late 2008 at UK forecourts while drivers in Austria have seen their costs edge up by just 2.3 per cent as a result of taxes.
The UK’s petrol tax surge is more than double the average five per cent average increase seen across 10 countries on the Continent where governments have held off piling so much additional tax on their drivers, according to the AA.
Now Chancellor Alistair Darling is gearing up to hit motorists here with another fuel duty hike on April Fool’s Day. The rise will mean up to 3p a litre to the cost of both unleaded and diesel.
AA president Edmund King warned that another crippling duty hike would hit motorists hard as they struggled to cope with spiralling fuel costs.
“Most other European countries have resisted such fuel tax hikes over the past 15 months, and they have also had to deal with the fallout from the credit crunch,” he said.
The Government has already announced plans to ramp up fuel duty by another 1p a litre, plus inflation, from April 1.
Despite a recent bout of deflation the total tax hike could be as much as 3p a litre because the Treasury plans to use its own inflation forecast based on what it thinks the rate will be in late 2010.
Motoring groups are furious at the Government’s claim that it is raising petrol tax to tackle the country’s financial problems.
Association of British Drivers spokesman Nigel Humphries said: “They just see the motorist as a cash cow. It is time to say enough is enough.”
Drivers have suffered three fuel duty hikes since December 2008 which together have added nearly 9p to the cost of a litre of petrol once the additional VAT is taken into account.
The tax element of a litre of unleaded soared from 64.17p on the date of the November 2008 pre-Budget report, when the Chancellor first announced measures to tackle the credit crunch, to 72.86p in mid- February this year. That is a 13.5 per cent rise in petrol tax over that period.
Meanwhile, drivers in 10 major European countries including the UK have seen their petrol tax rise just five per cent on average.
Motorists in France, Germany, Ireland, Italy and Portugal have all benefited from increases of less than four per cent. A Treasury spokesman insisted yesterday that the petrol tax hikes would help the wider economy.
Meanwhile, a steady rise in petrol costs has pushed UK unleaded up to an average 113.40p a litre at UK forecourts yesterday of which 73.08p was tax destined for Treasury coffers.
Iceland referendum 'to go ahead' as talks fail
Iceland has all but given up on agreeing a new deal with the UK and the Netherlands to repay more than 3.8bn euros ($5.2bn; £3.4bn) of debt.
It had hoped to avoid a referendum on the issue by agreeing a repayment plan before the weekend, but the vote is likely to go ahead on Saturday.
Opinion polls suggest Icelandic voters will reject a plan agreed last year.
A no vote could jeopardise billions of dollars of loans from the International Monetary Fund and other countries.
"The referendum is going to go ahead," said Iceland's Finance Minister Steingrimur Sigfusson.
"We have been trying to resolve the matter in another fashion but time has run out."
However, he did say that the referendum could, technically, be cancelled at any point up to Friday night.
High stakes
The UK and the Netherlands want Iceland to repay money that they paid out in compensation to customers of the Icesave online bank, which collapsed in October 2008.
The three countries have been negotiating a repayments package for months.
The country's parliament voted for a referendum on the original Icesave bill after President Olaf Ragnar Grimsson vetoed the repayment to the UK and the Netherlands.
Opponents say the repayment plan forces Icelandic taxpayers to pay for bankers' mistakes.
The stakes are high, because Iceland needs international loans to help it rebuild its economy, which was hit particularly hard during the global downturn.
Some of these loans are conditional on Iceland repaying its international debts.
The dispute has also overshadowed Iceland's application to join the European Union, which was submitted in July last year.
Debt, cuts and the ghost of Geddes
There are parallels between then and now
| By Finlo Rohrer BBC News Magazine |
Big cuts on the horizon, the media campaigning for an end to waste and those affected bitterly protesting. Sound familiar?
It might surprise a lot of people to think that 1921 and 2010 have a lot in common.
In 1921 public finances were looking shaky after years of rocketing expenditure during World War I and its aftermath.
The national debt had risen rapidly and many people - even outside the worlds of politics and business - weren't happy.
Agitation was led by Lord Rothermere, the Daily Mail owner, whose Anti-Waste League had started fighting by-elections on a manifesto of attacking excessive public spending.
At the same time cutting government spending was not a simple issue, with the Labour Party looking to use it rally people to its cause.
"The government of Lloyd George was being caught between Labour in the North and the Anti-Waste League in the south being led by the Daily Mail," says Martin Daunton, professor of economic history and author of Wealth and Welfare: An Economic and Social History of Britain, 1851-1951. " They were putting on candidates in this lower middle class attack on waste."
Shuffling responsibility
With this gathering storm in mind, at the start of August 1921 David Lloyd George announced the creation of an advisory committee of businessmen to advise him on departmental spending and the policy underlying that spending.
"Lloyd George, although a liberal, had a habit of calling on businessmen," says emeritus professor of history George Peden, author of The Treasury and British Public Policy, 1906-1959. "They had a reputation of being impartial, experts who knew how to get things done. It is politicians shuffling off the responsibility onto someone else."
The committee was led by businessman Sir Eric Geddes, who had joined the government in the war, before becoming minister of transport. He was not an uncontroversial choice, having presided over a ministry associated with lavish spending.
 Expenditure on WWI pushed the UK into debt |
But everybody knew which way the wind was blowing. The Times on 4 August 1921 had christened Geddes's new body the "Big Axe" committee, and coldly noted: "The Prime Minister has desired to set up the committee to take the sting out of the anti-waste agitation."
By 9 August, the Times was dubbing it the "Super-Axe" committee and asking questions about a body that seemed to bypass the chancellor, cabinet and even Parliament.
The need for action was clear to many. As Prof Daunton notes, the national debt had risen dramatically from a paltry £677.4m against a GDP of £2.233bn in 1910. By 1920 it was £7.809bn against a GDP of £6.23bn.
And the cost of servicing the debt was unpleasant with interest rates running at 5% in 1921, compared with 3% 10 years earlier.
"The Geddes committee was a piece of political rhetoric saying we are going to slash public expenditure," says Prof Daunton.
Defence cuts
"It was an incredibly tense period. The lower middle class really felt they had been hammered [through taxation]. There had been a big rise in trade union membership and militancy."
In February 1922 the recommendations of the first two-thirds of the report were made public, totalling £75m of annual cuts. The first part dealt with cuts in the armed forces, and the defenders of the Navy, for example, were quick to rail against some of the measures. The third part followed a short while later and covered another £15m in cuts.
 |  The next government is going to have many challenges, but tackling a public sector that has become obese and poor value for money is going to have to be a priority  The Times, 2010 |
"The bigger cuts were in defence. More controversial were the cuts in social services," says Prof Peden. "The then government under Lloyd George had promised a 'land fit for heroes' and then began to cut back on those promises."
Speaking in the Times after the release of the report, Sir Daniel Stevenson of Glasgow attacked the "cheeseparing" planned for the vital field of education.
But George Terrell, MP and president of the National Union of Manufacturers, probably gave some indication of the mood of business in response to the report.
He told the Times: "When the history of the war is written I am firmly convinced that Sir Eric Geddes will rank as a superman who not only performed great work in the war but who, by his Report, has indicated reforms which are necessary if we are to overcome the evils of unemployment and to recover financial stability."
| There are signs of an astonished realisation of the alarming bill for civil pensions that in a few years will be a millstone on the taxpayer's neck The Times, 1922 |
The overwhelming feeling was that something had been done and cuts were being made. "They were pretty severe at the time," says Prof Peden.
Apart from defence where there were widespread reductions, the blade of the Geddes Axe fell primarily on education and social housing.
Geddes scalpel
But the effect was not permanent. After cuts in the financial years between 1921-1924, expenditure again began to creep back up.
"After a couple of years the onward march of public expenditure resumed," says Prof Peden.
And for some, the Geddes Axe was not really that sharp at all.
 The report was well received by business but did draw protests |
"My argument is that it was not a Geddes Axe - it was a Geddes scalpel," says Prof Daunton. "It didn't slash expenditure as much as expected. It wasn't very rigorous. The level of government spending does not go down."
Instead, the real story is successive British governments quietly steering towards calmer fiscal waters.
"Compared with Germany and France, in Britain the government very carefully moves through this. It doesn't introduce a sales tax, it doesn't put up the income tax rate - but it does keep up the taxation on business.
"You gradually work your way out without cutting government expenditure."
It's certainly possible to find echoes of 2010 in 1921.
"The parallel you might make is the tremendous effort made by whoever's in power to win the confidence of the markets," says Prof Peden.
And the idea of taxpayers getting exercised over the national debt is also familiar. The idea of a taxpayers' revolt has certainly come up since.
"That's comparable to the feeling that brought Margaret Thatcher to power," says Prof Peden.
 Lord Rothermere's Anti-Waste League helped spur the cuts |
There are other echoes. The Times noted in 1922: "There are signs of an astonished realisation of the alarming bill for civil pensions that in a few years will be a millstone on the taxpayer's neck."
Perhaps the most extraordinary thing about the Geddes Axe was that it seemed to work as a political tool. The Anti-Waste League wound down. People were largely satisfied by the cuts, says Prof Daunton.
Lloyd George's political career was ended, but not by the issue of the national debt. The government continued to operate.
"Looking back the finances of the period look very sound and conventional compared with where they are now," says Prof Peden.
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