From time to time, one of my friends simply says it better than I could ever imagine saying it myself. I have known Peter Gianulis, manager of Carrelton Asset Management for years. He is one of the deepest thinkers I know of when it comes to the markets. His fund also happens to have one of the best track records out there. So without further ado, I turn the microphone over to my good friend Peter Gianulis.

The Greek population is in constant revolt with another 48 hour national strike underway against ever expanding announcements of economic austerity though to date little of which has actually been implemented and therefore risks at the very a least a delay of the latest tranche of Euro 12 billion in what has now become a permanent flow of funds from core Euro-zone to Greece and other peripheral eurozone countries, therefore tax payers of core Europe and to a lesser degree Britain are being taxed to pay for the unwillingness of the PIIGS to pay their bills.

Core Euro-zone countries are effectively being black mailed by Greece to finance Greece’s public budget deficit and the interest payments due on the ever expanding debt mountain, none of which that the Greece population are having to bare the consequences of, for were they then Greece would have gone bust Iceland style a year ago. The facts are that IF Greece were not being financed as a consequence of being within the Euro-zone then all of the middle class of Greece would have already been swiftly wiped out, as the value of earnings, savings and assets would have collapsed along with the Greek economy as a consequence of the markets immediate adjustment to the true level of debt and inability to ever repay.

Some argue that a short- sharp shock Iceland style would prove better in the longer run but there would be blood in the streets perhaps even revolution that would be infinitely worse for the Greek population than what is taking place today as international trade would literally seize up overnight due to the inability to make payments on goods and services and if a country can no longer import foods, then all that would be left would be food aid being shipped in Africa style to prevent starvation.

Therefore the Greeks life style is being subsidised by hard working tax payers elsewhere, and those demonstrating on the streets of Greece are mostly delusional or represent subversive interests such as the communist party that are banking on profiting from debt crisis chaos, for if Greeks actually got what they are asking for i.e. an exit from the Euro and debt default, then the Greek population would soon, perhaps within 24 hours come to regret the outcome as all roads would lead to instant bankruptcy with all of its consequences. So all this talk of the Greeks wanting to leave the Euro-zone is a load of nonsense, for what the Greeks really need to worry about is Greece being kicked out of the Euro as it continues to act as a funding black hole that is currently costing core euro-zone tax payers Euro 100 billion per year that they will never get back.

If Greece were ejected from the Euro-zone then there would soon be an exodus of Greece’s best and brightest workers as they sought earnings in hard currency such as the Euro rather than be paid in worthless Zimabwe-esk Drachma’s. Something that the Euro-zone politicians may be considering behind close doors in a desperate attempt to save the Euro currency from collapse.

The Greek Trojan Horse Full of Debt

Greece landed its debt filled Trojan horse economy onto the shores of the euro-zone in 1999, following which as if by magic a high interest rate high risk economy immediately became a low interest rate low risk economy. How did Greece achieve this apparent miracle ?

By perpetuating state sponsored fraud as the country proceeded to hide the true extent of public spending, debt and liabilities from the markets and European Central Bank as there was no longer a currency market that would reflect the real state of the economy which allowed Greece to secure funding for the state and its private sector at low interest rates that did not reflect the actual risk of default and debt burden.

The Greek government were not doing anything different than what most of the higher paid working population engages in, where fraud is endemic, be it government economic statistics or the 60% or so of of tax payers that evade the majority of taxes resulting in highly paid doctors paying taxes that can be less than typical public sector nurses.

Off course the Greek population can argue that most of the blame lies with their bankers, which is true, because the bailout is for holders of Greek debt which is mostly held by european bankster’s. But the same holds true for every other country that has seen its politicians dump all of banking sectors losses and liabilities onto the backs of tax payers that has put every western country onto the path towards bankruptcy. But the Greeks by virtue of euro-zone membership have decided not to bare the responsibilities for their debt (public and bankster’s) but for tax payers of other nations to take on both the liabilities of their banks and the Greek state, else the Euro dies. Therefore Greece is effectively black mailing core euro-zone nations into making funding available whether or not they actually implement any of the economic austerity plans as Greek politicians are likely to succumb to the greater weight of voters than follow through on demands from core euro-zone financing countries, after all what does most of the Greece population care, their money is safe against hyper-inflation, whilst they continue to evade taxes and the state runs a large budget deficit, instead letting the tax paying suckers of mainly Germany and France pick up the bill.

Which means the tax payers of Germany and France are effectively trapped into a lose, lose situation, where the only solution is for either collapse of the euro currency (savers wiped out) or for total political, economic and monetary union which means permanent financing of states such as Greece by means of internal transfer payments as occurs in nation states where wealthier areas are taxed to subsidise the poorer areas (UK example – London / South East subsidises most of the rest of the country).

Risks of PIIGS Sovereign Debt Default

Joining Greece are the other european bankrupting nations to varying degrees that are collectively referred to as the PIIGS (Portugal, Ireland, Italy, Greece and Spain), though a few others such as Belgium should also be included in the list as the risks of actual default vary between nations of the Eurozone as the below graphic illustrates the probability of actual default within the next 3 years, though this does not mean that we will have to wait for 3 years for countries such as Greece that are permanently tottering on the brink of default.

Britain and other european nations outside of the Euro-zone whilst having the ability to print money and inflate their debt away at a steady pace are still at a risk of bankruptcy and actual debt default if they could no longer service their external debts i.e. that which is denominated in a foreign currency courtesy of their bankster’s, which therefore puts Britains risk of default at somewhere between Germany’s 13% and France’s 25%.

Sovereign Debt Default Contagion Risk

To illustrate how severe the current crisis is, Greece’s debt is now rated at worse than that of Pakistan, though Pakistan’s debt never threatened a collapse of the global financial system. Greek government 1 year debt is yielding 20% and 2 year at 30%, that is a sign of markets discounting default i.e. the bond markets are pricing in a Greek debt default which is hitting the Greek banks hard and risks wiping them out and acting as a contagion to other european banks.

All that the European Union has done is to throw good money after bad by wasting 100 billion euros and pushing Greek debt up from 260 billion euros to 330 billion euros, as if a greater debt burden would somehow prevent bankruptcy which I warned over a year ago was inevitable and the solution to the crisis remains the same for the Euro to effectively split into two.

11 May 2010 – E.U. $1 Trillion Bailout, Detonates Nuclear Option of Printing Money to Monetize PIGS Debt).

Financing albeit shrinking annual PIGS deficits over the next few years will still mean that ALL of these countries debt burdens will be HIGHER in 3 years time, i.e. Greece’s debt burden is expected to rise from 120% of GDP to as high as 150% of GDP. How is that a solution for the debt crisis? How will that prevent eventual debt default ? Answer – It won’t!

The ONLY solution is for the Eurozone economies to GET their economic houses in order which means cut the deficits and total debt as a % of GDP which can only be achieved through economic growth which means public sector spending cuts and reform of economies to generate economic growth that means LESS E.U. and national regulation as touched up on in the article Solving Britain’s Economic Crisis Through Micro Business Capital Investments and Credit (31st Mar 2010). However when a country has a debt burden of 120%+ of GDP at interest rates of 5% or higher the inevitable result is still debt default.

EURO II ?

This, first of a series of money printing debt monetization bailouts puts the Euro firmly on a trend towards high inflation as are all fiat currencies, i.e. the fundamentals of the Euro block composed of many small weak economies that cannot devalue internally against highly competitive strong economies will still remain. The only possible solution is for a Euro II, i.e. split the Euro into two currency blocks one for the weak that suffer higher inflation and interest rates and the more competitive countries as part of the Euro II block (could just be Germany on its own?) which would act as a safety valve in times of economic crisis that demands internal currency devaluations.

The mainstream press predominantly focuses on the bottom line numbers of by how much are each countries banks exposed to Greek government debt, without fully understanding the total exposure is about 100 times greater as a function of the $600trillion+ derivatives market that gambling prone British banks are more exposed to in terms of per capita then virtually any other nation on the planet.

Forget the official UK statistics of £1 trillion of public sector debt, total actual debt and liabilities are in excess of £11 trillion and the fools in Coalition Government are now contemplating Britain borrowing money in the name of UK tax payers to throw into the Greek black hole!

For instance the mainstream broadcast press smugly declares that British banks exposure the Greek government debt is just £2.5 billion. However throw in the derivatives exposure that also includes Portugal and Ireland and then the figure jumps to at least £350 billion with a figure approaching £800 billion or about 60% of GDP as the default contagion would not stop with Portugal as soon Spain and Italy would also follow their PIIGS brethren over the cliff, which would be enough to trigger a collapse of the global banking system as the earlier article ( Nov 2010 – Global Sovereign Debt Default Bankruptcy Bailout and Contagion Risk Analysis) illustrated the risk each country on its own posed to the global financial system if one were to default on their debts.

The November 2010 analysis treated Greece and Ireland as being on life support pending inevitable bankruptcy with Portugal not far behind that combined present a contagion risk factor to the global financial system of about 22%, an eventuality that the worlds financial system could survive, if only it could be halted to the peripheral euro-zone which it would not as soon Spain and Italy would join the collapse as their bonds are dumped sending interest rates soaring towards where Greece debt currently trades, which would be more than enough to bring about a collapse of the Euro-zone and within hours of which a collapse of the whole global financial system including that of the United States as all fiat currency is dumped for hard assets i.e. an hyperinflationary collapse event and NOT Deflation as the ivory tower academics that populate the mainstream press would lead you to believe (see Inflation Mega-trend Ebook FREE DOWNLOAD).

Inflation is the ONLY Solution to the Debt Crisis and Next Phase of the Mega-Trend

The Inflation Mega-Trend ebook of January 2010, concluded that the ONLY solution to the unfolding global debt crisis was for governments to print money and inflate their way out of debt . What we have seen over the past 2 years is just the first phase of the Inflation Mega-trend in the inflating of asset and commodity prices.

Phase 3 of the Inflation Mega-trend (Phase 2 consumer prices) will be governments INFLATING WAGES, which is completely contrary to everything you hear in the central bank propaganda pumping mainstream press, the next phase of the Inflation Mega-Trend will be for central banks to inflate the wage price spiral, which will result in an acceleration of inflation.

Whilst many may argue that many aspects of UK public debt are linked to inflation such as benefits and state wages and pensions, and not forgetting that some 25% of gilts are indexed. Lets leave aside for the moment that real inflation is a good 2 to 3% above the official inflation indices for Britain and most western economies, if not higher. What people tend to forget that PRIVATE debt is at many multiples of public debt, therefore governments in acting to boost the economy in nominal terms by reducing the debt burden on the private sector that is in a far indebted state i.e. bringing total debt and liabilities to about £11 trillion (more than X10 official public debt statistics), then the indexation argument goes out of the window.

This has major ramifications for depositors who are already subsidising the debtors (both public and private) each year to the tune of at least 3% on CPI (after tax).

Why can’t those who STILL pump out deflation nonsense realise this inflation wage price spiral reality?

Again. I need to reiterate that the rise in asset and commodity prices over the past 2 years is to all intents and purposes just Phase 1, Phase 2 is consumer prices (well underway in the UK), Phase 3 is wages and then off go down the road of the feed back loop the end result will that bond holders and savers will be wiped out, along with the debt.

What this means for Greece ?

Greece cannot inflate so they have no choice but to leave the Euro to enable them to inflate EVERYTHING , i.e. prices, and wages, that is the only way they will be able to STEAL from all of the bond holders and savers as they STEALTH default on their debt by means of high inflation which is the path that the UK and US are upon for a decade long inflation mega-trend.

The ONLY reason why they are being prevented from defaulting and leaving the euro-zone is because banks of other european countries are not strong enough to withstand such an event.

What a Greek Debt Default Will Mean for the UK Economy?

There is no firewall between Britain and Europe if Eurozone banks start to go bankrupt then so will most of Britain’s banks, the only protection savers will have is to protect their deposits by abiding by the compensation limits. Where the economy is concerned the government via its central bank (BoE) will print money to inflate the economy to prevent recession, hence the most probable outcome is continuing stagflation of high inflation and very low economic growth, as governments such as the UK aim to buy time.

Credit Crisis Phase 3 Conclusion

The credit crisis that began in August 2007 when the credit markets froze is not over, far from it, the Lehman’s bankruptcy was just phase 2 of the credit crisis where increasingly over the past 18 months we have seen Phase 3 manifest itself in the bankruptcy of whole countries with Greece, Portugal and Ireland to all intents and purposes bankrupt, only being kept afloat to prevent bankruptcy of the banking system and the larger Eurozone countries namely, Spain, Italy, then France and Germany itself.

The time horizon for the manifestation of the inevitable debt defaults can only be guessed as it depends on how much tax payers money will be thrown at the bankrupt states before the sovereign debt default contagion spreads from country to country. Readers should be under no illusion that bankruptcy of whole countries is inevitable, where even if countries such as Britain, Germany, France and the United States do not default on their debts, there will be a very heavy price paid in loss of purchasing power of earnings and savings as covered at length in the January 2010 Inflation Mega-Trend Ebook.

However depositors need to immediately focus themselves on protecting themselves against nominal loss of deposits as would occur when states go bankrupt and bank deposits are only honoured upto the compensation limits.

Once you have achieved this first emergency step of protecting your wealth in nominal terms then you can purse the second strategy of protecting your wealth in real terms which I have covered at length in 3 ebook’s and ongoing newsletters (ALWAYS FREE), and continue to do so on an ongoing basis in articles that can be quickly viewed at walayatstreet.com

Off course there are also major implications in the costs of compensating depositors, which as we have seen will ultimately fall onto the back of tax payers at the rate of approx £85 billion for every 1 million customers across each banking group, a potentially huge bailout cost that could literally doubles Britians public debt virtually over night. So the governments response would be similar to 2008, which would be to inject capital into the bankrupting UK banks the cost of which would be 1/10th that of making good on depositor guarantees but this would be likely restricted to fully UK banks rather than the likes of Santander.

The risk that European Union is trying to balance is that of systemic risks of a disorderly Default of Greece and resulting collapse of the global financial system, with first in line being the PIIG’s then the larger euro-zone countries such as France and Italy and then countries such as the UK and ultimately the United States will be hit all with-in accelerating trend with little time for professionals let alone ordinary people to react.

Therefore readers should not be under any illusion that the debt default would be halted with Greece, because once it starts it would soon spread to the other PIIGS within a matter of weeks if not days, Portugal would go next, then Ireland and then Spain, with other debt dominos soon falling such as Belgium.

This would bankrupt virtually every European bank whether or not they are exposed to PIIGS debt due to counter party risks, though unfortunately at this point in time the coffers of countries such as Britain, France and Germany are empty after a series of bailouts and huge public sector deficit spending programme’s will mean they will not be in any shape to 100% guarantee bank issued debt or even retail deposits, instead savers are running a serious risk of actual loss of nominal value of their savings on funds deposited in excess of the £85k limit across banking groups.

European Bank Run Contagion Risk

The Greeks have already set the ball rolling by withdrawing their funds out of their banks during May and June as a consequence of their exposure to Greek Government debt, soon to be followed by Banks across Europe if not already in the process of desperately attempting to pull their funds out of Greek banks ahead of an inevitable debt default, and then from other PIIGS banks and financials, that’s banks of Portugal, Ireland, Italy, and Spain as well as Greece on rising default contagion risks.

The problem with the banking sector lies in the hidden exposure to the over the counter derivatives market that won’t become apparent until there is an actual credit event such as Greece defaulting its debts, triggering claims on credit default swaps issued by banks and insurance companies as occurred following Lehman’s bankruptcy in 2008 which brought down the worlds largest insurer AIG. Therefore Greece defaulting could quite easily collapse the whole banking system given that derivatives exposure could result in a crisis that is a100 times larger than the nominal value of the amount of debt defaulted upon.

Over the past 3 years, Santander and other foreign banks have been allowed to run amok amidst Britain’s retail banking sector as a consequence of an incompetent regulator and a desperate Labour government eager for anyone to take on the responsibility of restructuring a string of bankrupt UK banks which allowed Santander to gobble up a string of small to medium sized UK banks such as Bradford and Bingley, Abbey and Alliance and Leicester, which now pose a real risk to UK depositors as compensation licences have been consolidated therefore now instead of protection of 4X £85k, there is just 1X £85k across the banking group.

One can measure the rising contagion risks in the credit default swaps market, where the price of insuring against Santander bonds against default has been steadily on a rise since March 2011. This increasing risk is also manifesting itself in the yield of Spanish government debt that has hit an 11 year high of 5.75% on 10 year bonds, which stands nearly 3% above German Bund’s, a financing level that is not sustainable for Spain, let alone a further surge in yields that would follow a Greek debt default.

The rise of euro-zone default risks, risks another credit markets freeze as the banks of countries such as Britain that do not face default by virtue of its ability to print money and inflate, increasingly pull the plug on financing of euro-zone banks much as occurred following the freezing of the credit markets in August 2007. Similarly UK retail customers would also be wise to limit exposure to euro-zone banks, especially of peripheral nations (PIIGS).

Breaking Up the PIIGS Banks

It is my opinion that at some point in time (if the banking system survives the current crisis) the British Government will force PIIGS banks such as Santander to sell off their British banking arms so as to ensure contagion risks to Britain’s banking system are reduced, that is really the only solution to prevent a run on the UK banking system as occurred in September 2007 with Northern Rock and threatened to occur in Sept 2008. A break-up of the banks in itself would trigger a major credit market event, therefore it is probably going to take place in secret behind closed doors to prevent financial panic, i.e. British banking arms will be floated under the pretense of raising capital, which on balance would be seen as a market calming measure.

UK Safe Retail Banks List

The following table lists Britain’s major retail banking groups (separate licences) in terms of the percentage probability that your deposits above the UK compensation limit of £85k and Euro-zone banks 100,000 (current £/E £86k) would be secure in the event of a series of euro-zone debt defaults starting with Greece and that the crisis is contained to these smaller peripheral euro-zone countries i.e. Greece, Portugal and Ireland, if Spain comes under real risk of default then that would require a revaluation of this list as banks such as Santander would come under far greater pressure given exposure to Spanish government debt.

The government backed National Savings tops the list at virtually 100% depositor safety ranking, as if NS&I goes bust so will have the the whole British financial system. Readers may be surprised to find out that Britain’s safest commercial retail bank is owned and operated by the supermarket Tesco, next to follow are HSBC and Co-op, with Spain’s Santander offering a 50/50 bet on the safety of deposits over £85k. The rest offer an increasing probability of loss of deposits that would take place amidst a sovereign debt crisis induced banking crisis. The government owned Northern Rock is probably 99% safe at this point in time but it is being primed to be sold off as are the share holdings of other high risk major retail banks such as RBS and the Lloyds group.

There are other smaller safe banks such a Yorkshire Bank which is owned by the National Australia Bank Group.

Depositors Protect Yourselves From Potential Banking Crisis

UK bank depositors need to prepare for what will probably follow the Greece debt default contagion snowballing across Europe’s financial system, especially as you are receiving a pittance in interest on even the best deposit accounts of less than 2.5% after tax which does not match the risks of loss of funds in excess of £85k. UK bank account holders have been receiving mail shots from their banks over the past 6 months informing them of the protection of their deposits upto a value of £85,000 per individual customers across the banking group. This should not be treated as junk mail but rather banks laying the ground work for the real risk of defaulting on deposits over compensation limits as a consequence of the bankruptcy of peripheral Euro-zone countries starting with Greece. Remember Greece going bankrupt is not a question of IF but rather when.

Therefore savers with amounts deposited above the guaranteed limit need to ensure that they have measures in place well ahead of a banking crisis to ensure that they survive one both in terms of the ability to transact business as well as ensuring total funds exposed are LESS than the £85k banking limits at the time of a bank run.

Scare Mongering ?

Am I scare mongering? Try asking those that were locked out of their savings accounts when the Icelandic banks went bust during October 2008. The banks froze UK customers out of their accounts on the 7th of October 2008. My analysis of 2nd October 2008 had warned that small countries such as Iceland were at risk of going bankrupt, with Iceland’s bankruptcy preceded by some 24 hours earlier by Iceland Going Bankrupt?, – “savers should at the first opportunity seek to repatriate their savings to a 100% UK bank as the consequences of a country going bankrupt could render guarantees meaningless”.

Steps You Need to Take Now !

The situation is literally critical with a possible default imminent and bank runs probable even if Greece is bailed out again as a consequence of future inevitable default due to the ramping up of Debt burden (Debt/GDP).

1. Ensure that you have at least 2 current accounts across banking groups and at least one with a safe bank such as HSBC.

2. Next make a list of all of your deposit / bank accounts, with the amounts on deposit.

3. Now group your accounts by banking sector group (see list at end of this article as a guide).

4. If you are anywhere near the £85k limit with any banking group then move those excess funds immediately!

5. Consider transferring funds to your spouse so as utilise their compensation limit across a banking group.

6. Ensure you have procedures in place so that you can at short notice transfer funds from high risk banks to lower risk banks so as to limit the fallout from any banking system crisis. For instance open an NS&I Direct Saver account NOW (pays 1.75% gross), then use this during an unfolding sovereign debt crisis event to transfer your cash to as this is the safest deposit account available for UK depositors (Max £2mill, Min £1). Again do this now as you may not be able to do so during a debt crisis event due to high demand for the account.

Instant Access Savings Accounts with Lower Risk banks

• NS&I – 1.75%
• Tesco – 2.90% (includes 1.65% bonus for 12 months)
• HSBC – 0.75% (includes 0.5% bonus if you do not withdraw in a calendar month)
• SMILE (Co-op) 0.25%

Higher Risk banks

• Santander – 3% (includes 2.5% bonus for 12 months)
• Barclays – 1.25% (includes 0.35% bonus when you do not withdraw in a month).
• ING Direct – 2% (includes a 1.6% bonus if you do not withdraw in a month)

All accounts pay significantly less than current CPI Inflation of 4.5%.

7. Do not have ANY savings are fixed deposit exposure to banks that do not fall under the UK Financials Services Compensation Scheme.

8. Limit exposure to PIIGS banks, that is Greece, Ireland, Spain, Portugal and Italy as these are at the most risk of going bust thus triggering a lengthy process for savers having to wait for compensation. Remember that if Spain comes under pressure following perhaps Ireland and Portugal joining Greece, then the risks posed to Santander depositors will also significantly rise.

9. Keep enough in cash to cover at least 1 months expenditure, (I keep 2 months worth of cash).

Savers Paying For Low Risk

Savers preparing to cut their risk by switching banks will be disappointed to learn that the safest banks also pay the worst interest rates on deposits, typically less than 2% gross and often below 0.5% on instant access accounts, similarly the highest risk banks pay the best rates (typically 3%), which is further evidence of a market that is geared towards the risk of default and therefore higher risk banks are more desperate to attract retail deposits.

Britain’s Slow Stealth Debt Default

Off course the system is designed so that you can never win, to keep up with inflation and tax you will need to be in receipt of interest of at least 5.4%. Instead the banks are offering you a pittance WITH the risk of default, so frankly your being treated like fools, suckers by the banks and government as you finance bank losses, liabilities and government deficit spending.

The fact is that Britain is BANKRUPT, it can never repay its current debt in real terms or cover future liabilities with future economic output, its just that we don’t know it, this bankruptcy is manifesting itself in HIGH inflation that is the process for transfer of wealth from workers and savers as the price for stealth bankruptcy . It’s the reason why your savings buy less than a year ago and the reason why your pay buys less than a year ago despite going up a few percent.

There is only one way to escape from this decade long losing streak and that is to realise that approx 50% of the value of your savings will be wiped out over the next 10 years, so it is not the case that your savings are protected but rather they are guaranteed to lose approx 50% of their current value, so you have to learn to take risks with your capital, in which respect the Inflation Mega-trend Ebook (FREE DOWNLOAD) as well as the more recent ebook’s, contain strategies for protecting and growing your wealth in REAL TERMS.

Capital Safety in Index Linked Savings Certificates

One low maintenance high safety cash investment product that comes to mind is the NS&I index linked certificate, which has recently been re-introduced after being suspended due to high demand in June 2010. The returning product now pays 0.5% interest + annual change in the RPI index (currently 5.2%) TAX FREE for upto a total of £15k per issue per individual. In my opinion there is NOTHING on the market that can beat the NS&I in terms of return AND safety of capital, and even more so for higher rate tax payers.

Again no matter what happens to the inflation rate, your capital is 100% secure in real terms, and at the minimum guaranteed a return of 0.5% per annum, so even if deflation took place you would still receive a positive return of 0.5%. The certificates can also be cashed in early (after 1 full year), with little loss of indexation+interest. However these certificates are not suitable if you may require your funds within a year as you will not receive any indexation for inflation.

Banking Groups

Note whilst banking groups may have multiple licences as a consequence of mergers and takeovers, however they also may be in the process of merging licences so for ultimate safety one should remain focused on banking groups.

LLOYDS BANKING GROUP (2 licences)

• Lloyds TSB Bank
• AA Savings
• Bank of Scotland / HBOS
• Birmingham Midshires
• Capital Bank
• Cheltenham & Gloucester Savings
• Halifax
• Intelligent Finance
• Saga

SANTANDER GROUP

• Santander bank
• Abbey National
• Asda Savings
• Alliance and Leicester
• Bradford and Bingley
• Cahoot
• Moneyback
• Honycomb

Nationwide Building Society

• Nationwide Building Society
• Cheshire Building Society
• Derbyshire Building Society
• Dunfermline Building Society

BARCLAYS GROUP

• Barclays Bank
• Standardlife Bank

HSBC GROUP

• HSBC Bank
• First Direct
• Marks and Spencer Financial

ALLIED IRISH GROUP

• Allied Irish Bank
• First Trust

CITI GROUP

• Citibank
• Egg

CO-OPERATIVE GROUP

• Co-operative Bank
• Britannia
• Smile
• Unity Trust Bank

RBS Group

• Royal Bank of Scotland
• Nat West Bank
• Direct Line Savings
• Lombard
• The One Account
• Drummonds
• Ulster Bank

Additional comments

• Foreign Banks under UK FSCS Scheme – ICICI (India), First Save (Nigeria)
• Small business are covered by the FSCS on the basis of 2 of following 3 conditions – upto a turnover of 6.5 million, less than 50 employees, balance sheet total not more than £3.26 million

Banks not under the UK FSCS.

• ING Direct, Tridos – Dutch
• Anglo Irish, Bank of Ireland – Ireland

Don’t delay! Act today to form and implement a quick personal savings protection contingency plan, otherwise you may wake up one day to find yourselves locked out of your funds Iceland style, or worse lose deposits over £85k across banking groups.

Stock Market Trend

The stock market continues to track the conclusion of my last analysis (13 Jun 2011 – Stocks Bear Market Rally is Over Mantra About to Get Busted Again?) for an imminent bottom to be followed by the stock market carving out a base into late June / Early July, so no new analysis is warranted at this point in time.

Yes there is a disconnect between the stock market and economic perceptions, but that is nearly ALWAYS the case, well at least 70% of the time, which is why price trumps economics and the mainstream noise. Though don’t forget that investing in the stock market is at the best of times high risk, so it is never a case of treating stocks as an alternative to bank deposits even if the banks look set to default, as banks going bankrupt would also wipe out their respective stock prices.

Source and Comments: http://www.marketoracle.co.uk/Article28957.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2011 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem’s forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of three ebook’s – The Inf lation Mega-Trend; The Interest Rate Mega-Trend and The Stocks Stealth Bull Market Update 2011 that can be downloaded for Free.

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Source: Brian Sylvester of The Gold Report (6/29/11).

In this exclusive interview with The Gold Report, Doug Groh, senior analyst with Tocqueville Asset Management, likens the gold price to a mirror that reflects peoples’ concerns about global economic and political events. And he likes what he sees in the long-term prospects for gold equities.

The Gold Report: The situations in Greece, Ireland, Spain and Portugal are proving the unsustainability of deficit financing and are effectively killing the euro as a safe haven currency. As these worries escalate, have you seen more money come into your fund?

Doug Groh: Yes, we’ve seen funds flow into our gold fund product, but that’s been the case over the last year or so. I attribute it primarily to the rise in the gold price. Some investors see gold as an attractive alternative to other investment vehicles and they’re buying the gold ETF (exchange traded fund) and gold equities.

Gold bullion itself has outperformed equities this year. Some people feel there’s security in owning gold, but it seems they’re reluctant to buy the equities because of the risk. In addition to the market and equity risks, mining companies have risk—whether operational or political—with regard to developing their deposits.

TGR: What’s the Tocqueville Gold Fund worth right now?

DG: As of June 27th, the fund is valued at about US$2.4B, with about 6% of the fund in bullion.

TGR: Are you buying bullion now?

DG: No. We’ve been pretty steady in terms of the number of ounces in the fund for five to six years, although it has appreciated in value over the years. In percentage terms, it can go up or down relative to the equity positions in the fund. We have that position because we feel that, as a gold fund, we should own gold as well as gold mining equities. It’s not something we necessarily trade; it’s just a core position for us.

TGR: In 1980, about 22% of all financial assets were invested in gold-related instruments. Today, estimates put the current global investment at around 3%. Why aren’t more investors buying into the thesis that gold will only go higher as paper currencies or fiat currencies lose value?

DG: We think gold is a unique investment vehicle. You can look at gold as a mirror that reflects concerns about a number of factors around the world: uncertainty in Europe, the Arab Spring, U.S. monetary policy and debt, for example. When you analyze it, you might conclude that there’s no real utility to gold. In fact, gold’s utility is that investors see it as an alternative asset. Gold collectively expresses the notion that money isn’t worth what it used to be.

TGR: People are starting to whisper about contagion, much like what happened in Thailand in the mid- to late-’90s and spread to other Asian economies. Do you see contagion as a real risk?

DG: It seems appropriate that one consider that risk in one’s investment analysis. Greek debt is owned by a number of European banks; banks that also own debt from Spain, Portugal or Ireland. If Greece defaults, restructures its debt or cannot meet its obligations, its debt will be worth a lot less. This would put pressure on the balance sheets of those institutions holding Greek debt.

TGR: Would that spread to the United States?

DG: I think it’s certainly possible. If there’s a problem with debt in any part of the world, people will make comparisons. That’s where I think there’s a real risk. People would start to say, “If it could happen there, it could happen here.” That kind of mentality is what concerns me most. As a result of that mentality, you’re going to see the markets start to price that probability into the market. In essence, you’re already seeing that. I believe that’s why we’ve had a pretty tough couple of months in the equity market.

TGR: Let’s turn back to gold. Does the Tocqueville Gold Fund invest in junior mining companies that are strictly exploring for precious metals?

DG: We have exposure to gold mining equities across the spectrum, from those that are exploring and aren’t even mining yet to those that are developing and those that are actually producing gold.

Our approach is to have about a 35% weighting in smaller cap, exploring/developing-type companies. It’s a little hard to characterize because some of the explorers are actually developing. We think of them as exploring/developing companies. They comprise about a third of the fund. Others are producing cash flow and trying to become bigger. One can consider those as major producing companies and they account for another 40% to 50% of the fund

TGR: And the fund was up about 58% in 2010, correct?

DG: Net of fees, the Tocqueville Gold Fund was up 53.33% during 2010, which compares to the Philadelphia Gold and Silver Index, which was up 35.94% during 2010.

TGR: That’s very impressive. In February, you told us that you were “cautious about investing new funds into gold equities.” Is that still the case or has the pullback in gold equity prices created a buying opportunity?

DG: At the end of last year and beginning of 2011, many of the equities that we held had performed very well. It seemed as if the market was well ahead of itself. Year-to-date, however, gold equities in general have not performed well and in particular, since about the time Barrick Gold Corp. (TSX:ABX; NYSE:ABX) announced its plans to outbid Minmetals Resources Ltd. (HKSE:1208) of China for Equinox Minerals Ltd. (TSX:EQN; ASX:EQN). The gold mining equities in general are down relative to gold, which is up. That spread between the rising gold price and the decline in gold equity values, in our view, has created a very good investment opportunity.

At this time of year, you’re probably best served by adding more aggressively to your gold equity portfolio, I believe. Seasonally, we generally see a low valuation point this time of year. The second half of the year, particularly September through November, has seen good performance for gold equities over the past several years. In that regard, now may be an appropriate time to get positioned for that.

TGR: Do you still believe in a dollar-cost-averaging approach to buying equities?

DG: Yes. If you’re not working full time on the gold space, the best way to invest, I think, is to average the cost of the investment over the course of the year. If you’re paying close attention to the gold equity market, you can appreciate that these values don’t reflect what’s going on in the gold price. There can be some good buys in the space. And so, for those that have the time and ability to pay closer attention, it makes some sense to take advantage of the attractive values in the current market. However, the discipline of averaging the investment costs over time is also a good strategy.

The gold price is up over US$100 since the beginning of the year. That US$100 is falling right to the bottom line for gold producers, generating significant cash flow. The gold equities aren’t reflecting that cash-flow-generating ability. The margin has expanded, even though costs are up somewhat, but the investor base has lost interest in the cash flow that’s being generated.

A number of catalysts are coming into the market that could reinvigorate investors in gold mining equities. First of all, you’ll see good earnings and cash flow per share for the second quarter. Companies may increase their dividends. That’s an important element to get investors refocused on companies’ profitability, I believe. Additionally, in the latter part of the year, we expect to see more acquisitions.

TGR: Let’s get to some specific companies in your fund. Seven years ago, you bought Osisko Mining Corp. (TSX:OSK) at US$0.50. It’s now trading at around US$14.50. The company recently poured its first gold bar as it entered commercial production at the Malartic Mine in Québec. At the end of the first quarter 2011, about 4.3% of your fund was vested in Osisko. What’s that percentage now?

DG: Osisko is one of our more important holdings; it’s in the top five and is about 5% of the fund. They announced commercial production this week, about a month ahead of schedule. The reports we’re getting say that the plant equipment and operations are working better than planned. The new mine at Malartic is only part of the story. Osisko is developing other assets. They made some acquisitions over the last year or so that will add to their growth profile. The Osisko story isn’t over, and from our perspective, it’s not fully valued.

TGR: One of those assets is the Hammond Reef deposit in northwestern Ontario, which Osisko acquired when it bought Brett Resources in March 2010. Is Osisko going to plow some of the cash-flow from Malartic into Hammond Reef?

DG: That would be the expected business strategy. We believe the Hammond Reef project offers a lot of merit. They’re now de-risking the project by identifying the resource and a mining plan. That should be the best use of proceeds for them. I wouldn’t be surprised if they announce a property or a project acquisition. I don’t see Osisko acquiring another operating company unless it came with a tremendous amount of growth. At this point, I think Hammond Reef is really the next platform for Osisko to grow ounces from.

TGR: Hammond Reef has a 6.7Moz. inferred resource. So that’s not a small project.

DG: No, there’s good life to that project.

TGR: Another one of your holdings, NovaGold Resources Inc. (TSX:NG; NYSE.A:NG), is developing a mammoth project in the Donlin Creek gold/copper project in Alaska. When is NovaGold going to join Osisko as a gold producer?

DG: I haven’t seen their latest timeline. I think it’s quite a few years out. NovaGold has some significant engineering projects to complete, such as power facilities and road work and permitting; permitting being the more important element of de-risking that project. The company has been working to revise a feasibility study for Donlin Creek that incorporates a natural gas pipeline. That study is scheduled for completion during the second half of 2011.

It’s the type of mining project that major companies wish they had their hands on. Yet, the majors seem to be reluctant to build out assets in that part of the world. They’d rather gain copper and gold exposure in the far-off reaches of Africa and the Middle East as opposed to North America.

TGR: I should mention that Donlin Creek is a 50/50 joint venture (JV) with Barrick Gold. A few years ago, Barrick tried to buy NovaGold outright. Do you think that Barrick might try that again as the project develops? After all, NovaGold has 17 Moz. in the proven-and-probably category.

DG: It would seem to make a lot of sense for Barrick to attempt to acquire NovaGold. But, while it may be logical, it’s odd to us that Barrick was divesting its African assets a year ago and is now acquiring African assets to gain copper exposure, when NovaGold’s other major asset, Galore Creek, has a significant copper endowment along with gold and silver. Logic isn’t always the business principle that’s pursued in the mining space.

TGR: Right. The Galore Creek project is a 50/50 joint venture with Teck Resources Ltd. (NYSE:TCK; TSX:TCK.A, TSX:TCK.B), another major. Teck almost went under in the crash of 2008, but it’s rebounded nicely and has good cash flow.

DG: Teck likes to be diversified, and I think would rather share the cost of that project with somebody else. So, I don’t necessarily see Teck making that bid for all of NovaGold. It would have made more sense for Barrick to gain copper exposure by acquiring NovaGold in Alaska than it does for Barrick to acquire copper exposure in eastern Africa and the Middle East.

TGR: NovaGold’s prefeasibility study includes a proposal to build a gas pipeline from Beluga, Alaska to the Donlin Creek project. That would greatly reduce operating costs in terms of fuel and could benefit many projects in the area. Have you begun to examine that as an investment thesis?

DG: The viability of that gas pipeline should be more apparent with the release of the Donlin Creek revised feasibility study; that’s something we’ll have to check as we go through the study. Certainly development into central Alaska with a gas line and fuel source will open up the center part of the country to mineral exploration and development. Kiska Metals Corp. (TSX.V:KSK) is operating not too far from the proposed natural gas pipeline and they’ve reported some very good drilling success. We’ll probably see them broadening their footprint.

TGR: Do you have a position in Kiska?

DG: Yes, we do have exposure to Kiska.

TGR: Kiska expects another resource estimate in 12 to 18 months and is testing new targets at Island Mountain and Muddy Creek this summer. What are you hoping for from those drill programs?

DG: I’d like to see higher-grade results than we’ve seen in the past. I also hope that the geometry of the deposit can improve. As Kiska gains more information, they’ll have a better understanding of the geology and be able to position their drills to define the geometry at both Island Mountain and Muddy Creek.

TGR: Are there any other companies you’d like to talk about?

DG: One of the companies in our top 10 that doesn’t get much coverage is Gold Resource Corp. (NYSE.A:GORO; OTCBB:GORO; Fkft:GIH) in Oaxaca, in southern Mexico. Over the last year, they’ve had a fair bit of success developing their property and initiating production, finding additional ore on their property and generating cash flow. They’ve even started to provide a special monthly dividend. That’s a unique thing for a gold mining company, to initiate production and issue a dividend in such a short period of time.

TGR: Gold Resource put up guidance of 90,000 oz. (Koz.) in 2011. Is the company still on target for that?

DG: It doesn’t seem realistic for this year. Flooding this spring slowed production down. Perhaps by the end of the year they could get to a 90 Koz. per-year run rate.

TGR: The company plans to ramp up to about 150 Koz. in 2012. Is it more likely to achieve that target?

DG: I think the characterization might be at a 150 Koz./year run rate by the end of 2012, as opposed to generating that kind of gold-equivalent oz. during the entire year. It seems reasonable, although I think it’s ambitious. Gold Resource management wants to be ambitious. I think investors have to be a little bit cautious with ambitious statements.

TGR: You were going to mention another company; what is it?

DG: It’s ATAC Resources Ltd. (TSX.V:ATC). The company had two significant discoveries last year in the Yukon. One was a lead/zinc/silver discovery. More importantly, they came across very sizeable gold intercepts with high-grade gold on the eastern edge of their property. Many suggested that it had the look of the Carlin District in Nevada. ATAC is going back into the property there in the Osiris region to drill it off and see what else they can find. I think you’ll hear some good drill results from ATAC in mid- to late-summer.

TGR: Before you go, please leave our readers with a few words of advice on how to play the current market.

DG: One point to keep in mind is averaging costs over time. I think that’s the best way to get exposure. Secondly, it’s important to assess a company’s prospects and to think about a price target before investing. If it reaches that price target, reassess the investment. Third, assess each investment within a certain timeframe. Explorers and developers can take a long time before they realize the value of their assets, whereas producers are not on as extended of a timeline to realize the value of their assets. One has to match one’s expectations with the nature of a company’s operations.

TGR: Doug, thank you for your time and insights.

Doug Groh has 25 years’ investment experience. Before joining Tocqueville in 2003, he was director of investment research at Grove Capital from 2001–2003. Between 1992–2001, as a senior sell-side analyst for JP Morgan and Merrill Lynch, he was recognized as a ranked analyst by Institutional Investor Magazine and The Wall Street Journal for his coverage of basic material stocks in the non-ferrous metals, chemicals and paper and packaging industries. He began his career as a mining analyst and worked as a precious metals portfolio manager at U.S. Global Investors and American Express Financial Advisors in the 1980s and early 1990s. He holds an MA in energy and mineral resources from the University of Texas at Austin and a B.S. in geology/geophysics from the University of Wisconsin—Madison.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: NovaGold Resources Inc. and Kiska Metals Corp.
3) Doug Groh: This article reflects my views as of the date or dates cited and may change at any time. The information should not be construed as investment advice. No representation is made, nor is there any guarantee that any projection, forecast or opinion will be realized. References to stocks, securities or investments in this writing should not be considered recommendations to buy or sell. Past performance is not a guide to future performance. Securities that are referenced may be held in my personal portfolio or in portfolios managed by Tocqueville or by principals, employees and associates of Tocqueville, and such references should not be deemed as an understanding of any future position, buying or selling, that may be taken by either me or Tocqueville. I personally and/or my family own shares of the following companies mentioned in this interview: Tocqueville Gold Fund. I personally and/or my family are paid by the following companies mentioned in this interview: as an employee of Tocqueville Asset Management.

Will a hidden link between the Greek debt situation and the U.S. banking system ignite the next global credit crisis?

The odds of the “next” global credit crisis are increasing with each new day, and with each new revelation. And escalating fears are hitting worldwide stock markets hard.

Just yesterday (Thursday), Greece’s leaders revealed that the country’s socialist government is on the brink of collapse. Greek protesters – angered by brutal austerity measures that will almost certainly heighten the country’s record 16.2% unemployment rate – are rioting in the streets of Athens.

On Wednesday, Moody’s Investors Service (NYSE: MCO) warned France’s three largest banks that their exposure to Greek debt could lead to credit-rating downgrades. There are even concerns that the European Central Bank (ECB) may be technically insolvent – meaning it wouldn’t survive a global financial meltdown.

Investors are right to be worried.

But with the European banking system’s financial woes currently dominating the headlines, those investors might be very surprised to discover that it’s actually the U.S. financial system that may end up as the real weak link in the event of a Greek debt default.

And investors don’t even know this link exists.

The Scary Facts About Greece’s Finances

Since last May, when the International Monetary Fund (IMF) and Eurozone members ponied up $159 billion (110 billion euros) for a Greek bailout, Greece has had to implement radical austerity measures. Terms of the bailout forced Greece to boost taxes and slash government spending. There was a public outcry, but the country’s citizenry largely went along; it had no choice.

One in three Greek workers is employed by the government. As austerity-mandated layoffs have progressed, Greece’s unemployment rate has zoomed from 11.7% in the first quarter of last year to the record 16.2% rate recently reported.

And given that government spending is still at 46.8% of gross domestic product (GDP), additional budget cuts will be coming – meaning Greece’s national jobless rate is certain to increase.

So is the national anger level.

The sometimes-violent demonstrations on Wednesday forced Greece’s Socialist Party Prime Minister George Papandreou to reach out to the opposition party in an effort to form a coalition government.

He was quickly rebuffed, is reshuffling his cabinet and will call for a vote of confidence. A no-confidence vote – pretty much a foregone conclusion at this point – would require new elections to be held quickly.

The Surprising Trigger for the Next Global Credit Crisis?

This kind of leadership chaos is unnerving to stock-and-bond investors around the world – especially since Greece needs an infusion of $85 billion (60 billion euros) by mid-July to remain solvent.

And Wednesday’s announcement by Moody’s isn’t helping. In addition to its warning that France’s three biggest banks may be downgraded, the U.S.-based credit-rating firm made it clear that there were other banks in France, Germany and the rest of Europe that could face the same treatment in the event of a Greek debt default.

All of this is widely known. But the largely untold “rest of the story” is this: If the European banking sector implodes, the U.S. financial system could take an unqualified beating.

B ig U.S. banks have been lending generously to banks across Europe. C lose to 29% of their lending books during the past two years have gone to their heavyweight European counterparts. While they have pulled back considerably as a result of recent turmoil, U.S. banks are widely believed to have $41 billion of direct exposure to Greece.

The amount of exposure to the rest of Europe is not easily quantifiable.

And this U.S. financial system link doesn’t end there: U.S. money-market funds have a hefty European exposure, too.

A recent report in The Wall Street Journal said that the three large banks Moody’s is threatening to downgrade – BNP Paribas SA, Credit Agricole SA, and Societe Generale SA (PINK ADR: SCGLY) – get a significant amount of their short-term funding from America’s money markets.

According to The Journal, about 12% of the loans made by our biggest money-market funds were made to those three banks.

The interconnectedness of U.S. banks and money-market funds to global banks, many of whom are now at risk from a Greek default, is a sobering revelation.

Even the European Central Bank won’t be immune.

Bad News for the ECB?

According to Open Europe, a U.K. think tank, the ECB will be close to insolvency if Greece defaults – or even “restructures” – its outstanding debts.

The ECB has $116 billion (82 billion euros) of equity capital against a balance sheet just shy of $2.84 trillion (2 trillion euros) of “assets” consisting of bonds, loans and “credits”. Of that amount, it holds $637 billion (444 billion euros) of debt paper from the so-called “PIIGS” countries of Portugal, Ireland, Italy, Greece and Spain.

Of that total, approximately $270 billion (190 billion euros) are Greece’s crumbled paper. Open Europe estimates that a 40% to 50% haircut on Greek debt would come close to wiping out the ECB’s capital base. And the spillover from the contagion – the next global credit crisis – would sink the central bank almost overnight.

Lorenzo Bini Smaghi, an ECB executive board member, doesn’t buy the conclusions reached in Open Europe’s rapidly circulating report – telling the WSJ.com blog that they are “fundamentally flawed.”

For instance, on the subject of the ECB’s holding bonds that might fall precipitously, Bini Smaghi said that “not being a liquidity-constrained institution, we can act as a buy-side counterparty in markets where sell-offs are taking place, and our investment in those markets can be held to maturity, so that only default risk could threaten our profit and loss accounts.”

In terms of collateral, the ECB board member said that “assets held as collateral only constitute a guarantee, not a direct exposure. Accordingly, related price decreases could only induce Euro system losses if those decreases took place after the default of the counterparty.”

But here’s what’s frightening: In dismissing claims that the ECB could fail, Bini Smaghi makes arguments that repeatedly rely on the premise that there won’t be any actual defaults.

When talking about the bonds the central bank holds, he opened up the proverbial can of worms by saying that “only default risk could threaten our profit and loss accounts.”

Doesn’t he realize that default is exactly what’s on the table?

It’s the “Euro system losses” that would take place as a result of a Greek default that has the global investing community frightened to death. European contagion spells global contagion.

French President Nicholas Sarkozy is in Germany today (Friday) to meet with German Chancellor Angela Merkel. Not surprisingly, the topic will be the Greek debt crisis. President Sarkozy will be pleading with the German Chancellor to back off Germany’s call for Greek debts to be “restructured.”

The rift between France and Germany, the strongest members of the European Union (EU), could be the straw that breaks the Union’s back. That could certainly mean that the next global credit crisis is fait accompli. And it would also represent a definite end to the global recovery.
Source: Money Morning

News and Related Story Links:

• Reuters:

  Greek Unemployment Soars in March, Industry Slumps.

• The Guardian:

  Europe Warned of Financial Chaos Over Greek Debt Crisis.

• Time:

  As Austerity Anger Swells, Greece’s Government Struggles.

• Bloomberg News:

  Papandreou Reshuffle Fuels Dissent Among Allies as Financial Markets Slump.

Debt Default ‘Deferral’ of Greece a Dangerous Precedent – Got Gold?

www.FinancialArticleSummariesToday.com

If the implications of the recent Greek tragedy were not so serious it would have been seen more as a Greek comedy (of fiscal errors). In fact, however, to deploy another metaphor, Greece’s sovereign debt is seen as the proverbial canary in the coal mine – a microcosm of the relentlessly growing sovereign debt that has taken much of Europe by storm and is threatening to spread to the U.S.

Short-Term Bail Out

Fifteen other member nations comprising the Euro currency club have recently saved colleague Greece from defaulting on its debt … for now.  On the surface this solution is just what any Keynesian economist would advocate because, as part of the bargain, Greece has agreed to implement a variety of painful spending constraints which will result in a much reduced standard of living for its people.  In spite of such action, however, Greek debt will continue to grow to 150 percent of GDP by 2012.

Long-Term Debt Tomb

Unfortunately, however, this new bailout provokes and perpetuates a series of errors because Greece cannot, and will not, be extricated from its debt tomb.  According to the UK Telegraph, Greece will now be doomed to transferring to foreign creditors an amount equal to 8 percent of its GDP in perpetuity … much more than German reparations to foreign creditors after WWI.  It cannot, and will never, be repaid.

Temporary Hiatus

Further proof that these loans will provide only temporary relief is recent research by economists Carmen Reinhart and Kenneth Rogoff in their new book “This Time is Different:  Eight Centuries of Financial Folly.”  They concluded that when sovereign debt exceeds a level of over 80 percent of its GDP, that debt grows ever more rapidly invariably pushing the country into financial default.

Inevitable Default

If we are to take the Reinhart/Rogoff research at face value then all that this recent bailout of Greece has done is buy it sometime before its inevitable financial default.  It also allows Euro countries, the IMF and other agencies and persons with responsibilities for debt issues to work their magic.  Moreover, it conveys hope to other countries on the brink of financial collapse.  It defers the calamity and appeals to the overwhelming need of politicians everywhere to avoid and escape responsibility, if only to have the debt implosion occur on someone else’s watch.

Dangerous Precedent

While the temporary hiatus given to Greece should be characterized as default deferral, it also, unfortunately, sets a highly dangerous precedent.  Each of the next Euro default candidates – Portugal, Spain and Italy – comprise of much larger economies which will therefore require substantially greater levels of assistance.  Of course, fairness will demand that they too receive an equivalent boost from their Euro partners and backstopping by the IMF.

A closer look at bailout details brings to light something else which should raise serious concern.  Who are the foreign creditors which Greece is having difficulty paying?  While the current bailout originates among the taxpayers of the sixteen member nations of the Euro group, the existing debt which is in danger of default is held by foreign banks…not foreign nations.  These foreign banks are headquartered in France, Germany, Switzerland, the UK and elsewhere.  A short list includes Credit Agricole and Germany’s Landesbanken. This begs a few unanswered questions:

a) Is this a Greek government bailout or is it an indirect bailout of foreign banks by their own governments under the guise of loans to the government of Greece?

b) Will this Greek script be played out on the stages of other Euro nations?

c) Will it spread to the United Kingdom and the United States?

Will the Debt Default Tragedy ‘Tour’ the U.S.?

U.S. national debt now stands at $12.78 Trillion, more than twice as large as it was in the year 2000.  Even the President Obama’s budget director admits that the on-budget debt level will reach close to $20 Trillion by 2020, almost double over what it was just over one year ago.  The non-partisan Congressional Budget Office says it will be even higher.

As major as those debts are, however, the genuinely mind-boggling debt projections are the future commitments to citizens for such services as Social Security and Medicare, as well as a myriad of additional federal government obligations.  These Unfunded Contingent Liabilities are now well beyond the $100 Trillion level. Some calculate the number is closer to $137 Trillion. Remember that these pending expenditures are the unfunded portions.  No money has been set aside, just another promise.

It has been calculated that the net present value of these future budget needs is in the neighbourhood of $35 Trillion.  What that means is that $35 Trillion of 2010 dollars needs to be invested  today in order to meet the $137 Trillion United States government responsibilities to its citizens in the years ahead.

Combine the current budget debt of $12.78 Trillion with the $35 Trillion net present value for future obligations, then add in $1.5 Trillion of continuing annual deficits for as far as the eye can see and factor in future rising interest rates from their current multi-generational lows and it is clearly evident that:

America’s debt picture is truly astronomical and, like the situation with Greece, the debt cannot, and never will, be repaid. Indeed, any way you look at it, the consequences for the United States, let alone the many other haunted economies, are grim, dismal – even disastrous.

As long as bond creditors retain a modicum of confidence the play – the ‘Greek’ tragedy - can continue for awhile longer, maybe even indefinitely. However, should interest rates spike northward or external events affect us it is highly likely we will witness a sudden unscripted end.  We can only hope that creditor confidence, supplemented by modest economic gains and strengthened by politicians who exhibit vision and serve tough love to their respective electorates, might be sufficient to enable us to experience a ‘muddle through’ scenario. Time will tell.

How Can You Protect Yourself From Sovereign Debt Defaults?

Quite simply, individuals should invest in gold and silver in the form of bullion and select precious metals mining stocks. There is no better protection available.

Arnold Bock is a frequent contributor to both www.FinancialArticleSummariesToday.com. and www.munKNEE.com. He can be reached at editor@munknee.com

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Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

Natural forces are at work in Europe, powerful forces, in fact forces that are not evident. It is amazing how little the financial analysts notice the forces at all. Since the year 2007, a hidden force began to put pressure on the European Union financial underpinning. Like any fiat currency, the foundation resorts to debt. It came to my attention almost three full years ago that Spanish EuroBonds had a yield slightly higher than the benchmark German. Commentary swirled that the EuroBonds were not homogeneous, and therefore the Euro currency was badly flawed. They were identifiable by the markings on the bond IDs. German EuroBonds carry an ‘X’ in the ID. So the arbitrage professionals went to work, buying the German and selling the Spanish bonds. The flaw was to the structural foundation to the Euro currency, not the market that traded them, surely not the alert speculators. In time, the Greek, Italian, and Portuguese bonds, even the Irish bonds, showed significant separation from the German benchmark. Last December, the Greek bond broke first. Its arrival to the crisis was not part of evolution (natural selection) as much as European tribal leader selection. Greeks are neither Latins nor Teutonics. The bust of the EuroBond structure invites the arrival of a gold-backed currency, urgently needed to provide stability.

A second natural force has arrived in the gigantic bond marketplace. While as many political analysts as financial analysts promote the wisdom of a preserved European Union, and a shared Euro currency across that union, a natural force works to separate the entire group of PIGS nations. Refer to Portugal, Italy, Greece, and Spain. As much force comes from the Nordic Core power center to push the PIGS nations away from the common European financial structure, as does the force from the PIGS nations to sever ties and go it alone. A German banker contact has repeated an important point on numerous occasions. The European Monetary Union experiment has cost the nation of Germany over $300 billion per year, all for what clearly appears to be a welfare program directed toward the benefit of wasteful inefficient nations not deserving of a low bond yield. After ten years, the cost has been $3 trillion to Germany. It is not a matter of German willingness to continue the Southern Europe Welfare Program, as much as their ability to continue. They cannot continue. They cannot afford it.

My forecast made since January was that Germany would not aid Greece, but would say all the right things. Their leaders did occasionally show human tendencies, like when some critics claimed Greece possessed innate specialty in dance, drink, and song. My longer standing forecast is that all PIGS nations would revert to their former currencies, the Greeks to the Drachma, the Italians to the Lira, the Spanish to the Peseta, and the Portuguese to the Escudo. The forecast is of decentralization and increased local autonomy. However, and very importantly, the path is a very slow one with political obstacles, face saving requirements, economic pressures, and social pressures too. Notice the Germans appeared to be cooperative in aiding Greece, but when money had to be committed, arguments ensued surprisingly. Not a surprise to the Jackass. The German High Court will surely reject both the Greek aid and the Euro usage itself, all in time.

ADVANTAGES OF REVERTED CURRENCY

The political ideals of a unified Europe are all well and good, but might be fantasy built upon folly in ignorance of practicality. The national differences are significant in work habits, industrial efficiency, tax structure, credit practices, federal bureaucracy load, economic diversity, educational depth, native intelligence, demographic makeup, arable land & sunny climate, and more. The pursuit of a unified Europe has proved elusive for a millennium. Not gonna go there here. The pope in the Dark Ages had the most success, except that its church accumulated an outsized collection of wealth, even in the form of gold, enough to be a clandestine global player.

Enter the London financial analysts and economics brain trust. They have entered the room with some interesting counsel, not the typical self-serving defense of their system. Instead, a prominent think tank suggests to Athens leaders a debt default and return to the Drachma currency. Greece is urged to leave the Euro currency. We are moving gradually toward a restructure of Greek Govt debt, and a corresponding stimulus to the Greek Economy via devalued currency. When tied to the Euro currency yoke, such a Greek stimulus is impossible. British economists advise Athens to abandon the Euro and default on its €300 billion debt under the basic motive to save its economy. The Centre for Economics & Business Research (CEBR) out of London has warned Greek Govt officials of the horrible bind. The CEBR believes Greece will be unable to escape a debt trap without devaluing their own currency to boost exports. Greece must pursue economic expansion, but cannot with the Euro straitjacket. The only workable path is for Greece to return to its own currency, the Drachma. To date, the EU Bailout is a poorly disguised rescue for German and French banks, even London banks. The dirty secret across Europe is that the major nations all own a huge raft of PIGS debt, and each nation within the PIGS pen all own a huge raft of the same debt. Any departure by Greece from the Euro would create a grand shock for banks across all of Europe, cause great disruption, and subvert the banker plan for their latest welfare program in continuation of public governmental adoption. It all ends in ruin.

Doug McWilliams is chief executive of the CEBR. He said “Leaving the Euro would mean the new currency will fall by a minimum of 15%. But as the national debt is valued in Euros, this would raise the debt from its current level of 120% of GDP to 140% overnight. So part of the package of leaving the Euro must be to convert the debt into the new domestic currency unilaterally… The only question is the timing. The other issue is the extent of contagion. Spain would probably be forced to follow suit, and probably Portugal and Italy, though the Italian debt position is less serious.” McWilliams called the move virtually inevitable (in his words) but he minimizes the devaluation potential. See the Business Times article (CLICK HERE).

The advantages are as numerous as they are deep, all significant.

Defaulted Restructured Debt: A return to the Drachma currency would enable a restructure of the Greek Govt debt. Look for at least a 50% debt reduction, but against a currency devaluation. The Athens leaders can win a very large portion of debt forgiveness, or else threaten default. European banks will choose a writedown rather than a total wipeout loss. These bankers will realize the futility of carrying full debt on their books, all too aware of the poison pill nature of the compulsory austerity programs heaped upon Greece.

Economic Stimulus: A return to the Drachma currency would enable a strong stimulus to the Greek Economy. Nothing is free, however. Currency devaluation is a double-edged sword. The benefit to be realized with cheaper exports (including tourism) will be offset by higher energy costs and other import costs (like cars, cellphones, and machine equipment). The historical effective tool is for a currency devaluation, one that leads to valid stimulus but with a steady dose of price inflation. Greece, like other European nations, is no stranger to socialist solutions to spread the misery.

Poison Pill Revenge: A return to the Drachma currency would enable a national rejection of the IMF/EU poison pill solution. The austerity measures have no precedent of effectiveness. They are ruinous, lead to greater federal deficits, worse unemployment, and more social disorder, yet the Banker Elite continue to push such non-solutions. Rejection of the austerity programs would incite a national rally of pride and celebration. Obviously, when Greek reverses the austerity cuts, the maneuver would ensure a second thump one year afterwards. Bloated government payrolls would remain, at a heavy cost. The Drachma would suffer a continued devaluation later on. Stimulus would be required in additional doses. The shared pain from price inflation would follow.

Autonomy & Control: A return to the Drachma currency would enable a national movement for the Greek people to take control of their fate. Their population feels on the receiving end of dictums and forced solutions, complete with massive job layoffs and budget cuts. They detect duplicity, since other nations in Europe are in violation of guidelines. Nevermind that something like 11% or 12% of all Greek jobs are located within the government sector. Turn a deaf ear to the rampant tax evasion and other corruption that might be more prevalent than Italy. The psychological benefit to a reversion to the Drachma is to spit in the faces of bankers and to take the reins of national control. This has a value in national pride and spirit, which ironically would avoid most internal reform.

PRECURSOR TO NEW NORTHERN EURO

Prepare next for a Euro currency with a more trim look, one with the PIGS fat trimmed off. The next three big big shoes are about to hit the floor, with severe crises erupting much worse for Spain, Portugal, and Italy. Banks in those nations will suffer failures, liquidations, stock declines, CDSwap contract rises, rescue requests, mergers in desperation, and more. These three nations represent the remainder of the famed PIGS descriptor, as Greece has captured far too much news and attention. When the Greek Govt debt news broke out and was developed from February through May, was Spain deeply committed to reform? NO! Was Spain deeply involved in liquidations and bank asset writedowns? NO! They delayed. Attention turns to the other PIGS in distress. Greece has served to distract attention not just from the other PIGS nations but from the United States and United Kingdom as well. Sovereign debt default will not end as a story until the USTreasurys and UKGilts default, even if technical defaults. All four PIGS nations will be removed from formal Euro currency participation. Economics and nationalism dictate it.

Prepare next for a Euro currency with a more trim look, one with the PIGS fat trimmed off. As the PIGS sovereign debt is discharged, written down, and defaulted, the demand will increase for the survivor Euro core, the healthy strong core. The new Northern Euro currency will initially be comprised of a PIGS-less Euro, which awaits on the other side of the door, here and now. The PIGS-less Euro currency will have much less debt to refinance in the short horizon. The PIGS-less Euro currency will have much stronger fundamentals with smaller annual deficits and better looking debt ratios versus economic size. The PIGS-less Euro currency will have a much healthier trade surplus picture. The PIGS-less Euro currency will realize much greater respect in a faith-based fiat world. But it is a transition vehicle.

The events in the next few months regarding the European Monetary Union are set to accelerate rapidly. The Greek Govt debt situation was replete with delay, debate, deliberation, confusion, distortion, false starts, deceptive fixes, reversals on decision, difficulty in endorsement, revealed lies on debt volume, harsh criticisms, low blows, violence, and much more. The new few months will be different. One well connected banker source told me a few months ago that the Greek debt situation will come to a resolution, all rescues will fail, as default is inevitable, complete with a return to the Drachma currency, but afterwards, the default of Italy and Spain will occur with lightning speed. He expected the events to occur in a fast chain reaction. We are seeing it.

The transition currency stripped of PIGS fat-ridden lining will eventually make way for the new Northern Euro. It was described in last week’s article. It will contain much more independence among its members and their central banks. It will contain an embedded gold component. Watch in the future for a crude oil component, even possibly OPEC oil sales tied to new Northern Euro currency payments. Time will tell. Events are moving rapidly. The PIGS-less Euro currency forces the monetary issue, as it demands a better and more perfect form of currency. An old maxim goes “A paper currency cannot be replaced by another paper currency, but rather by a metal currency.” How true!! Regard the PIGS-less Euro currency as a vehicle whose arrival will serve as a penultimate event in the Competing Currency Wars. The arbitrage will continue to pull apart paper currencies, tethered to lost integrity and faded trust. The PIGS-less Euro currency will require the broader adoption of a strong viable realistic currency born of crisis, a currency formed in a golden crucible.

The reversion to local currencies, complete with more autonomy taken back by individual central banks, will demonstrate a strong DECENTRALIZATION TREND. Even the new Northern Euro currency will feature greater decentralization. Those who feared a continental Amero currency for North American usage, a sustained Euro currency for European usage, and an emerging Yuan currency for Asian usage, must go back to the drawing board or replace the perceptual prisms. Prepare for several gold-backed new currencies. China is talking of a gold component to the Yuan currency. So is Russia. My hunch is that Russia will either participate in the new gold-backed Northern Euro currency or launch its own gold-backed Ruble currency.

The Americans and British will be last on board, as their nations tumble into the Third World where corrupt leadership and tight corporate mergers are their calling cards. Gold will be the stability mainstay, the common anchor applied across the world, but its application will enable decentralized power to be managed. Gold will emerge as the great liberator. Those nations first to embark on true remedy and reform will be the new global leaders. Those nations stuck in stubborn refusal will elect themselves Lord of the Flies in the Third World, where apparently oil-soaked shorelines and dead marine ecosystems will be the norm, maybe even toxic rain.

ITALY NEXT ON THE BLOCK

The Italian Govt debt picture is seriously distorted. Financial analysts point to more favorable debt ratios as a proportion to their larger economy. The debt volume in Italy to be refinanced this year alone is almost ten times that of Greece. The important factor is the volume of short-term debt to be financed, that must come from the bond market. So what if its ratios look more favorable? The money aint there!! Over half of all the 2010 total finance needs for PIGS nations plus Ireland are derived from Italy alone. The needs for Italy diminish somewhat in following years, but the volume remains grand. Unlike other European nations, the Italian vendors and shopkeepers have maintained a stubborn habit of showing sales receipts in both Euro terms and Lira terms over the years. Never argue with an Italian, since their hands move faster than others.

The Italian Govt debt is under sharp attack. During this week, the sovereign risk returned with a vengeance as the Italian Govt debt took heavy blows. The reminder is stark, that sovereign debt is a major contagion across all of Europe. The Credit Default Swap contract, which insures the 5-year bond, rose in a big way on Monday. MarkIt reports the Italian CDSwap went from 200 basis points to 250 bpts in a single day, to mark a new record high level. The new story to replace Greece has arrived to take away attention in the financial news media. The contagion is spreading globally now, even to South Korea, far beyond Iceland from two years ago. An important new trend evident in the last few months is the appearance of sovereign nation debt as the most actively moving in the official CMA reports. The trend of national debt struggles and deep distress will continue until a true monetary anchor can be constructed, fashioned of a gold alloy, urgently needed to provide stability.

SPAIN NEXT ON THE CROWDED BLOCK

The Spanish Govt debt picture is seriously distorted, in different ways. The banks in Spain have chosen to ignore the reality of lower property prices, and have carried credit assets at absurdly high values. It is safe to say that the Spanish banks are ready to enter freefall. A major shock comes to Spain. For well past a year, they have refused to mark down much of any credit assets tied to property. Furthermore, their property markets have refused to mark down prices seeking buyers on the open market. The result has been a mammoth reduction in sales volume, as sellers want prices that buyers are unwilling to offer, with huge price gaps that are sometimes described as comical. Reality is set to strike, and strike very hard. The Greek focus will soon turn to Spain, and also Italy.

Not being an expert, this analyst regards the Caja sector of the Spanish banks to be the large group of savings banks. They are all operating in a fantasy land, as their credit portfolios have been shattered for a long time. The common practice of carrying lofty valuations is slamming against the wall of reality. The Spanish Govt has been attempting to enforce a grand restructure process among its cajas. They are in deep debt and teetering. Merger with larger banks is seen as a potential solution, but that constitutes fusion of insolvent pieces with bad glue. The Govt has created a Fund for Orderly Bank Restructuring, (FROB) to facilitate the process. Usage of the fund comes with a timetable, as the savings banks have until June 30th to make formal requests for the money urgently needed. The FROB fund has a total value of €99 billion and is funded with €9 billion of capital and up to €90 billion of new government supported debt. Yet more monetary inflation enters the picture.

The savings banks within the Spanish Caja system total 45 in number. They, like the bigger banks, have stalled on taking proper liquidation and writedown action. The Bank of Spain has stirred things up with a recent seizure of troubled Cajasur one week ago. Other merger announcements have followed. Cajasur had a distinction, since its board of directors contained some stubborn priests, who refused to merge with the bigger Unicaja. Bank analysts are coming to the conclusion that the collective costs of the bailouts in Spain by their government will be an order of magnitude higher than what it anticipated. The Spanish Govt deficit ran at 11.2% of GDP in 2009. That ratio must come down. My forecast is that it will rise, not fall. The reason is simple. Just like with the United States and United Kingdom, no reform has come, no bank liquidations have come, no housing market remedy has come, no initiatives to plow under generally have been embraced, and those in charge of the disaster remain at their posts. So the banks will face continued losses. So the housing market will face continued declines. So the economies will face continued recession.

Rumors swirl that Caja Madrid said to ask for €3 billion of aid from the official rescue fund. The news has captured much attention since it is the second largest among the cajas. By the way, caja in the spanish language means box, cage, booth, register, teller unit, or repository. Confirmation came in the form of an official denial by the bank, calling it speculation. The savings bank did reveal last week as being in talks to merge with several regional cajas. Caja de Avila, Caja Insular de Canarias, Caixa Laietana, Caja Segovia, and Caja Rioja were mentioned.

COMPARTMENTALIZED PERCEPTIONS

Think nation, not bank! Until 2008, perceptions and evaluations of the banking sector were specific. Talk was about Santander in Spain, their big bank, and not about Spanish Govt bonds. Talk was about Societe General in France, and not about French Govt bonds. Talk was about Royal Bank of Scotland and Northern Rock and Lloyds in Great Britain, but not about UK Gilt bonds. Talk never was much about individual Italian or Greek or Portuguese banks. But now, talk is replete with Italian and Greek and Spanish Govt debt securities, and not of private banks. The line of thinking, the analysis, the focus is much more directed at national debt exposure, the sovereign debt. The insolvency of big banks has been transferred to insolvency for entire nations and their governments. After 18-20 months of shifting the debt risk from individual banks to the government balance sheets, the impact has finally come to be felt. The sequence of formal debt downgrades reads like a parade of disasters, mostly concentrated on the distressed nations and their sovereign debt. It has become a global phenomenon, since Korean debt, Brazilian debt, and other nations have joined the sovereign debt crisis. Remember that the clownish popular financial analysts called the Dubai debt default isolated. My analysis actually forecasted the Dubai debt event over three months in advance. My analysis also pointed out the interwoven nature of the sovereign debt exposure, since banks across London, France, Switzerland, and Germany share the debt risk as underwriters and investors. We have vividly seen the interwoven debt exposure.

The Spanish Govt debt situation has provided a gloomy cloud over their entire banking system.

Last week, Fitch Ratings became the second major ratings agency to downgrade Spanish sovereign debt. They marked it down to AA+ from AAA. Standard & Poors had cut the same Spanish debt rating back in April, lower than AAA. In their formal announcement, Fitch stated belief that the unemployment rate in Spain over 20%, along with the reversal of fortune tied to the construction boom, will weigh heavily on their economy struggling under extremely high debt burden levels. Neither the Spanish Govt nor their banking leaders have any firm resolve or grip on the situation. Recall that delay to remedy and reform always results in much worse bank losses and much deeper economic recession. Their government has delayed on bank accounting practices, and only last week worked the austerity measures through the Parliament by a single vote. Fitch offered a mealy mouthed vapid statement about how the special FROB fund to clean up their banks should be sufficient, in a total denial of the depth of the problems and future losses. The FROB fund is designed to aid the caja banks heavily exposed to the real estate and construction sectors. Fitch noted that their restructuring process is progressing slowly, which means not quickly enough. The politicized wrangled process could intensify constraints on the supply of credit and affect the pace of economic recovery for the country, so claims Fitch rightfully so.

The next three big big shoes are about to hit the floor. The bang will reverberate around the world. The Spanish, Portuguese, and Italian banks will next go belly up and quickly, as they sink with PIGS debt and other credit assets tied to fallen property. Spain will make the most shrill sounds, for a simple reason. They were the worst offender in holding onto mindless unreasonable lofty property values. Their bank books have the biggest drop to realize, after re-entry to reality. The crises underway in the remainder of PIGS nations will continue unabated, and usher in magnificent events where a legitimate gold-backed currency arrives, urgently needed to provide stability.

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Source: Barbara Templeton and Karen Roche of The Gold Report 5/26/10

http://www.theaureport.com/pub/na/6390

Replacing most of Europe’s colorful notes and various coins less than a decade ago, the euro is on the brink of extinction, according to Trader Tracks’ Roger Wiegand, sharing news and views of Euroland’s critical condition with Gold Report readers in this exclusive interview. Roger says the euro at $1.20 is the “line in the sand where big trouble will start. . .and that’s dangerously close.” On the other side of the world, he sees China doing well now, but doesn’t pin his hopes on China as the engine for global economic growth as so many others do. In fact, he says things there are “fraying a bit on the edges.” So, is there a white horse waiting in the wings to lead the world back to economic good health? Read on. . .

The Gold Report: You put a rather provocative quotation in a recent Trader Tracks. It says: “The destruction of a currency does not follow a straight, predictable course. . .like a cancer, the disease breaks out anew because inflation cannot be cured through monetary and fiscal measures alone; it requires a fundamental change in social and political attitudes and this change usually does not occur until complete monetary chaos forces a change.” The quotation credit reads, “G. Carl Wiegand, ‘The Great Inflation: Germany,’ 1923.” Two questions: First, is Carl Wiegand among your ancestors?

Roger Wiegand: He’s not. I found that particular quote in a book, Golden Insights. It was written by James U. Blanchard III out of his Gold Newsletter of many years ago. He’d put together a collection of his favorite quotes, and that particular quote was among them. I thought it intriguing that the quotation came from someone with my surname, and it was a very interesting quote.

TGR: Very interesting indeed, and it leads right into the second question: What do you think of Carl Wiegand’s observation in light of the euro’s troubles and what’s happening in the European Union now?

RW: I think the statement was very appropriate for what’s going on in Europe today. We’ve been doing a lot of writing on this lately, and based on latest information Germany has become the engine of Europe. Its share of the huge Euroland rescue package will come to between $154 billion and $185 billion in loan guarantees. It’s going to be mostly German money and savings that was going to have to do it—their credit.

Chopper Ben (Federal Reserve Chairman Ben Bernanke), Timmy the G (Treasury Secretary Timothy F. Geithner) and the New York banksters turned up the heat and the German Parliament approved that ridiculous package in mid-May, contrary to Chancellor Angela Merkel’s urging lawmakers to reject the whole deal. They think they can blunder through to help the euro. They cannot. Germany goes down with the rest. I think the German people are very angry about this. They don’t want to be Europe’s paymaster.

I said back in 2003 that Euroland (i.e., the European Union); the European Central Bank and the euro would fail. Now it’s coming true. It’s in writing, seven years ago. I said that because I thought it was ridiculous idea for a group of countries with major cultural differences and languages, disparate economies that don’t match up at all, with their abilities to buy and sell and obtain credit being so different. There was no way to achieve parity to reach a point where they could participate as equal members. Germany is expected to save all its neighbors and it cannot.

TGR: Do you expect to see the return of guilders and schillings, pesetas, francs and marks as one outcome from all of this?

RW: Yep. Absolutely. It won’t happen overnight. It would be too much of a big changeover at once. There may be a “mini-euro,” a higher-quality currency probably established by Germany, running alongside the current euro. I contend that Germany will be the first to bail out of the European Union and abandon the euro. I have said numerous times that the German mark probably would come back, run in parallel with the euro, and eventually the euro would just be cancelled out as a currency in Germany and they would use the old marks.

TGR: And then other former European currencies might follow?

RW: They very well could. The survivors who still remain in the European Central Bank with the euro may, in fact, try to keep it together. But without the German credit, and with all the problems they’re going to face, I really don’t understand how it can keep going. The debt is just overwhelming. Basically, Italy, Portugal, Spain and Greece are pretty much broke; they have no hope of paying their debt. To my understanding, Spain’s debts are 24 times larger than Greece’s. That’s a pretty big mountain to climb. So yes, I suspect that what would happen is if Germany drops out and they go back to their own old currency, the rest of the countries will, too.

TGR: Despite the vote in the German parliament, do you project that Greece and potentially Spain and Portugal will ultimately default on their sovereign debts?

RW: I think they will. There’s no way Greece can pay anything back. They have nothing going for them. They have a tourism industry, but very little manufacturing. I saw a comment the other day that said Greece hadn’t balanced a budget since 1893 or 1898. How in the world they managed that is beyond me.

TGR: So, suppose Greece defaults. And then assume, with Spain and Portugal teetering on the edge, the euro then plummets dramatically unless they start to inflate their way out of it. At what point does everyone abandon the euro and move to safer currencies? Say the U.S. dollar?

RW: There are two big numbers to watch. First would be the euro at $1.20, and that’s dangerously close. Everybody considers $1.20 the line in the sand where big trouble will start; it’s a major, major support number. The other number would be when the euro is at parity with the U.S. dollar, which would be 20 points lower. Keep in mind that one point with the euro is $1,250 the same as the Swiss franc, in currency trading. So, those are the key numbers.

TGR: What happens if the euro goes below that $1.20?

RW: Everything starts coming apart. Keep in mind, too, the euro and the U.S. dollar are supposedly the two reserve currencies of the world, with the U.S. dollar being dominant at about 80% to 85% of all reserves. The euro has a much smaller position, but it is a pretty big deal. Not all of the European population lives in Euroland, of course, and the Swiss and the Brits (the UK) still use francs and sterling—but also remember that Europe has 850 million people in contrast to 330 million in the U.S.

The Swiss franc, incidentally, trades almost point-for-point with the euro because Eurolanders surround the Swiss. The Swiss don’t want a large disparity between the two currencies to mess up export/import, in comparing prices, and in a variety of domestic things.

TGR: Speaking of import/export, let’s turn for a few minutes to the other side of the world. Many people have pinned hopes on China as the savior that would lead us from the depths of recession back into the promised land of global growth. You’re commentaries have been suggesting China’s bubble is about to burst and dash these hopes. What signals do you see that lead to your conclusion?

RW: China’s GDP is in a race to the moon, running between 8% and 11%, which is beyond the pale. It’s just too far out. It’s growing too fast. A major sell-off in the SSE—the Shanghai Composite Index—was one warning sign. It did come back, but it told us that things are fraying a bit on the edges.

Then, in the first quarter of 2010, Hong Kong real estate went up 23%–23% in four months, and it’s even higher now. I spent 25 years in real estate, and I know that is not sustainable. You can’t have prices rising that quickly. They’ve got a bubble; there’s no question about it. Some of the prices they’re paying for properties are just staggering. The last time we saw that was in 1989 in Japan, and we know what happened in Japan in 1989. The market just crashed.

As you know, the Chinese government is a command-and-control operation. Actually, they’ve been doing a pretty good job, but it’s so large and they’re a fairly new at being capitalists (along with being communists). To cool down the real estate situation, they’ve been tightening credit; no longer offering financing for third homes, for instance. They’re requiring more money on down payments for first and second homes.

Another factor that is making it difficult for the Chinese economy is the fact that the United States has broken down to the extent that it has. American consumers are no longer using homes as ATMs for the purchase of Chinese products. Not so long ago, 25% of all exports leaving China went to the U.S. A good portion of that is gone now.

Many have said that organic growth within China could sustain its increasing GDP, because 100 Chinese cities each have populations of more than a million people. That’s true, but how high is high? Trees don’t grow to the sky.

I am not the only one anticipating problems in China, either. Earlier this month in a Bloomberg TV interview in Hong Kong, Gloom, Boom & Doom Report publisher Marc Faber said that it’s likely to crash sometime in the next nine to 12 months.

TGR: If China’s growth has in fact peaked—and is about to turn south—is anyone waiting in the wings to lead the world back toward global good health?

RW: Three countries that I can see that are the strongest as of this date are Canada, Germany and China.

TGR: Didn’t we just rule China out?

RW: Major market shifts can take longer than we expect. China is doing exceedingly well right now. They’ve got a tremendous amount of cash, which they’re trying to offload, the biggest portion being U.S. dollars and U.S. bonds. They’re desperately trying to get rid of that paper and trade for hard goods. That would be crude oil, oil-related service companies, stocks in good companies, properties, copper mines, gold mines, silver mines and base metal mines.

They’re shopping in Venezuela for oil and oil services. They’ve got three big new oil-related operations in Nigeria. They’ve been buying oil properties in Libya. They’ve made some deals in Peru and Chile, and they’re working on a couple more in Australia. The list goes on.

TGR: Okay. On to Germany and Canada.

RW: Germany’s got a big overload and we know what their problems are. We just reviewed that. As for Canada, the major thing is that they avoided getting involved in a lot of the risky trading and debt that their American counterparts did. Canada has five large banks; that’s pretty much it, and they were prevented by law and rule from engaging in that kind of trading in derivatives. It kept them out of trouble, and they’re in pretty good shape.

TGR: So Canada may be the knight on the white horse.

RW: That’s the way I view it, and that’s what we’ve been talking about in our letter. In our speeches in Canada at the shows and conferences, we’ve said numerous times that the Canadian economy is the best of all. The banks are in the best condition. The currency is very sound and rising. Canada’s primary negative is a manufacturing slowdown in Ontario and Quebec. This is minor, though, compared to the great things Canada has going for it in commodity-related markets and finance.

TGR: Moving south, we’re hearing and reading that the employment situation in the U.S. is improving, but you have a different view. In Trader Tracks, you’ve indicated a current jobless rate at 24% and forecast it rising to 35% within three years. What makes your outlook so grim?

RW: Why am I grim and at odds with the happy Pollyanna people in Washington? We have two different sets of numbers. Those numbers pretty much track mine at John Williams’ shadowstats.com—and he worked in the government and consequently worked on that data. I follow a simple rule of thumb: take the official unemployment number and multiply times two. That pretty much matches up with what John says. In other words, if Washington says that nationwide unemployment is at 9.9%, multiply times two and round it up to 20%. John’s report a week or so ago was about 22%.

TGR: Okay, it’s not the facts that are changing so much as the figures that go with the facts.

RW: That’s correct.

TGR: You’ve also said you expect major market mayhem before the end of July. Could you describe more specifically what you see, and tell us why?

RW: I am not alone in my forecast. Many others are saying the same thing. Stocks are up about 80% from March of 2009. It’s gotten very peaky. The markets have normal technical shifts. The Lehman meltdown in 2008 hit the market so hard that for 30 to 60 days, nothing seemed to behave normally on the trading cycles and calendar. I expected it to self-correct, but it has not. That period just fell off the trading calendar. Consequently, the old “sell in May and go away” shifted to July.

Our next short-term call is that the big funds will have pushed the market up, sold into strength, taken their profits and be out of the way by Memorial Day weekend. Then the selling begins. It will continue at a very heavy rate probably for one to two months. Six negative events are converging this month and next. First is housing. We can expect another three to five years of falling prices. Some Alt-A loans—not subprime but those based on slightly blemished credits—are going to fail and foreclose. One report said there will be two million of these.

Number two: commercial real estate has hit the wall. Vacancies are climbing. A few months ago, General Growth Properties, the owner of 158 malls, filed for bankruptcy for about $28 billion. That’s in a breakup in court right now. Good shopping centers in the U.S. are in trouble. I have never seen a big mall close, but some people have told me they have seen two of them. That’s a major event in my view. So, commercial real estate, REITs, and the life insurance companies that gave them all the money will take a big hit as related group.

TGR: A lot of shoes dropping here.

RW: We’re just at number three, the auto business. The only thing that propped it up was all the free cash from the government, “cash for clunkers” and some of the other programs. The spring auto sales that will be reported after Memorial Day won’t be good.

The next hit’s coming when the banks have to report about what’s happening with credit cards on their financial statements. Look for $40 billion in credit card debt to be written off in June and July. That’s not my forecast; I think it may have come from prominent banking analyst Meredith Whitney. That’s number four.

That brings us to number five. Remember the TARP plan, which bailed out the big New York banks? All these banks have done was to gather in cash from the taxpayers, rearrange the balance sheets—the deck chairs on the Titanic—and then march forward saying everything was super duper. And it’s not. I saw Meredith Whitney on a TV show a couple of weeks ago, saying that the bad loans they’re still holding are four times worse than what got them in trouble the last time. That does not bode well.

And finally, number six was the big surprise—what’s going on in Euroland.

TGR: Yikes. Harmonic convergence turned upside down.

RW: Yes. Arch Crawford—publisher of Crawford Perspectives and Wall Street’s best-known astrologer, according to Barron’s—has mentioned the date of July 26. He said it’s the worst day astrologically and technologically that he can see on charts in 10,000 years. I asked him at a conference how bad that was and he said, “It’s so bad I can’t imagine what could happen”—you know, World War III, Iran invasion, complete systemic economic crash, or whatever. I am not of the view that something like that will happen, although it could. We don’t know. I just think we’ll have a long, slow sink in the mud, and this is going to be a very hard recession-depression that will continue for another three to five years. So, it’s going to be tough, but keep in mind the fact that in the 1930s, as bad as it was, three out of four people still had a job—so 75% were employed.

TGR: A glimmer of hope. Let’s talk about some companies. Your latest Trader Tracks lists a number of companies in the news lately for one reason or another, and our readers would certainly appreciate your viewpoint on some of the developments they’ve read about. We saw a broad spectrum of companies represented in there—from rare earths to precious metals. Can you talk about some of the companies you’re following?

RW: Sure. I find Rare Element Resources Ltd. (TSX.V:RES) attractive because they’re safely located in the United States; they’ve got some rich deposits; in their reserves they have the basic rare elements the U.S. defense industry needs to operate. They must have those minerals. As you know, 90% of those kinds of minerals are located in China. The U.S. Department of Defense is probably a little uneasy about that. There really aren’t that many companies for that particular field, but we find that Rare Element is one of the top selections. And we also like them simply because of where they are, what they have, and what’s moving forward in their business plan.

TGR: It was clear in Trader Tracks that you were pretty stoked about Newmont Mining Corporation (NYSE:NEM) being involved with Bear Lodge in Wyoming, but within the last couple of weeks, Rare Element announced that Newmont won’t be exercising its option on a 65% interest in the gold and base metals at the Sundance Venture on that property. Also, all of Newmont’s 327 wholly owned claims outside the venture will transfer to Rare Element. What’s the significance of this development, in your view?

RW: I suspect the project turned out to be too small for Newmont. Some of these really big operators—Barrick Gold Corporation (NYSE:ABX; TSX:ABX), AngloGold Ashanti Ltd. (NYSE:AU; JSE:ANG; ASX:AGG; LSE:AGD), BHP Billiton Limited (NYSE:BHP; PKSHEETS:BHPLF), Rio Tinto (LSE:RIO; NYSE:RTP; AUS:RIO), Newmont, etc.—have to operate on such a scale that it’s difficult for them to find a project with the reserves necessary to really warrant the large investment they put in up front. They’d prefer to be involved with projects with sufficient reserves to pay out for 40 or 50 years. I’m not sure, but with the Rare Element project, I think Newmont was just looking for a bigger deal. You know, they go worldwide looking for bigger deals.

TGR: Turning to silver briefly . . . any juniors that you’ve got an eye on?

RW: We like First Majestic Silver Corp. (TSX:FR; OTCQX:FRMSF). Its income keeps going straight up in a steady line and they keep finding more and more silver. It’s among the companies I call junior intermediates. They have done well; they’re good managers. It’s easy to cut through reserves pretty quickly, so one thing they have to do with these mines when they start to run and operate at higher volumes is to keep the reserves coming. First Majestic has done well, in that they keep adding to reserves. So, we like First Majestic.

TGR: How about in the gold arena?

RW: There’s Eastmain Resources Inc. (TSX:ER). We know the management; we know the geologists; we know what they’re doing. One thing I’d emphasize about Eastmain is that they’re in Quebec, and that’s probably one of the best mining-friendly locations anywhere in the world. They give them tax breaks. They have trained employees; they’ve got geologists. They have shipping; they’ve got rail. They have all the ingredients to run a good mine, and if you’ve got management as good as we see in Eastmain, expect their drilling program to be successful. We think they’re going to find some fine deposits, and considering the infrastructure in Quebec—water, power grid, roads and so on—things bode well for the stock.

TGR: In light of what you said about Quebec, any other companies there you’d like to mention?

RW: Clifton Star Resources Inc. (TSX.V:CFO) has done exceedingly well. We have been in and out of its stock several times, and it’s been very good to us—numbers in the neighborhood of 30% to 40%, 70%, maybe 140%. A big shareholder sold out recently, taking huge profits, but the stock is solid. They’ve got a fantastic partner; they’re exceedingly well capitalized; they’ve got $4 million to $5 million worth of ore mined, in a pile on the ground. It just has to be reprocessed. So, it’s a good opportunity; it’s a good company.

TGR: Any other comments on companies in good locations?

RW: Pediment Gold Corp. (TSX:PEZ; OTCBB:PEZGF; FSE:P5E) comes to mind, although at this point I have to say at this point I’m not up to snuff on Pediment’s news. We know the management, though, and I am going to meet with their president and geologist to get caught up on the latest things when we’re in Vancouver at the June 6-7 conference. Again, though, this is a company with smart management in a good location. They’re operating in a rather mountainous region, which makes it more expensive and difficult. But these are smart people. They know what they’re doing, and they’ve got the capital. We think they’re going to do quite well.

TGR: That’s the World Resource Investment Conference?

RW: Yes. In fact, I’m scheduled for a keynote speech on the second day, covering several topics—taxes, devaluation and the divergence between gold and silver and the shift of precious metal shares away from the general stock market. I’m also running a short workshop on my business, Trader Tracks. And finally, I’ll be delivering a speech that isn’t on the agenda, speaking on behalf of Endeavour Silver Corp. (NYSE:EXK; DBF:EJD; TSX:EDR), which is another one of the companies I follow.

TGR: Have a great time in Vancouver, Roger, and as always, thanks so much for your thought-provoking commentary.

Roger Wiegand—aka Traderrog—produces Trader Tracks to provide investors with short-term buy and sell recommendations and give them insights into political and economic factors that drive markets. An insatiable reader, he digests a variety of domestic and international publications, with the economic, political, monetary and market news and commentary woven into his opinions and analyses. After 25 years in real estate, Roger has devoted intensive research time to the precious metals, currency, energy and financial market for more than 18 years now. His varied background—which also includes graphics, writing, editing, sales, marketing, commercial printing, consulting and trading—helps shape the view he shares. In addition to Trader Tracks, Roger pounds out a weekly “Rog’s Corner-After The Bell” column for Jay Taylor’s Gold, Energy & Tech Stocks newsletter. For other essays, visit websites such as Kitco and, of course, The Gold Report. Roger is a frequent speaker at The Cambridge House Resource Conferences, the latest in the string being the World Resource Investment Conference at Vancouver coming up June 6–7. Visit Roger and Jay’s website at webeatthestreet.com. Tel: 718-457-1426 Claudio Bassi, Manager cbassi@miningstocks.com.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

DISCLOSURE:
1) Barbara Templeton and Karen Roche of The Gold Report conducted this interview. They personally and/or their families own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: First Majestic, Pediment, Eastmain and Rare Element.
3) Roger Wiegand: I personally and/or my family own shares of the following companies mentioned in this interview: None.

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As Ludwig Von Mises long ago predicted, there is only one choice left for Europe. To save the eurozone economy, the euro currency must be destroyed…

“Politicians like to gloss over reality, but we confront them with the facts.”
– Hugh Hendry, Eclectica Asset Management

Some ways back in these pages, we questioned whether the Federal Reserve, in trying to plug a massive credit contraction hole, might be tossing a mattress into a volcano.

It turned out to be the right analogy, but the wrong tosser. The eurozone is the region with serious volcano issues (and not just by way of Iceland).

It wasn’t supposed to be this way (according to the powers that be). Last weekend, European heads of state finally got their acts together in offering up a Greek rescue package. The proposed rescue – which the U.S. taxpayer had a hand in too, by way of IMF commitment – was supposed to restore calm and show a fiscally united front.

View Larger Chart

The actual effect was the opposite. Instead of calm, there was fresh panic. The sovereign debt volcano, rather than being sated by last-minute terms for a Greek bailout, grew angrier. The euro hit new 12-month lows on the panic… then broke even further through the psychologically key $1.30 level… and is plumbing fresh new depths as I write to you.

Nor was it just the euro that took a wallop. Risk assets all over the world went into freefall. For a brief window of time, everything seized up, like a middle-aged man clutching his chest on the tennis court.

The scary thing, when it comes to Greece, is less about “present pain” and more about “future precedent.” What is happening there could happen in other countries too – on a larger scale. Weare witnessing a template for sovereign debt destruction.

Taipan Daily warned readers of this possibility in late January, dubbing 2010 (if you’ll recall) “the year of political risk.” As your editor wrote in that missive, “2001 Will Be the Year of Political Risk” some months ago:

HOT SPOT #2: EUROPE. Skeptics have long argued that the euro is not actually a currency. It is an experiment. The hope of the euro experiment was that 16 different countries could band together, under one united monetary policy, while yet preserving wholly separate cultures, political structures, and economic climates. This was always a nutty idea, and the experiment is now under severe stress. With the Greek sovereign debt crisis consistently getting Page One headlines in financial newspapers worldwide, investors have awakened to the utter helplessness of the ECB (European Central Bank). What happens if Greece implodes? What if happens if Spain or Portugal is next? If Germany and the other rich countries refuse to help (i.e. whip out the checkbook), will the PIIGS (Portugal, Italy, Ireland, Greece, Spain) simply be left to die in the abbatoir? How could German political leaders even think of writing a check to Greece without a deluge of outrage at home?

According to Greek economics professor Savvas Robolis, Greece now has “explosive unemployment” in its future. “Panic is slowly taking hold in the minds of the [Greek] people,” he says.

Robolis further fears the harsh austerity measures of the IMF threaten to put Greece “on ice,” meaning that severe cutbacks and punitive measures could kill off any chance of growth in the weak Greek economy.

In more ways than one, the troubles for Greece are troubles for us all…

Nein! (No More!)

To add some further color, the whispered word on trading desks is that Germany is to blame for this week’s big freak-out.

Initially, investors reacted negatively out of concern that the Greece rescue package was too little, too late… out of fear that the Greek populace (of whom a very large portion are civil servants) would not accept it anyway… and out of conviction that far more money would have to be spent.

The negative “concern” became full-blown panic, though, at least partially on rumor that German politicians were drawing a bright hard line that said: “No more bailouts after this one.” Teutonic stubbornness reduced the odds that Portugal or Spain would see a rescue check – which, of course, increased the risk that they might fail.

The prudent investor’s attitude is “better safe then sorry” with these things, and credit default swaps on Portuguese and Spanish debt thus exploded higher on talk of German intransigence. (Credit default swaps, or CDS, are a sort of catastrophe insurance; the higher the swap, the greater the implied odds of catastrophe.)

The troubles this week also trace back not just to sovereign debt contagion – with Greece a sort of patient zero – but leveraged hedge fund contagion.

It seems that some clever funds – too clever for their own good – were caught by surprise trying to pick a bottom in the Greek bond market. Having gotten their fingers smashed, these funds suddenly had to sell other assets from the portfolio to reduce overall risk. Along with fresh bad news from China, this then set off a domino chain of forced selling that stretched all the way to Brazil, Japan and parts beyond.

Greek protesters, many thousands strong, have already rioted in the streets, throwing makeshift firebombs at police. Sadly, three people have died thus far. In Spain, the bankers tremble as fearful investors dump their shares – getting out ahead of time in case of a full-on bank run. In both Germany and the United States, taxpayers are seething that they didn’t want to throw more rescue money down a rat hole, but feel coerced and left without a choice.

It’s a horrible situation… everyone is angry. The Greeks are angry at being put on a brutal starvation diet. The Germans are angry at the perception of having to be their profligate brother’s keeper. Other eurozone nations are angry at being caught up in a downward debt spiral, as fears of continent-wide insolvency threaten to become a self-fulfilling prophecy.

Roll Out the Presses

There is perhaps just one thing left to do: Destroy the euro.

Jean-Claude Trichet, the head of the ECB (European Central Bank), should swallow hard… admit his failure… and print like a madman, devaluing the currency in order to “monetize” the vulnerable eurozone countries’ debts.

The ECB does not want to do this, of course. Trichet is such an inflexibly stiff rod, a directive like that could snap him in half. For such paragons of fiscal rectitude as the keepers of the euro, the idea of intentionally vaporizing the currency (in the name of monetizing toxic debt) is an awful one.

But the palatable choices have essentially run out now. It is too late to play the fiscal responsibility card. One cannot play at prudishness and moral rectitude after sobriety and virginity are already long lost. If something is not done, the vulnerable eurozone countries could be crushed under the weight of their ill-accumulated debts like a field mouse beneath a cinder block.

The Austrians Called It

What we are seeing now for the eurozone is a clear instance of the Von Mises prophecy. (Ludwig Von Mises is the father of Austrian economics. We have quoted him – and his prophecy – many times in these pages.)

To go to the well one more time – and probably not for the last time! – many decades ago Von Mises taught and predicted as follows (emhasis mine):

There is no means of avoiding the final collapse of a boom expansion brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Note the Hobson’s choice presented, i.e. a choice that isn’t really a “choice” at all.

Once past the point of no return in terms of accumulated debt, the only real options are to destroy the economy or destroy the currency (in the name of saving the economy from debt-laden doom). The currency destruction comes about as the authorities “monetize” debt that would otherwise crush them.

Another way to put it is “inflate or die.” The eurozone is now faced with the compact directive to “inflate or die.”

Japan will eventually face the same music. And so too will the United States…

An 18-Year Flashback

There is also a bit of déjà vu here as far as the United Kingdom is concerned. That’s because Britain went through a phase some 18 years ago with similarity to what the eurozone faces now.

In 1992, Britain was part of something called the ERM, or European Exchange Rate Mechanism. The ERM was a kind of fiscal strait jacket. As a member of the ERM, Britain had to keep its currency, the Pound sterling, within a certain agreed-upon range.

The trouble was that the prescribed range for the ERM meant Britain’s currency was too strong. An overly strong pound was killing the weak British economy. (Sound familiar yet?)

Back then, British politicians were just as pig headed as the talking heads in the broader eurozone today. They swore up and down that Britain would not drop out of ERM… that the British pound would not be devalued… that the pound would hold its value, no matter what.

Well, those politicians didn’t know what they were talking about. They didn’t understand that fiscal strength requires preventative maintenance – that you keep a strong currency by avoiding debt build-up in the first place, not irrationally denying it after the fact.

And so – we are still talking about 1992 now – along came a speculator named George Soros, looking for trades to make in his legendary Quantum fund.

In a nutshell, Soros saw that the British politicians were being stupid. He saw that the British pound would have to be devalued, for the sake of the weak British economy… and that stubborn British politicians wouldn’t be able to maintain membership in the rigid ERM band just because they wanted to.

And so Soros shorted the daylights out of the pound… and made a billion dollars in a single day doing so, earning the nickname “The Man Who Broke the Bank of England.” The tabloids hated Soros after that – they accused him of taking 12 pounds sterling from every man, woman and child in Britain – but really all he did was do the country a favor.

(Some British economists admitted that, had they stuck to the artificially strong ERM trading band even longer, much greater damage to the British economy would have been done.)

The euro, and the eurozone, are now in a similar place as to 1992 Britain (on a much larger scale). Europe’s pols are just too dimwitted and stubborn to see it.

When politicians try to deny reality on too large a scale or for too long a time, reality always wins out. No matter how big and powerful the government entity in question, gravity wins out in the end. That is why traders and speculators can make a great deal of money through tactical alliance with the right side of history.

A Lesson in Financial Physics

Von Mises’ prophecy – in which the accumulation of debt over massaged credit cycles leads ultimately to destruction of the economy or destruction of the currency, with no third option to choose from – is not a grand morality exercise. It is more akin to a keen observation as to the effects of gravity and the laws of financial physics.

The inevitability of financial physics further explains why your humble editor – and plenty of others – saw the euro’s fate written on the wall quite some time ago. (The late Milton Friedman, for example, predicted the euro would not survive its first true crisis, for the same essential reasons we see in play today.)

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The Spain debt outlook is nothing like that of its Greek counterpart. When you get right down to it, Spain looks more like the United States than it does the other European “PIGS” (Portugal, Ireland, Greece and Spain, or “PIIGS,” if you wish to include Italy). It’s because of those U.S. similarities that Spain is fairly unlikely to share the fate of its Mediterranean neighbor, Greece, which is essentially insolvent.

Indeed, in one respect, Spain’s position is actually much better than its U.S. counterpart. We’ll see why shortly.

A Tale of Two Monocracies

Like Greece, Spain suffered from a reviled dictatorship that exited the scene in the 1974-1975 time frame. The dictatorship in Greece ended in 1974 with the collapse of the “Regime of the Colonels,” while the curtain came down on Spain’s autocracy in December 1975 with the death of General Francisco Franco.

However, both the tenure of the dictatorships and the two countries’ reactions to the collapse of their respective regimes were quite different.

Greece’s dictatorship lasted only seven years, was never stable, and occupied itself mostly with corruption, military expenditure and saber rattling in Cyprus. Franco, on the other hand, after winning a truly devastating civil war in 1939, devoted himself over his remaining 36 years to developing his country’s economy on a more or less free-market basis, with low public spending, while maintaining an international posture of caution and neutrality.

With the two countries traveling down such divergent paths, it’s no surprise that they experienced very different outcomes. By 1975, Greece was a total basket case, with only its offshore (and non-taxpaying) shipping sector flourishing, whereas Spain was a rapidly developing tourist magnet, with a substantial industrial economy behind it.

The Next Phase

After 1975, the two countries continued to develop very differently. Greece – which had exiled its king, Constantine II – elected the leftist socialist Andreas Papandreou and in 1981 joined the European Union (EU), where it became a master in the art of subsidy corruption: After all, Greece was the union’s poorest country at that time.

Spain, on the other hand, kept King Juan Carlos, who thwarted a coup in 1981, elected a moderate social democrat government under Felipe Gonzalez followed by a very good center-right one under Jose Maria Aznar. The nation also developed the best luxury tourism sector in Europe, together with one of its best business schools in the University of Navarra’s IESE.

Today, while both countries have similar per-capita GDPs – $33,700 for Spain and $32,100 for Greece – Spain is ranked 32nd on Transparency International’s Corruption Perceptions Index, while Greece is ranked 71st – below much poorer countries like Bulgaria and Ghana.

Spain’s debt load – at about 55% of GDP – is less than half of its Greek counterpart. Clearly, Greece’s GDP per capita needs to be sharply deflated for the country to regain competitiveness; it’s much less clear that Spain needs to do the same.

Why Spain Won’t Flinch

In addition to a budget deficit of 11.5% of GDP in 2010 – very similar to that of the United States – its banking and real estate mess (though the largest bank, Banco Santander SA (NYSE ADR: STD) is pretty solid), and its relatively low debt, Spain (also like its U.S. counterpart) also has itself a left-leaning government with a proclivity for overspending.

Prime Minister Jose Luis Rodriguez Zapatero was unexpectedly elected on an anti-U.S. platform after a terrorist attack in 2004, and was re-elected in 2008 – both times by small majorities. Zapatero is undoubtedly responsible for much, though not all, of Spain’s budget problems; he undertook two economically damaging “stimulus” packages in 2008 and 2009 and has raised public spending from about 38% of GDP when he took office to 46% of GDP today.

In fairness to Spain, the big run-up in spending wasn’t due to a big run-up in poorly thought out handouts: The country moved enthusiastically – perhaps too much so – into the green-technology sector, to the point where an all-too-familiar boom-and-bust scenario played out.

Like the United States, Spain is stuck with its left-leaning administration until 2012 (both have four-year electoral cycles; Spain’s is seven months earlier). However, it has one enormous advantage over the United States – a savings ratio (personal savings as a percentage of disposable income) that stood at an extraordinary 24.7% in the 2009 fourth quarter, compared with a mere 2.7% in the latest month here in the United States.

Admittedly, Spain’s saving is highly cyclical, so the annual average is only about 20%. Nevertheless, the much-higher level of domestic saving suggests Spain should be able to finance its budget deficit domestically much more easily than will the United States.

With public debt also lower than in the United States – let alone in Greece – Spain’s position is thus fundamentally sounder. It should be relatively easily able to navigate the current storm and ride out the current government’s spendthrift tendencies – giving the voters the chance to put a more-fiscally-appropriate government in place in the next election.

That being said, investors have to acknowledge that panic can trample logic. Indeed, as U.S. investors learned all too well back in 2008, in a market panic even well-run institutions can get into trouble (not that many of the Wall Street houses of that year were well-run, but a few were).

The same is true of countries, and Spain under Prime Minister Zapatero has weak-and-economically damaging leadership, which the voters are stuck with for another two years. Nevertheless, with its debt rating still a very respectable “AA,” only the worst storm should cause Spain to take the same kind of crisis-spawned battering that Greece continues to face.

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Greece, Europe’s Achilles Heel continues to implode under its budget deficit and total debt burden sending a series of strengthening shock waves across Europe’s credit and financial markets. Whilst many western economies bounce back from the Great Recession of 2008-2009, Greece’s economic depression continues as the economy is set to contract by further 4% during 2010 which is much worse than the 2.5% contraction of 2009 and looks set continue contracting for several more years. Greek Unemployment is soaring to 12% this year up from 9.5% in 2009 and is set to continue higher to 13.5% in 2011.

All of the austerity measures implemented to date are only going to narrow the Greek budget deficit to about 10% of GDP for the current year, and contrary to ECB and Greek government announcements Greece is NOT going to meet the 3% deficit target in 3 years time. Meanwhile missing from the whole too and fro is that the Greece debt mountain will continues to mushroom ever higher demanding ever greater interest payments to service it as a % of GDP despite the bailout which effectively caps Greece’s borrowing rate at 5% for 3 years.

So Greece is in economic depression carrying a huge debt burden that continues to deleverage, so why are we not hearing debt deleveraging deflation in Greece ? Especially as Greece unlike the non Euro Zone countries such as the UK CANNOT devalue their currency OR print money because they they gave up those sovereign powers to the ECB. All of this suggests that Greece should be experiencing deep price deflation as many workers are being forced to suffer 30% pay cuts as a consequence of being forced to cut the governments budget deficit to back under 3% of GDP.

Surely if there was one place on Earth where deflation should now be rampant as per the debt deleveraging deflationary academic and BlogosFear models than it should be in Greece ?

Nope !

Instead of Deflation the Greek Inflation rate has soared to CPI 3.9% for March 2010, against a low of CPI of 0.5% just 10 months ago in June 2009.

Greece CPI Inflation 2010

• Jan 2010 2.4%
• Feb 2010 2.8%
• Mar 2010 3.9%

The ivory tower theoretectical economic models again FAIL in the real world.

Whilst my inflation mega-trend ebook (FREE DOWNLOAD NOW) focuses primarily on the UK economy, however as stated, many of the primary drivers of inflationary mega-trend impact on ALL of the western debt ridden economies that have NO CHOICE but to deploy INFLATIONARY mechanisms which in Greece’s case comes down to a defacto debt default the bill for which is being picked up by predominantly Germany and France which signals surging inflationary consequences across the Eurozone that will continue to manifest itself in a weaker Euro currency as the European Central Bank is forced to ramp up the printing presses towards the monetization of bankrupting Euro-zone nations debts.

ALL Central Banks are only good at One Thing and that is PRINTING MONEY ! – The ECB IS PRINTING MONEY for Greece, and soon will PRINT hundreds of billions of more Euros as the other PIIGS line up one by one each with their own Euro’s begging bowls.

People have to understand that the inflation mega-trend is a GLOBAL PHENOMENA, not just a Greek problem, Euro Problem, UK problem, for ALL of the countries central banks are printing money as they are engaged in continuous competitive devaluations of their fiat currencies that continue to feed the fires of the inflationary mega-trend that will eventually reach ALL shores of ALL budget deficit running, money printing, debt accumulating economies and even those that have well managed economies and national accounts are engaged in highly inflationary pegs against bankrupting currencies that ensures inflation will be imported whilst such pegs exist.

Eurozone Bailout to Save German and French Banks from Bankruptcy

Most of Greek debt is held by German and French imbecilic banks, include the debt of the other potential defaulters Spain, Portugal and Greece and the amounts to $1.3 trillion of debt of which about 60% is held by French and German banks. Therefore the bailout of Greece is to prevent another banking sector collapse that would hit German and French banks hard and soon soon engulf the whole global financial sector and markets as the banking system again once more freezes, though this time the sovereigns as a consequence of the first bailout are not in a position to embark upon Global Financial Bailout 2, not when the markets expect, no DEMAND deficits to be cut or else they will dump the Triple AAA’s down to Junk status.

The Euros 110 billion Greece bailout to finance the next 3 years of budget deficit and debt rescheduling will eventually amount to an INCREASE in Greece’s debt burden by approx another 30% of GDP. Therefore Greece will remain stuck in an INFLATIONARY depression as it is FORCED to import inflation whilst at the same time its economy stagnates in nominal terms and deflates in real terms. In the meantime the credit markets will remain closed to Greece and increasingly to the other PIIGS.

Germany Profits From Keeping Bankrupt Countries on Life Support

Germany directly profits from the European PIIGS debt crisis as Germany’s highly competitive industrial machine is able to export its goods and services to other European countries that cannot competitively devalue against Germany. Germany is further boosted by global exports as the Euro is KEPT Relatively WEAK against its major export markets such as the United States. If the Euro did not exist then the Deutschmark would have shot through the roof during the financial crisis which would have crippled German industry. In actual fact the German economy is bouncing back strongly whilst weak Euro-zone economies such as Greece are stuck in what is amounting to an Inflationary Depression, but there does come a point when Germany itself will suffer the consequences of inflation and thus be forced to RAISE Euro-zone interest rates which yes you’ve guessed it puts the whole Eurozone under an increasing debt interest burden.

Greek Bond Investors Wiped Out

The Bond Investors have been wiped out. Greece has defaulted in all but name, Greek Bonds have crashed by over 60% as bond investors face as much as 70% loss on the value of their holdings. Greek 2 year bonds are yielding 20% against German 2 year notes at just 0.8%. The only question is how much of these losses will be covered by Germany and France as both fear what would happen to their own imbecilic mega banks that hold over a $1 trillion of PIIGS debt.

All Countries Trending Towards Bankruptcy

The Greek contagion is spreading, Portugal Spain and Ireland are gearing up to default on their debts to some degree which is resulting in a dash for relative safety, notable US, German and UK Bonds have benefited over the past 2 weeks. My in depth analysis of 3 weeks ago (13 Apr 2010 – Britain’s Accelerating Trend Towards High Inflation and UK Debt Default Bankruptcy ) concluded :

The bottom line is that Britain over the next 4 years is projected to borrow an ADDITIONAL £300 to £350 billion to be added to Britain’s £870 billion official debt mountain. However this does not mean that Britain will go bankrupt either imminently or during the next 4 years because the bond markets on balance trust Britain’s credit worthiness more than the likes of the PIIGS, which does give the country some breathing space to run higher deficits without Greece and Iceland style panics. But there is a limit, we are NOT the United States that has the benefit of having the worlds reserve currency and never having defaulted on its debts before (Britain has at least twice).

This lack of imminent default risk is providing for a boost to Britain’s ability to finance its own huge issuance of new debt which is short-term supportive of sterling against the Euro as bond holders seek a safe haven home in the dollar and sterling.

Greece Tip of Euro Zone the Iceberg

My in depth analysis of (13 Apr 2010 – Britain’s Accelerating Trend Towards High Inflation and UK Debt Default Bankruptcy ) included a list of countries that were at the greatest risk of going bankrupt -

Whilst the mainstream press these past two months has been obsessed with the Greek debt crisis, the above graph clearly illustrates that a far larger debt crisis looms in Ireland that could soon transplant Greece in the debt crisis headlines over the coming months, similarly a number of other Euro Zone countries head the risk towards bankruptcy league table with Belgium and Portugal not far behind Greece. The price that these countries pay for being stuck in the Euro single currency is that they cannot devalue to try and gain some competitive advantage for their economies and therefore try and grow and inflate their way out of a high debt burden that stifles economic activity.

As the above excerpt illustrates Greece is just the tip of the Eurozone debt ice-berg as illustrated by other countries such Ireland, Belgium, Portugal and Spain fast lining up for a Euro-zone (German) bailout to OFFSET the pain of economic contraction that implies they too will witness a surge in inflation right across the Eurozone.

Britain, as I elaborate at length in the 100 page Inflation Mega-trend ebook is going down a different route towards bankruptcy that will witness the systematic destruction of its currency as the government attempts to inflate and grow its way out of the debt crisis, to be frank, the Labour government is NOT going to implement any serious cuts, and even those proposed by the Conservatives amount to a mere pin prick against an annual deficit of £167 billion as illustrated ny the talk about the difference of between £6 billion and £12 billion annually between the two parties as if that amounts to huge difference when set against the £167 billion black hole that will suck the economy into a debt singularity with a wage price spiral emerging from the other side of the debt equation.

Greece Will Go Bankrupt Due to the Debt Interest Spiral

Greece public government debt stands at about $300 billion, on which it currently pays 5% interest (market interest rates have surged far higher), which amounts a debt interest burden on the Greek economy to the tune $15 billion per year which is set against the Greek economy of $300 billion (and shrinking) and Greek government revenues of about $115 billion. Therefore the Greek government is currently forced to pay about 10% of its annual revenues as interest on debt per year which it cannot afford to do i.e. the Government is running a budget deficit of 12% of GDP. It is about 25% short of revenues against what it spends. What this means is that the debt interest is being financed by NEW debt that is continuously added to the Greek debt mountain and there in lines the debt interest spiral, as the greater the total debt the greater the interest the country has to pay which results in even greater debt and thus greater interest payments due each year.

However throw into the debt spiral the fact that bond investors are ‘usually’ not stupid, they are not going to wait around for a country to go bankrupt, they will demand a higher interest rate to hold the riskier Greek debt which means instead of paying 5% interest, suddenly the annual debt interest burden jumps far higher as we are witnessing in the crash of the Greek bond market, which results in a further escalation of the debt interest spiral, and as the risk ratchets up so does the interest rate demanded by the market to continue to hold Greek debt until eventually the Greek government gives up and defaults on the debt as there is no way it can finance the deficit as a function of the burden of servicing the annual debt interest.

The Euro bailout of Greece is not going to stop Greece form going bankrupt as at the end of the day the bailout is just a loan at 5% interest i.e. more debt to pile on top of existing debt that Greece cannot service.

Who Will finance the Issuance of New Global Government Debt?

The problem is that all of the countries in the Euro zone are running large deficits requiring funding, even Germany is running a deficit of about 8% of GDP. If this was just a Eurozone sovereign debt problem then it could be manageable as the Euro devalues, but it is not, it is a global sovereign debt crisis with the big deficit elephants in the room comprising the United States, Japan and UK, that combined are seeking to finance a deficit of $2.8 trillion this year alone.

The answer does NOT come at near zero interest rates, the deficits can only be financed (for a short-while) at significantly higher interest rates which suggests that regardless of what the U.S. Federal Reserve or the Bank of England or the ECB says, global interest rates are going to rise, and much sooner than anyone expects with Greece acting as the interest rate canary in the coal mine signaling global bond market interest rates will rise several % points higher over the coming SIX months, both short-end and long end regardless of the manipulated official interest rates. This outlook is inline with the inflation mega-trend and as illustrated in the UK Interest Rate Forecast (13 Jan 2010 – UK Interest Rate Forecast 2010 and 2011).

Off course higher interest rates means higher interest payments and thus an increasing debt burden which feeds the inflationary debt spiral ever higher (03 Dec 2009 – Britain’s Inflationary Debt Spiral as Bank of England Keeps Expanding Quantitative Easing )

Higher UK Interest Rates Are Inevitable

Regardless of the objective of the Bank of England to KEEP UK interest rates at ZERO for the foreseeable future, the fact is that the growing government debt issuance and despite monetization of the debt via money printing which has the effect of driving sterling lower is that the market will eventually FORCE the Bank of England to RAISE interest rates, i.e. gradually we will see the Government losing control over the levers of power as the market will not stand to watch losses mount on government bonds as inflation statistics respond to the real world increase in commodity prices.

UK Inflation Trending Inline With Forecast

UK Inflation CPI surged higher for March from 3% to 3.4% taking the mainstream press by surprise against consensus views of inflation rising to 3.1% of just the day before. The Bank of England’s forecasts for inflation to fall have yet again been shown to be an abysmal failure when it comes to inflation forecasting and targeting where the mantra of UK inflation being at 2% in 2 years time only having been achieved approx 4% of the time, i.e. there is a 96% probability that inflation in 2 years time will NOT be at 2%.

As the below graph shows, the inflation trend to date has been highly accurately mapped out now FOUR months in advance, with inflation for March of 3.4% having been precisely forecast in December 2009 (27th December 2009 (UK CPI Inflation Forecast 2010, Imminent and Sustained Spike Above 3%).

VAT TAX RISE Ensures UK Post Election Inflation Spike

A post UK election VAT hike to 20% from 17.5% is near certain to bring in extra revenue of about £13 billion per year. This will have the effect of both spiking inflation sharply higher and maintaining the ongoing longer-term inflationary mega-trend, therefore I would not be surprised that following the implementation of a VAT tax hike that CPI spikes above 4% and RPI as high as 6%! Which would further discredit the Bank of England’s mantra of “Don’t Worry Folks its Only Temporary”.

Who else is seeking to raise VAT ?

Greece, VAT going up from 21% to 23% which means more inflationary pressures for the Greek economy pushing up prices whilst wages are cut by between 20% and 30%.

New wave of E.U. economic migration heading Britain’s way from European FAILED States such as Greece and the string of other PIIGS soon to join them.

Interest Rate Rises Inevitable

Market interest rates are soaring as evidenced by the retail and bond markets. The artificially low official interest rates such as the UK base rate will soon be literally yanked significantly higher as Consumer Price INFLATION Forces Central banks to ACT. The UK target inflation rate is 2%, it is now at 3.4%. Will the Bank of England still sit twiddling its thumbs when CPI soars above 4%? or will it be Forced to RAISE the base interest rate to prevent sterling going into a free fall death spiral dance?

UK Interest Rate Forecast (13 Jan 2010 – UK Interest Rate Forecast 2010 and 2011)

UK Interest Rates Forecast 2010-11: UK interest Rates to Start Rising From Mid 2010 and Continue into end of 2010 to Target 1.75% / 2%, Continue Higher into Mid 2011 to Target 3%.

U.S. Dollar Achieves Forecast Target of USD 84

So much for the perma U.S. Dollar collapse mantra of the past year, the global flight to safety in the wake of the sovereign debt contagion spreading has today seen the U.S. Dollar hit USD 84, achieving my un-revised bull market target as of November 2009, USD 76.35 (01 Nov 2009 – U.S. Dollar Bull Market Scenario Update), an in depth update will soon be forthcoming that will aim to map out the Dollar trend for the next 6 months.

The British Pound continues to oscillate around £/$1.50 in advance of the target low of £/$1.40 as elaborated in the Inflation Mega-trend Ebook and earlier forecast (26 Dec 2009 – British Pound GBP Forecast 2010 Targets Drop to Below £/$1.40)

1. That sterling is targeting immediate support at £/$1.57 which implies it may temporarily bounce from there back through £/$1.60 before the eventual break.

2. That a break below £/$1.57 would target a trend to below £/$1.40. On a longer term view, the chart is indicative of trading range between £/$1.57 and £/$1.37, on anticipation of the eventual break of £/$1.57. On average this implies a 10% sterling deprecation against the trend of the preceding 6 months or so.

The Bottom Line

Inflation continues to surge higher even in countries that supposedly should be experiencing Deflation according to the bankrupt ideology of academic economic theorists that populate the mainstream press, financial institutions and large areas of the BlogosFear. Market interest rates are following inflation higher, the markets will soon force the official short interest rates higher too. Higher interest rates will mean WIDENING of budget deficits as debt interest payments on accrued debt Increases which will be met by more money printing, falling fiat currencies all of which will continue to feed the inflationary mega-trend not just for this year, or next year, but for a decade as there is no way that ANY DEBT will be actually paid down for the next 10 YEARS! Instead it will be INFLATED AWAY.

So I repeat my warning of November 2009 (18 Nov 2009 – Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend )

The warning of November 2008 of the worst case scenario of Hyperinflation has not only NOT diminished over the past 12 months, but it has been greatly reinforced, where 2010 looks set to the year of INFLATION NOT DEFLATION and 2011 may be Far worse as the Deflationists lose every penny they own and hold in Government Bonds that they so vocally now profess to pile into!

After the deflationary correction of 2008 we are about to witness the INFLATIONARY MEGA-TREND of the NEXT DECADE! the consequences of which are many.

Little has changed, instead of recognising the flaws in the deflationary argument, deflationists are delusionally playing around with what actually constitutes Inflation, no not the Inflation Data such as CPI that 99.99% of the people on the planet recognise as a measure of inflation of general prices in an economy but obscure credit statistics that supports the theory of deflation whilst in the real world inflation rages, destroying the value of hard earned wealth.

Many governments have already abandoned inflation targeting in all but name, Look at the UK, CPI is at 3.4%, RPI is at 4.4%, the Bank of England comes out with its regular monthly nonsense that the inflationary surge is temporary, despite the fact that inflation continues to rise the following month. Its not the Bank of England’s fault, for it is not in the MPC’s nature to admit that they are incompetent at targeting UK Inflation at ANY level let alone at 2%. If anything the UK and many other economies are heading for an inflation shock THIS YEAR that will make today’s 3.4% CPI rate look LOW.

Protect your wealth from the inflationary mega-trend that has boosted asset and commodity prices in most cases by more than 50% during the past 12 months whilst most still question the existence of the inflationary mega-trend and ramble on about NON Existant Deflation (CPI is at +3.4% NOT -3.4%). My FREE EBOOK contains 50 PAGES of of how to protect and grow your wealth as ever higher fiat currency supply seeks a home in scarce limited supply resources and asset classes as private sector and sovereign debt mountains EXPLODE into Much Higher inflation as we are witnessing with Greece today, especially as government’s induced asset price inflation to prevent economic depression is increasingly spilling over into consumer price inflation the only response to which is to RAISE interest rates.

As was the case in March 2009 (15 Mar 2009 – Stealth Bull Market Follows Stocks Bear Market Bottom at Dow 6,470 ), once the academic’s and talking head pundits wake up to the INFLATION MEGA-TREND in the real world, it is by then always already too late to act as the markets will have long since MOVED!

U.K. General Election Forecast 2010, Hung Parliament or Conservative Win ?

The mainstream press obsesses over national opinion polls that are clearly suggestive of hung parliament that typically places Conservatives on 35%, and both Labour and the Liberal Democrats on 28% which translates into a decidedly hung parliament. The Conservatives to win outright typically need a swing from Labour to Conservatives of at least 7% to reach 39/40%, instead they are only achieving a 5% swing nationally.

My long standing and unchanged UK Election forecast as of June 2009 is (02 Jun 2009 – UK General Election Forecast 2010, Seats Per Political Party)

The general election forecast is for 225 seats for Labour and 343 seats for the Conservatives which implies a Tory government with a much smaller majority of 36 than the 192 being bandied about in the mainstream press this week, which would mean that the next Conservative government will not be able to implement many of the more radical reforms necessary to restructure the economy in terms of deep cuts in public spending and therefore suggests a weaker government that could by mid-term at the the mercy of rebel euro-skeptic MP’s much as John Majors government of 1992 to 1997 experienced. This is potentially bad news for the economy as it confirms my expectations of continued stagnation for most of the term of the next government i.e. low average growth coupled with above average inflation as a consequence of not being able to mend countries finances which is likely to continue to see large year on year budget deficits and therefore achieves the Labour parties strategy of delivering a scorched earth economy to a Conservatives one term crippled government, that sows the seeds for a landslide Labour victory come the 2014-2015 election.

The latest average of opinion polls as tracked by the Sunday Telegraph puts the Conservatives on 35%, Labour on 28% and Liberal Democrats on 28%.

According to the BBC Election Seat Calculator the above poll would translate into Conservatives on 277 seats, Labour on 262 and Liberal Democrats on 82 seats, therefore a hung parliament.

However the mainstream press and opinion poll projections including the BBC seat calculator repeatedly fail to recognise that only the 140 or so of marginal constituencies count, therefore focusing and making projections based on the national share of the vote is not as accurate as the individual marginal constituency swings which typically are achieving the 7% needed for the Conservatives to win, thus the official polls grossly under-estimate the number of seats that the Conservatives are likely to win.

UK General Election Revised Forecast

Considering a string of marginal constituencies that are showing a swing from Labour to Conservatives of the 7% needed to win, however also adjusting for the fact that the Conservatives will also lose some seats the Liberal Democrats due to their poll surge. Therefore my revised forecast for the May 2010 General Election is for the Conservatives to be the largest party on between 305 and 325 seats, Labour second on between 240 and 260 seats and Liberal Democrats third on between 70 and 80 seats. Which suggests on the Conservatives best outcome they will just fail to secure an overall majority by as little as 1 seat, which also implies that the Conservatives could decide to govern as a minority government.

Also of interest is that the combined Labour / Liberal forecast range is 310 to 340 seats, so if the Conservatives manage to get towards the upper end of their forecast range, then the combined Labour / Lib-Dem total could also just fail to secure an overall majority which truly would result in a remarkably hung parliament.

Your inflation-mega-trend investing, money following, election watching analyst.

Source: http://www.marketoracle.co.uk/Article19199.html

By Nadeem Walayat

http://www.marketoracle.co.uk

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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem’s forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk