International Forecaster Weekly

Bailouts Pass On Burden To Taxpayers

Monsters in the marketplace, a third bailout for Greece, a bigger emergency fund in Europe, bailouts a subsidy for taxpayers to pay for years to come, Fed in an orgy of free money, banks in lawsuits, lessons of hyperinflation.

Bob Chapman | April 4, 2012

How do you create your own monsters? Over the past month the US and Europe have been telling us they will agree to release oil reserves into the market to drive down prices. What are they waiting for? It is expected there could be serious supply disruption, but yet no action. Incidentally, in all the media we see no admission or comment that those nations’ actions were responsible for oil prices at $107.00 a barrel.

Over the past month China and India have been avoiding oil sanctions by agreeing to trade for local currencies commodities and consumer goods. The trend continues, but leaves Iran with a shortage of currencies. In addition Iran is helping Syria by supplying an oil tanker. That oil is shipped directly to China.

Appointed Greek PM Papademos informed Europe late last week that a third bailout cannot be excluded. Just as we predicted. There will be no end to these subsidies. The idea is to keep bleeding Greece forever.

This past Friday European governments called for a bigger financial emergency fund, extra engineering a firewall to fight the regions debt crisis. The firewall commitment is $1.1 trillion, and of that $320 billion has be set aside to fund the ESM due July 1st.

If you remember more then several months ago we told you it would take $4 to $6 trillion to bail out Italy and Spain. These firewall funds are supposed to protect the sovereign debt of some six countries, and $1.3 trillion cannot accomplish that. They’ll need at least four times that amount. As you can see, the entire program is deceitful and these subsidies, if allowed to, will continue for years with Northern European taxpayers footing the bill for these subsidies. They believe eventually Europe will never be able to tear away from the grip of world government. Those of you who have been paying attention are witnessing the demonstrations, violence and arrests in Spain and it appears it is escalating. Cutting the budget by 1/3 under the circumstances is stupid. That is a fall in the public debt from 8.5% to 5.3% of GDP.

In Greece, the Greeks know they cannot nor do they want to, meet the terms of their financial agreements. On April 29th an election is due and that has caused a splintering of the vote, which pollsters believe only gives the two major parties some 35% of the total vote. This means political instability and perhaps social and political chaos not seen in Sprain since the 1930s. This is what happens when people are without hope in any country. During May and June chaos will reign and the austerity-bailout deals will have to be canceled plunging Greece into default, something that should have been done three years ago, and all of this could in part been avoided.

In the Greek election that many never happen on April 29th, or maybe May 6th or perhaps May 13 Pasok and the Democracy Parties, as we pointed out before, may only get 35% of the vote together and if they do not win there will be no parties to pledge support to cutting more public spending of 5.5% of GDP. That means no bailout in a fractionalized government. Those kinds of cuts will flatten the economy totally. Greek debt is still more than 100% of GDP, or $440 billion.

It only took three months and Spanish PM Rajoy is losing support as millions of Spaniards demonstrate in the streets. The voters in Andalusia failed to give him a majority, as well. Already Rajoy is in trouble.

Avoidance of a Greek election is only going to make things worse. As it stands now Greece is going to end up in chaos and if that happens Spain and others may follow, upsetting all of Europe.

This past week’s results of EU member meetings may have set the stage for bailout, but it will be interesting to see if the funds are found to accomplish their ends. Many professionals are not convinced that all will go well in Greece, or for that matter in Ireland, Portugal, Italy and Spain. Many believe they are facing a global government finance bubble. Let’s face it; the risks are massive, because all governments and the financial sectors have all taken the route of expansive money and credit that will all end in bubbles.

Like all the creations of the last few years’ currency swaps by the Fed, commonly known as illegal loans, to the European Central Bank is just another form of welfare that they know will only try to work in the short run. A virtually free service provided by the banks that control everything. It is all risk free of course, because bankers supposedly know what they are doing. That is how they put us in the position we are in the first place. These loans, created out of thin air do not create economic goods and services or a recovery, especially who 800 banks refuse to lend any of the funds out to business to increase business and employment. Mind you this is virtually free money – like financial welfare.

In another orgy of free money the Fed tells us that it bought 61% of US Treasuries issued in 2011, and as we said in an earlier issue that program, Operation Twist, was a disaster. Again, the Fed was undermined by its own so-called allies. This exercise, just like the year before, has just barely kept the economy alive.

If House bill (HR-4180) by Rep. Kevin Brady (R-TX) makes it out of committee it would strip the Fed of half of its dual mandate. It would no longer have to provide full employment they would only have to insure price stability. Like the efforts of Ron Paul over countless years, who expect billions of dollars will be passed out in bribes and nothing will happen. The only way to recapture the system is to bring it down.

The Fed oblivious of history pours money and credit here, there and everywhere, keeping many currencies from failing and supposedly giving them viability. If needed more money is extended with a hope someday it will be repaid and, of course, it won’t be. The extension of debt central banks believe can go on forever, and needless to say, that is ridiculous. Something you probably missed in the Copenhagen meetings was that there was a proviso to supposedly increase competition within rating agencies by forcing rotation and to draw in European agencies. This was a move to have less rerating encounters, so as to deceive the public.

Money is readily available to banks and to an extent to major corporations, which in turn have used part of those funds in western stock markets sending them close to new highs. Most economies are sputtering at best and investors ask how can this be? Well, that is why markets are up in spite of lack of participation and volume. That means there is a limited market to sell into. The buyers are not there, so the banks have to sit on the shares. 70% of the volume is algo trades that last 8 nanoseconds. That adds no liquidity to the markets. There is no longer a retail to dump the shares on.

Now that the G-20 has decided how much money will be donated to the EFSF and the ESM, they now want $500 billion more from the IMF, 19% of which is paid for by US taxpayers. The bulk of those additional funds are to come from emerging market economies. The BRICS have said that they will not participate without an increase in their voting power.

Bob Chapman - Financial Survival 1/2 - March 30, 2012

Bob Chapman - Financial Survival 2/2 - March 30, 2012

Bob Chapman/with James Corbett

or: Bob Chapman - James Corbett - 02 Apr 2012

Bob Chapman/The PowerHour

Bob Chapman - Financial Survival - April 2, 2012

Bob Chapman - The Financial Survival - 02 Apr 2012


The United States will hold the dubious distinction starting on Sunday of having the developed world's highest corporate tax rate after Japan's drops to 38.01 percent, setting the stage for much political posturing but probably little tax reform.

Japan and the United States have been tied for the top combined, statutory corporate rate, with levies of 39.5 percent and 39.2 percent, respectively. These rates include central government, regional and local taxes.


            The delinquency rate on commercial mortgages packaged into bonds recorded the largest increase since November 2010 amid a drop-off in the resolution of bad loans, according to Wells Fargo & Co.

The proportion of payments more than 30 days late rose 42 basis points to 10.04 percent last month, Wells Fargo analysts said in a March 30 report. Property owners fell behind on $4.3 billion in debt tied to everything from skyscrapers to strip malls, compared with about $3.3 billion the prior month, the analysts said.

The rise contrasts with readings last year that signaled an improvement in the delinquency rate in the roughly $600 billion commercial-mortgage backed securities market. March marks the second month in a row of “meaningful” increases following “more muted” changes from mid-2011 through January, Credit Suisse Group AG analysts said of the group’s preliminary estimates for the month.

The jump in March was driven in part by a slackening in the pace of troubled loan resolutions, the Wells Fargo analysts, led by Marielle Jan de Beur, said in the report last week. Loan servicers worked out $1.8 billion in problem debt last month, down from $2.8 billion in February, the analysts said.

Additionally, not as many defaulted loans were extinguished, leading to a pileup of delinquent debt, according to Harris Trifon, an analyst at Deutsche Bank AG. About $620 million in mortgages were liquidated in March, meaning the debt has been written off, according to the bank. That compares with more than $1 billion in monthly liquidations in 2011. The deceleration may be a seasonal blip, Trifon said.

“We expect things to return to the situation we observed in the last couple of months of 2011,” he said.

The delinquency rate will probably remain elevated for the foreseeable future as borrowers contend with stagnant rents and persistent vacancies in many U.S. cities, particularly for office and retail buildings, Trifon said.


            Bank of America Corp. was sued by Bank Hapoalim BM and Principal Life Insurance Co. for fraud and breach of contract over the sale of almost $960 million worth of mortgage-backed securities.

Principal Life sued Charlotte-based Bank of America over its investment in $239 million worth of the securities, according to documents filed in New York State Supreme Court in Manhattan on March 30. Principal Life, a unit of Des Moines, Iowa-based Principal Financial Group, sued JPMorgan Chase & Co. in the same court earlier this month over $114.9 million worth of the securities.

Bank Hapoalim, Israel’s second-biggest bank by assets, sued over $721 million. Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s. The housing market collapsed, and the crisis swept up lenders and investment banks as the market for the securities evaporated.

Lawrence Grayson, a spokesman for Bank of America, said he had no immediate comment on the lawsuits.

The cases are Principal Life Insurance Co. v. Bank of America Corp., 651015/2012 and 651017/2012, and Bank Hapoalim B.M. v. Bank of America Corp., 651022/2012, New York State Supreme Court (Manhattan).


            Construction spending in the U.S. unexpectedly fell in February, reflecting broad-based declines that indicate the building industry will take time to stabilize.

The 1.1 percent decrease, the biggest in seven months, followed a revised 0.8 percent retreat in January that was larger than previously estimated, Commerce Department figures showed today in Washington. The median estimate of 45 economists surveyed by Bloomberg News called for a 0.6 percent increase.

The prospect of more foreclosures is keeping downward pressure on home prices, which may discourage builders from taking on new projects. At the same time, budget cutbacks at the state, local and federal government level are also weighing on the construction industry.

“There is an exaggerated sense that U.S. housing may be on the mend,” Derek Holt, vice president of economics at Scotia Capital in Toronto, said before the report. “People lack the confidence and the means to buy and are instead renting. This is benefiting home construction firms that are focused upon this segment, but doesn’t imply consumer enthusiasm.”

Estimates in the Bloomberg survey ranged from a decline of 0.6 percent to a 1.5 percent gain. The Commerce Department revised January’s reading from the 0.1 percent drop initially reported.

Construction spending increased 7.4 percent in the 12 months ended in February, before adjusting for seasonal variations.

Private construction spending in February fell 0.8 percent from the prior month, reflecting decreases in non-residential projects.


Home Improvement

Private residential outlays were little changed in February, the report showed. A decrease in homebuilding offset a 1.2 percent gain in home improvement expenditures. Private non- residential projects fell 1.6 percent, hurt by a drop in power plants.

Spending on public construction decreased 1.7 percent from the prior month. Federal construction spending climbed 1.9 percent, while state and local construction dropped 2.1 percent, the most since July.

The decrease in total spending signals favorable weather failed to lift the industry in February. The average temperature was 38.2 degrees Fahrenheit (3.4 Celsius), 3.6 degrees warmer than the 20th century average and the 17th warmest February in 118 years, according to the National Oceanic and Atmospheric Administration.


Von Havenstein took great pride in his work, bragging repeatedly about the Reichsbank’s success in gearing up physical note production to meet soaring market demand. Rather than practice or urge monetary restraint, he regarded the explosion of physical banknote production as a triumph of German efficiency. Such was the need for speed, in the fall of 1923 when prices were doubling every 3 days that he was forced to resort to airplanes to get the currency to the more distant economic centers. All he lacked was Ben Bernanke’s helicopter!...

Bernanke’s problem is that the mix of gigantic deficits, interest rates below the rate of inflation and gigantic central bank purchases of government bonds is precisely that of the Weimar regime. Admittedly the Reichsbank by October 1923 was financing 99.9% of government spending and we haven’t got to that yet. Still the budget deficit represents more than 40% of government spending and during the QEII period the central bank is financing about 70% of the government deficit. That’s pretty close to the early Weimar period of 1919-22, when the Reichsbank was financing about 50% of the government’s expenditure compared to about 25% of expenditure in the United States today.


‘Some useful things I’ve learned about Germany’s hyperinflation’

Amazingly, von Havenstein got away with the move largely because a school of economic thought at the time held that increasing money supply had nothing to do with the rate of inflation. Instead Germans were told the high rates of inflation were all down to external factors; foreigners to be exact, and the reparations Germany had to pay them. Oh, and a hefty portion of blame was laid on speculators too…

And anyway, how could Von Havenstein not have known that the continued and escalating printing of money to fund government deficits would cause inflation?... it possible that, like today, he was overconfident in his ability to control his creation and in the economic theory which told him such control was possible? Certainly, in an article in the New York Times on the eve of the First World War, again from Liaquat Ahamed’s book, there seems to have been evidence of the general optimism that there would be no “unlimited issue of paper money and its steady depreciation … since monetary science is better understood at the present time than in those days.”

The fact is we do understand the economics of inflation. Despite what economists everywhere say about being in `uncharted territory’ with QE, we know that if you keep monetizing deficits eventually you get inflation, and we know that once you’re on that path it can be extremely difficult to get off it. But we knew that then. The real problem is that inflation is an inherently political variable and that concern over debt sustainability and unfunded welfare obligations leaves us more dependent on politicians than we have been in many decades.