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Currency Wars: Gambling With Other Peoples’ Money

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Posted by Axel Merk, Merk Funds

on Sunday, 22 April 2012 18:19

Axel Merk, Merk Funds

If running out of your own money wasn’t bad enough, policy makers are increasingly spending other peoples’ money to bail their country out. At the upcoming G-20 meeting, finance ministers from around the world will contemplate an increase to the resources of the International Monetary Fund (IMF). At stake for politicians is whether they can continue to do what they know best – to play politics. In contrast, at stake for investors may be whether currencies will retain their function as a store of value.

One of the major concerns is Spain's regional government debt. Spain consists of 17 autonomous regions, whose total debt almost doubled in the past three years, due to economic recession and a housing market collapse. In many ways, Spain reflects a microcosm of how the Eurozone as a whole is structured:Let’s highlight Spain, as the country may be the key to understanding how dynamics may play out. Last November, Spaniards voted for change by electing conservative Prime Minister Rajoy, handing him an absolute majority in parliament, displacing the previous, socialist government. The election may cause former British Prime Minister Thatcher to change her view, that socialism is doomed to fail, as ultimately you run out of other people’s money. It doesn’t take a socialist to run out of money. In the case of Spain, if you run out of your own people’s money, there may always be other peoples’ money.

Spanish regions have the power to issue public debt. The central government has little ability to interfere with regional government spending and is prohibited by Spanish law to bailout regional governments.

While regions enjoy high autonomy on spending, the central government retains effective control over regional government revenue.

Spain has its own peripheral problems: the most indebted region, Catalonia, recorded 20.7% debt-to-regional-GDP ratio and 3.6% deficit-to-GDP ratio in 2011. Its 10-year bond yield recently breached 10%, far beyond the yield on 10-year Spanish government bonds, which yield around 6%. In 2011, the total debt of 17 regional governments rose to €140 billion, accounting for 13.1% of Spain's GDP. This number is up from 6.7% by 2008.

Spanish law forbids the central government from rescuing regional governments (in much the same way that the Maastricht Treaty prohibits bailouts of EU countries). In practice, the central government appears to have implicitly helped Valencia, Spain’s 2nd most indebted region, with a €123 million loan repayment to Deutsche Bank.

More broadly known are Spain’s banking woes. Unlike much of Europe, a housing boom propelled much of Spain’s recent growth, causing Spain’s regional banks, in particular, to become overly exposed to the mortgage sector. Spain’s banks are very dependent on liquidity provided by the European Central Bank (ECB). The recent 3 year long-term refinancing operation (LTRO) by the ECB at first took pressure of the Spanish banking system, but has since been seen more critically, as Spain’s banks may be using the liquidity to buy Spanish government debt, thus increasing inter-dependency and potentially making nationalization of Spanish banks (read: the Spanish government taking on the obligations of its banks) more, rather than less likely.

To Read More CLICK HERE

2012-04-19-IMF-spain



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Currency

April Fears Ahead of Fed, Spain & China

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Posted by Ashraf Laidi

on Wednesday, 18 April 2012 22:21

 Ashraf Laidi

Forced Liquidation or Improved Sentiment?

Recent intermittent bounces in EURUSD in the face of surging Eurozone spreads are said to be reflecting possible liquidation by European banks unloading US assets to relieve an ensuing shortage of US dollars. Other explanations were attributed to the IMF buying Irish and Portuguese bailout tranches during the late European trading hours, taking advantage of cheaper levels (lowest since Feb 15). But as long as traders find no confidence in battling the coordinated efforts of asset-buying central banks and the Fed produces no new dissenters to the ultra low rates til 2014 mantra, risk currencies may be assured to find support.

Spanish government bonds are now the latest victim of bond traders typical one-country assault amid speculation that Spain will be the 4th recipient of a Eurozone bailout. At a time of deepening recession, Spanish authorities have selected education and health sectors for 10 billion in budget cuts. Cuts in these sectors have yet to prove successful or sustainable the he Eurozone. Little surprise that the biggest yield gainers are of nations, which have not yet been bailed outSpain and Italy. Considering that Greece, Ireland and Portugal were each bailed out when their 10-year yields crossed the 7% level, we ought to watch Spanish yields, currently at 5.9%.

The chart below shows how zero purchases from the ECBs Securities Market Programme (SMP) was replaced by the LTRO-1/2 program and Greek Private Sector Initiative deal (PSI), all of which were effective in shorting up risk appetite and the euro at the expense of sovereign yields. Unless the ECB acts with the next dosage of stimulus (LTRO, SMP or swap operations with the Fed, EURUSD is most likely to finally break the $1.2950 floor.

CLICK HERE to Read More

ECB SMPs EURUSD Apr 17.JPG 640W



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Currency

Of Debt, Gold and Okun’s Law

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Posted by Rick Mills via Resource Investor

on Tuesday, 17 April 2012 11:19

Is gold’s run over? Let’s look at some facts.

The amount of money the federal government owes to its creditors, combined with IOUs to government retirement and other programs, now tops $15.23 trillion. That's roughly equal to the value of all goods and services the US economy produces in one year: $15.17 trillion as of September, 2011.

Among advanced economies, only Greece, Iceland, Ireland, Italy, Japan and Portugal have debts larger than their economies.

The US government spent over $454 billion just on interest on the national debt during fiscal 2011.

The debt ceiling stands at nearly $16.4 trillion. Some predict the US will run out of money by September 2012. The next increase to the debt ceiling could be as high as $2 trillion.

4-16-12-aoth-1-image001

zerohedge.com

Since Barack Obama was elected, the US government has added $5 trillion more to the national debt.

The United States government is responsible for more than a third of all the government debt in the entire world.

Mandatory federal spending surpassed total federal revenue for the first time ever in fiscal 2011.

 


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Currency

Is Paper Money Legal

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Posted by Martin Armstrong

on Sunday, 15 April 2012 11:10

One of the fascinating aspects of all the controversy about paper money v hard money, has been the
lack of knowledge of just how did it come about? Oh we can go back to paper money being a receipt
from bullion dealers offering money storage, and we can go the American Colonial Period and point to
the drastic shortage of coin that necessitated paper money issues. But those stories are fairly common
knowledge. What isn’t talked about even in school is the manipulation of the Supreme Court AFTER it
declared that PAPER MONEY WAS UNCONSTITUTIONAL!

Armstrong-Economics new-129x73



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Currency

Reader Mail, Bundesbank Frustration, and Impressed by an Elder...

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Posted by Jack Crooks

on Friday, 13 April 2012 12:44

“A fool thinks himself to be wise, but a wise man knows himself to be a fool.”  

- William Shakespeare

 
Reader Mail Commenting on the “Pavlovian QE-Barking Dog”

[Thank you JCD; well said.]  

“Watching the current behavior of the markets as a sign-post pointing to something more that is behind its irrational mania, perhaps we can see that there are also problems that we are witnessing today involving the structural challenges in government and our economy.  The oppressive condition we are under when it comes to how the market is behaving is - in my opinion - the result of legally-sanctioned organized crime.  In order for the FED to do what it is doing to prop the market up presumably requires some degree of legislation allowing what would otherwise be illegal and unethical behavior; i.e., legally-sanctioned fraud.
 
“If the FED is legally obliged to answer to Congress, then how can it continue with this fraudulent show of a false recovery unless Congress is also complicit in the act? The current economic policies under which we now suffer are those that (by any other description) can be defined as the policies of an organized crime syndicate.  In the belief that it can buy more time until a truly sustainable recovery can be installed is like believing that so long as we ignore the bad weather all around by sticking our heads in the sand it will go away.

To Read More CLICK HERE

wise fool



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