By The Daily Bell

Crisis-talk in Brussels is hardly new. What’s different today is the palpable sense of failure and confusion communicated, even by the most fervent advocates of the EU. It is easy to dismiss this reaction as merely a symptom of the bitter conflict and rivalry unleashed by the crisis of the Eurozone, with Greece, Ireland and Portugal having to be bailed out with huge injections of cash to keep their governments solvent. However, the current problems confronting the integrity of the EU are not confined to the domain of economics; the organisation is also threatened by a political and cultural crisis. – Spiked

Dominant Social Theme: Just give us a little more time. Say, can we ban these nasty bond markets? Why do they exist anyway?

Free-Market Analysis: Frank Furedi of the alternative web newspaper Spiked has written an insightful article on the breakdown of confidence among the EU’s chattering classes. He has the idea that Eurocrats are so out of touch with average Europeans that they have run out of ideas of how to protect the union from its onrushing Armageddon. His larger point, though he doesn’t use our vocabulary, is that a fundamental dominant social theme (internationalism forever) is beginning to crumble.

This is a cause for happiness in our view. Let the EU crumble and the Anglo-American elites will have received a significant setback. Combine a failure of the EU with failure in Afghanistan (see other story, this issue) and it becomes clear that Money Power is less dominant in this century than in the last. Of course, we have been arguing this possibility for years.

This group of authoritarian socialists IS out of touch. They would disdainfully require countries to vote again and again when the votes were not in the best interest of the EU Leviathan. They would gladly hold whole populations hostage for the sins of a handful of elites, while ignoring the EU’s own fiscal lapses, ones that are so bad an auditor has refused to sign off on EU finances for a decade or more.

Lately, there seems to have been a pullback in EU elite ambitions, a cessation of confidence in the idea that Eurocrats could slam their collective, Orwellian boot endlessly in the face of a resentful populace. Talk of massive abrogation of civil rights has seemingly been muted for the moment. Putting all EU citizens into one large one database in order to spy on them more effectively has seemingly been shelved for the time being. Building an EU Army to help NATO with its job of oppression around the world has quieted.

Generally, we’re getting the sense that the Eurocrats are beginning to believe that the financial crisis is a bridge too far. Gone are the proclamations of confidence issuing from the lips of Sarkozy, Merkel and Trichet. The Camp of Confidence seems to have fallen mute. Furedi captures it well.

The new buzzword in Brussels: ‘Crisis’ The EU is beset with problems, but it is so cut off from the electorate that it lacks the popular legitimacy to solve them. During a recent visit to Brussels, I was struck by the uninhibited use of the word ‘crisis’ by people who closely watch or inhabit the institutions of the European Union.

With the Greek economy in a state of disintegration, European leaders know that there is no alternative but to restructure Greece’s debt. They may use the euphemism of ‘re-profiling debt’ to avoid acknowledging the scale of the problem, but the spectre of insolvent nations haunts Europe. Just a few weeks after pouring billions of euros into bailing out Portugal, it is evident that the medicine is not working and that the Eurozone is in big trouble. Inevitably, there is talk of reorganising Europe’s monetary union as more and more people have lost faith in the existing bailout strategy.

Opposition to this strategy has led to the growth of euroscepticism throughout the more prosperous regions of Europe. A recent opinion poll in Germany showed that 30 per cent of the respondents wanted an ‘independent Germany’, without the euro. That is why last week, the German chancellor, Angela Merkel, stated that people in countries like Greece, Portugal and Spain should not have more holidays, work less or retire earlier than Germans. One Portuguese journalist described this gesture as ‘feeding the populist monster that is growing in the Europe of the euro’. But this monster is not about to disappear.

Furedi makes other interesting points. The anti-EU True Finn party has emerged as Finland’s third-largest and is actually within a whisper of being Finland’s largest. This is no accident, he writes, and shows how the EU’s woes are mutating.

There are other issues, just as serious as the financial crisis, though they have received less attention. The biggest challenge, curiously, may be the tens of thousands of North African and Libyan refugees showing up on the doorstep of Italy. Prime minister Silvio Berlusconi has called this refugee wave a ‘human tsunami,” and has indicated that Italy is not about to foot the bill for an endless surge of homeless Tunisians.

Berlusconi wants a fundamental tenet of the EU done away with for the moment – the Schengen border-free travel agreement. Freedom of movement, Furedi points out, is one of the few areas where the EU has delivered something entirely positive, and now it is under attack. It is not just the Italians either; the Danish government has indicated it will regenerate permanent border controls. The EU, Furedi notes, has responded by announcing it will spend £84million “to explain European policy and for ‘better connecting with citizens’.”

The article saves the best for last. Furedi explains that the EU has been effective at overcoming resistance to its policies because it was deliberately set up in such a way that its top Eurocrats did not have to respond to public opinion. Many were appointed rather than elected; at the very, top votes were not necessary to make policy, which could simply be handed down.

Of course, this fundamental anti-democratic state of affairs has kept various EU opponents in something of a subdued frenzy (and been responsible for making many powerful EU enemies) but authoritarianism admittedly has its merits. “The EU is able to adopt policies that would often prove contentious and difficult to justify in a more open, national parliamentary setting,” Furedi points out.

Furedi also make the clever point that lacking legitimacy, the EU substituted vast PR programs. He is absolutely right about this. We noted this occurrence without fully understanding its import. But the EU’s use of PR is virtually unprecedented within a modern democratic setting. Not only is it unusual, but as Furedi notes, it has produced an environment where the EU’s top people have no legitimacy and no political tools to wield when they need them most.

He writes, “Today decisions affecting the lives of hundreds of millions of people cannot be insulated from the anger and hostility of the public.” This is a profound point. It was always pointed out by the EU’s enemies that its lack of accountability was its most dangerous element. But ironically, this very lack of accountability means that the Eurocrats never built the communication channels and relationships that could be used in a time of crisis.

The European Central Bank just yesterday indicated that any kind of debt restructuring was out of the question for Greece, presumably for any of the PIGS. We have noted in the past the exceptional European “rigor” on this issue. The Greek socialist leadership promptly and cravenly agreed with the ECB and came out of with a statement vowing to inflict on Greeks every part of the unfair, unwise and unworkable austerity program that the IMF has devised for the Greeks –and for Portugal and Ireland as well. In fact, they really have no idea what to do. The politicians have begun to bicker with the bankers and it is wonderful to watch.

Conclusion: Spain, convulsed by protests, may be next on the austerity list. If Spain goes, so goes the EU – and we will gladly wave it goodbye. One more dreadful, authoritarian celebration to pile on the junk heap. That it will likely mark a significant setback to the Anglosphere elite’s efforts at building world government would only make it more satisfying.   (my emphasis)

By The Daily Bell

By permission The Daily Bell

www.thedailybell.com

They Can Try to ‘Delay and Pray’ But the Euro Is Running Out of Time - Telegraph

Why the Next Crisis Could Be Even Scarier – Yahoo

Goldman Sachs: Comin’ This Summer… $5 Gas – NY Post

The Gold Standard Prefers Main Street to Wall Street – Caffeinated Thoughts      “It Restores Security and Prosperity to Regular Citizens.”

By Michael Pento, Senior Economist at Euro Pacific Capital

Based on many pronouncements by economic policy makers, reams of articles by the top financial journalists and near continuous discussion on the financial news channels, it appears that the quantitative easing juggernaut that has steamed the high seas of macroeconomics for the last three years is finally pulling into port…supposedly for the last time. According to the dominant narrative, QEI and QEII helped stabilize the economy during the Great Recession and now the Federal Reserve is ready to take the training wheels off. If so, the economy may need a helmet because there is virtually no chance that it can avoid major contractions without central banking support.

It is ironic, but there is no doubt that the proposed removal of artificial stimulus would be the best thing for the country in the long term. But very few observers understand how it will inflict short term pain. So confident is the Fed that earlier this week, St. Louis Fed President James Bullard indicated that any notion of additional quantitative easing is off the table. In fact, he said the central bank may tighten policy in 2011 by allowing its balance sheet to shrink. Investors would do well to remember that Bullard was the first Fed official to support the second round of bond purchases now known as QEII. It is likely that he will make a similar reversal if the economy shows any signs of weakening in the months ahead.

Fed policy makers like Bullard are guilty of reckless optimism if they believe the economy has truly healed. The evidence of a pending slowdown is abundant. The Empire State’s business conditions index decreased 10 points from April to just 11.9 in May. Meanwhile, the prices paid index rose sharply, with about 70% of respondents reporting price increases for inputs, and none reporting price reductions. That inflation index advanced 12 points to 69.9, its highest level since mid-2008. And things are even worse in Philadelphia. The Federal Reserve Bank of Philadelphia’s general economic index fell to 3.9 in May from 18.5 a month earlier.

Turning to the labor front, the four week moving average of initial jobless claims rose to 439,000 last week, from 437,750 in the week prior. Of course, the real estate market continues in its malaise. According to the National Association of Realtors, April existing home sales dropped to an annual rate of just 5.05 million. Prices continue to set new post crash lows, with prices down 5% YOY. Despite the fact that the government still accounts for nearly the entire mortgage market and the Fed has rates near zero percent, inventory of existing homes jumped from 3.52 to 3.87 million units and the months’ supply climbed from 8.3 to 9.2. Does it sound like the economy is ready to get up on its own two feet?

But the Fed is under pressure to do something about the growing inflation threat. Year over year increases of CPI, PPI and Import prices are 3.2%, 6.8% and 11.1%, respectively. As price increases hit middle class consumers, the Fed is facing intense pressure to push down inflation by draining the balance sheet and raising interest rates. It’s a dangerous game.

In its simplest terms quantitative easing is nothing more than the government’s attempt to boost consumption by borrowing trillions of dollars. Over the long haul this is no way to run an economy, and a sustainable recovery will be impossible as long as such borrowing continues. But in the short term, a cessation of government borrowing will lift the veil on our artificial economy, and reveal how dependent we have become. U.S. fiscal and monetary austerity will cause GDP to fall as the deleveraging process that was interrupted in 2009 returns with a vengeance. I do not believe the Fed or the Administration has the intestinal fortitude to let that happen.

A bona fide Fed exit from interest rate manipulation means that both nominal and real interest rates would rise significantly. The ten year note yield is less than half its average over the past 40 years. Normalization of rates would provide a serious headwind to markets and the economy.

The high leverage that brought on the Great Recession has not been addressed in the slightest. U.S. household, corporate and government debt as a percentage of GDP has never been greater. So, if interest rates were to rise, why should we expect a different result from what occurred in 2008?

Whether or not the Fed is bluffing has dramatic implications for investors and the country. Mr. Bernanke will eventually have to choose whether he wants another depression or more of the inflation the Fed is so adept at causing and then denying.   (my emphasis)

By Michael Pento, Senior Economist at Euro Pacific Capital

www.europac.net

Shale Boom in Texas Could Increase U.S. Oil Output – NY Times

Arizona Land Sells for 8% of Price Calpers Group Paid at Peak – Bloomberg

Friday’s May Payrolls Report Really About McJobs – MarketWatch

Fireworks Shows Need New Environmental Review – San Diego Union Tribune     Another Case of Environmental Overreach

By Michael Boskin

Canada’s Prime Minister Stephen Harper, by winning an outright majority of seats in his country’s parliament for the first time since assuming office, continues a remarkable series of national election victories, backed by voters demanding at least a pause, and perhaps some reversal, of the growth of the welfare state.

… Those who want to control, reform, and reduce government spending seem to have the big picture right. It is a prerequisite for substantial economic advance. That is the broad lesson of history – from the Reagan and Thatcher revolutions in the US and the UK, to Stephen Harper’s more recent experience, to the repeat performance that David Cameron and the Republicans in the US Congress are now trying to engineer.

Only time will tell if the recent elections in the UK, the US, and Canada signal a retreat from the growth of the welfare state or just a temporary respite. But comparing the US, Canada, the UK, and France reveals that the stakes are immense. (my emphasis) 

Read all of Michael Boskin’s commentary from Project Syndicate here.

Copyright Project-Syndicate 2011

www.project-syndicate.org

Michael Boskin, currently Professor of Economics at Stanford University and a senior fellow at the Hoover Institution, was Chairman of President George H. W. Bush’s Council of Economic Advisers, 1989-1993

Project Syndicate: the world’s pre-eminent source of original op-ed commentaries. A unique collaboration of distinguished opinion makers from every corner of the globe, Project Syndicate provides incisive perspectives on our changing world by those who are shaping its politics, economics, science, and culture. Exclusive, trenchant, unparalleled in scope and depth: Project Syndicate is truly A World of Ideas.

By Ilargi

Oh boy, oh, just lovely. Where to begin? The Eurozone mess spreads faster than wildfire. We should start considering the possibility that it doesn’t matter much who will next lead the IMF, because that person won’t be in office until June 30 at the earliest, and who knows what the situation will be by then?

There’s a lot of resilience left in Europe, it’s rich and won’t blow up easily, but it still might do so fast. All it would seem to take is rifts, divisions, fights etc. to emerge. Already, the EU finance ministers and the ECB don’t see eye to eye anymore, quarrels between countries can’t be all that far off, and governments will start to fall at increasing rates too. Argentina had how many presidents in no time at all when its last major financial collapse hit?

After Greece, Ireland, Portugal and Spain, Italy is now joining the ranks of increasingly exposed economies. And as always, the denial levels are deafening. Don’t forget Eurogroup head honcho Jean-Claude Juncker’s recent words, though: “When it gets serious, you have to lie”. Here’s guessing Jean-Claude thinks this is serious.

Right. Italy. Serious. Here’s Gavin Jones for Reuters:

S&P warning heralds tough times ahead for Italy

Standard & Poor’s surprising decision to revise downward its outlook for Italy could mark the start of increased market scrutiny on the euro zone’s third-largest economy, which faces tough challenges that it is probably unable to meet.

Italy has escaped the brunt of the euro zone debt crisis that has engulfed Greece, Ireland and Portugal, due largely to a prudent fiscal policy and low levels of private debt. But if markets begin to focus more on the country’s appalling growth record, weak reform prospects and the grim implications for reducing its mountain of public debt, then Italian bond yields will rise and its situation could become untenable. [..]

Italy’s public debt stood at 119 percent of gross domestic product at the end of 2010 — second only to Greece in the euro zone. The government last month said it would remain above that level both this year and next. But the real and interlinked problem for Italy is growth. For well over a decade, when the rest of the euro zone goes into recession, Italy has gone into a deeper one, but when the rest of the euro zone recovers, Italy’s rebound is weaker.

And the dismal story is not only in comparison with its European peers. According to International Monetary Fund data, Italy was the world’s fourth most sluggish economy between 2000 and 2010, ahead of only Zimbabwe, Eritrea and Haiti.

Ilargi: It may sound reasonable to say that Italy’s real problem is growth, but that’s just -at least potentially- a nearsighted view. If Greece could still borrow at Germany’s terms, for instance, it would obviously be in much better shape than it is today. It is precisely this sliding scale towards ever worse debt financing conditions that may well hit Italy too, and then it remains to be seen whether growth alone is its biggest problem.

The markets can, if they want, simply sit back and pick the weaker countries off one by one now. What is the EU, and the ECB, going to do about it? It takes -seemingly- forever just to arrange something, anything for Greece, and really, Greece isn’t even anywhere near “the big problem”. Joe Weisenthal at Business Insider dug up the graph below (I edited it somewhat for better quality). It’s from an August 13, 2010 article by Emma Saunders in The Financial Times:

Banks’ exposure to Italy dwarfs risk from PIGS

Further jitters at the eurozone periphery today with Irish, Spanish and Greek sovereign yields higher, and news that Spanish banks tapped the ECB for €140bn during July.

Of particular interest, demand for Italian bonds dropped significantly. This matters because European banks are exposed very heavily to Italian sovereign debt – the top 91 banks own €100bn of the stuff in their trading books. This is quadruple the trading holdings of Spanish debt, and 22 times holdings of Irish debt. Indeed, Italian debt is held in the trading books of Europe’s banks more than any other European sovereign – even German-issued debt totals just $70bn.

Ilargi: Yes, that is scary. The take-away message is that all the denials concerning Greek debt restructuring, or reprofiling, or any name that’s being attached to it, are directly aimed at one thing and one only: the very salvation of scores of banks. Greece is but a minor factor in the grand scheme of things, but fears of stepping stones and sliding scales are so all pervasive that politicians and bankers, given the chance, won’t hesitate to throw another odd trillion euro’s or so into this bottomless cesspool.

A little taste of things to come, when, not if, none of these trillions will suffice to prop up the system was given by Andrew Lilico in Friday’s Telegraph (I thought I’d give you just about the whole list, it’s hard to leave out some, even if it’s largely hypothetical):

What happens when Greece defaults

It is when, not if. Financial markets merely aren’t sure whether it’ll be tomorrow, a month’s time, a year’s time, or two years’ time (it won’t be longer than that). Given that the ECB has played the “final card” it employed to force a bailout upon the Irish – threatening to bankrupt the country’s banking sector – presumably we will now see either another Greek bailout or default within days.

What happens when Greece defaults. Here are a few things:

• Every bank in Greece will instantly go insolvent.
• The Greek government will nationalise every bank in Greece.
• The Greek government will forbid withdrawals from Greek banks.
• [..] the Greek government will declare a curfew, perhaps even general martial law.
• Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting)
• The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting on 50 per cent or more of all Greek euro-denominated debts.
• The Irish will, within a few days, walk away from the debts of its banking system.
• The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn.
• A number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements.
• The European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt.
• The French and German governments will meet to decide whether (a) to recapitalise the ECB, or (b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little foreign currency-denominated exposure, it could in principle print its way out, but this is forbidden by its founding charter. On the other hand, the EU Treaty explicitly, and in terms, forbids the form of bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn’t prevented that from happening, so it’s not intrinsically obvious that its being illegal for the ECB to print its way out will prove much of a hurdle.)
• They will recapitalise, and recapitalise their own banks, but declare an end to all bailouts.
• There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps.
• This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps.
• Bondholders will take the Spanish Banking Sector to the European Court of Human Rights (and probably other courts, also), claiming violations of property rights. These cases won’t be heard for years. By the time they are finally heard, no-one will care.
• Attention will turn to the British banks. Then we shall see…

Ilargi: What I think is important is to connect the dots here. Greece is but a two-bit player relatively speaking, but the effects of a default in Athens, and the haircuts it would force upon financial institutions (and dare we even consider pensions funds?!), would -make that will- be felt across the world. For one thing, it would substantially weaken banks and economies pretty much around the globe. Just Greece alone.

It all comes back all the time to the dreaded mark-to-market theme. The last thing anyone wants is to let anyone else know what the paper they’re holding is truly worth. But it will be done. You might even say help is on the way. David Enrich and Steve Eder report for the Wall Street Journal:

Buyers Battle for Soured European Bank Loans

As banks across Europe clean up their balance sheets, it is causing a feeding frenzy among hedge funds and private-equity firms hungry for their troubled assets.

Many marquee funds are flocking around the dozens of European lenders that recently have ratcheted up efforts to get rid of soured loans and other assets, a legacy of profligate lending and investing before the financial crisis. Banks from the U.K., Ireland, Germany, Austria, Greece, Italy, Portugal and Spain have been unloading tens of billions of dollars worth of assets—from loans to finance major U.S. construction projects and leveraged buyouts to slices of securities composed of risky residential mortgages.

The buyers are hedge funds and private-equity shops that are taking advantage of banks’ desperation to sell, and are therefore able to grab the assets at bargain-basement prices. Among the buyers is Marathon Asset Management LP. Seeking to drum up interest in the strategy, the roughly $10 billion New York-based hedge fund recently produced a 135-page “white paper” outlining what it sees as the avenues to profit from the European banking crisis.

Marathon’s recent bank-asset purchases include a batch of leveraged loans from the U.K.’s Lloyds Banking Group PLC; some European banks’ holdings of subordinated debt in a troubled U.S. commercial real-estate company; and a German bank’s portion of a revolving credit line to a major U.S. gambling company. Marathon has been buying bank assets, usually in batches of $25 million to $100 million, at discounts of as much as 50% of their face value, said Chief Executive Bruce Richards. “They’re substantial positions.” [..]

European banks are sitting on more than €1.3 trillion ($1.9 trillion) of loans that are considered “non-core” to their businesses [..]

In the U.S., a similar process has been going on for years. Even while the financial crisis was raging, banks such as Bank of America Corp. set up entire floors of their offices dedicated to getting rid of unwanted assets, partly in response to government pressure. Bargain-hunting investors swarmed. The process was painful, requiring the banks to absorb losses to reflect the diminished values of the assets they were selling. But by leaving banks with much cleaner balance sheets, it ultimately helped the industry put the crisis in its rearview mirror.

Ilargi: Sure, the word is that these is all “non-core”, and it actually makes the banks healthier to sell their “assets” at 50 cents on the dollar. But we need to realize that what they sell at these discounts is by no means the worst they have in their vaults. That, no hedge-fund would touch with a ten foot pole for more than a few pennies on the buck. Just take one look at European banks’ exposure to Greek debt. And Portuguese, Irish. And Spanish, Italian.

Driving up both the rates these countries must pay on their loans, and the CDS spreads to insure against them, will force ever larger sales at ever lower prices. Provided buyers can be found. Pumping in trillions in public funds is, and always was, futile and useless. The debts are simply too high, and these economies have effectively zero chance of reaching growth numbers that would be sufficient to pay off even the interest on their liabilities. That is, both the governments and the banks. When defaults come, they will come fast and furious, and in large numbers. All across the world. Defaults and haircuts won’t be a pretty sight to behold, but they’re a whole lot better than the alternative.

But before they come, a lot more of your money, whether you live in Europe or North America, or anywhere for that matter, will be thrown into the big black hole of gambling losses. Unless perhaps, like the Icelanders, you say “no mas”. You’d better hurry with that one, though. There’s no telling how much longer this ship can be kept afloat; it’s leaking on all sides. And the leaks are getting bigger. Fast. (my emphasis)

By Alargi for The Automatic Earth

By permission The Automatic Earth

http://theautomaticearth.blogspot.com

It’s Ever More Obvious, Greece Must Leave the Euro – Telegraph

Mideast Communications Chaos – Washington Times

No Way to Pick a President: We Need Changes to Our System – IndyStar

Gates As Uncomfortable Truth Teller – Boston Herald

By Peter Morici

In all their piety, the barons of Europe—German politicians and the European Central Bank—are pressuring Greece to sell off assets, raise taxes and curb spending to resolve its debt crisis. After all irresponsible southern EU states are in need of rehabilitation and some lessons in Teutonic thrift.

Sadly, selling assets won’t lower Greece’s debt enough to make it manageable. Further, cutting spending and increasing taxes further will thrust Greece into a deep and prolonged recession and severe deflation. That might raise Greek exports enough to service its euro denominated debt but not without turning much of Greece into a Great Depression era Appalachia.

And, Greece’s problems are hardly all its own doing. The 1992 Maastricht Treaty widened and deepened the EU’s single market, and raised expectations in poorer EU states for retirement, health care and other social benefits on a par with rich states like Germany and France. However, the treaty did not provide Brussels with the taxing powers Washington enjoys to equalize Social Security, Medicare and Medicaid, and other benefits across the 50 states.

With Maastricht, German manufactures and technology became more valuable in a single integrated European market. However, Greece, Portugal and others were not able to use their lower labor costs to capture assembly plants to the degree that the post-World War II American South captured northern textiles and furniture factories, and now attracts automobiles and high-end electronics manufacturing. Germany and other rich states enjoy subtle forms of protection that discourage sufficient outsourcing even to other EU member states, and this frustrates the EU single market promise to more effectively equalize prosperity among the prosperous core and southern Europe.

Germany grew richer, while Portugal, Greece and others fell behind northern Europe. In such circumstances, the currencies of poorer states would be expected to fall in value, lifting exports and providing a new elixir for Mediterranean growth, but the advent of the euro in 1998 put the kibosh on that most vital tool of macroeconomic policy.

Prosperous Germany, unburdened by an obligation to share significant enough tax revenues with poorer EU states, used the wealth it obtained exploiting a single market to provide generous pensions, gold plated employment security and jobless benefits, and the shortest workweek on the planet. Meanwhile, governments in Greece and other poorer EU states struggled to keep up, piled up lots of debt and couldn’t scale back spending too much without risking political upheaval. Their voters don’t understand why the much touted single EU market imposes equal responsibilities without ensuring more equal benefits.

If Greece still had its own currency, it would still have had to cut spending and increase taxes—but not by nearly as much as richer EU states and the ECB now demand—because Greece could also devalue its currency against those of richer EU economies to make exports more competitive, accelerate growth, and increase debt servicing capacity.

But like an American homeowner with a mortgage too large relative to his income, Greece is too far in debt for any kind of refinancing that does not cut principal owed to succeed.

Selling off Greece’s prized assets, like the Piraeus Port Authority or the Thessaloniki Water and Sewage Company, will only finance interest payments for a period without addressing Greece’s fundamental insolvency problem.

In the end, the only viable option is to restructure its debt—ask bondholders to accept long maturity and lower interest rates, or a more explicit write down of amounts owed. The ECB has threatened to abandon Greece’s private banks if Athens restructures.

That would force Greece’s banks into failure and surely thrust Greece into a depression. And it begs the question: if the ECB won’t support the only reasonable solution for Greece, why should Greece remain in the euro?

Thanks to German and ECB intransigence on restructuring, Greece has no choice but to require sovereign and private creditors to take haircuts; abandon the euro and reinstate the drachma; and rethink its welfare state.

Like Americans, the Greeks will have to work longer to retire, accept other less generous social benefits, and accept that the European dream of a single market is a very pleasant reality for the Germany and other rich states but a nightmare of constant austerity, or worse, for the poor Mediterranean nations.   (my emphasis)

In the bargain, Greece can let its currency adjust to a value that fairly values its exports and regain control economy. The alternative is endless EU bailouts—something the German, Dutch and French voters are doubtful to allow—loss of Greek sovereignty, and economic collapse.

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.

Peter Morici
Professor
Robert H. Smith School of Business
University of Maryland
College Park, MD 20742-1815
http://www.smith.umd.edu/lbpp/faculty/morici.aspx

Beijing to the Euro Rescue Yet Again – Wall Street Journal

The New “Don’t Go To College” Scholarship – Kids Prefer Cheese     Great Idea!

UK’s Ostrich Generation: Millions of Britons Risk Pension Poverty – Telegraph     Sound Familiar!

New Housing: Built to Bust – Project-Syndicate

By Michael J. Kosares for USA Gold

The table displayed immediately below is likely to surprise even our most-jaded readers. It shows the astronomical increase in cash prices for well-known food commodities over the past 12 months. With inarguable exactness, it contradicts the nearly constant prattle in the mainstream press that inflation is under control, or that it is peaking and likely to come under control sometime soon. Some items on the list have doubled — even tripled — in price over the past year. Others have risen at mere double-digit rates. These numbers signal a potentially serious inflation shock for the American consumer down the road as wholesale food inflation feeds through to consumer prices. It should be noted too that these are the rates of increase AFTER the highly publicized corrections during the first two weeks of May.

The Bureau of Labor Statistics likes to underplay the role of food and energy in the cost of living and emphasize instead the less volatile core inflation rate. “If you don’t eat or drive, inflation’s no problem,” the New York Times once quipped in a headline. For the typical American, though, the price of food is unquestionably a major issue, as well as a real-life indicator for prices across the spectrum of goods and services. In fact, for most, if food prices are rising that is the very definition of inflation and, as our table illustrates, food prices have risen with a vengeance.

I Can’t Eat an i-Pad

William Dudley, president of the New York Federal Reserve, rationalized at a townhall meeting in Queens recently that “you can buy an iPad2 that costs the same as an iPad1 that is twice as powerful. You have to look at the prices of all things.” A voice quickly came from the back of the room: “I can’t eat an iPad!” Newsweek magazine thought enough of the retort to label it “the line that launched the Great Inflation of the 2010s.”

Inflationary concerns go beyond that of the citizenry to those who manage vast capital pools for governments and large institutions. Last month, Mexico’s central bank surprised gold market experts with the announcement of its acquisition of 93 tonnes of the metal. The central bank’s Governor, Agustin Carstens, denied publicly that the purchase reflected a lack of confidence in the U.S. dollar. At the same time, it is difficult to explain the motivation as anything else. Interestingly, Carstens was quoted by Bloomberg in mid-April that rising commodity prices had “caused uncertainty about the inflation outlook in Mexico” and “complicated the bank’s monetary policy.” Even as Carstens spoke, Mexico was in the process of mitigating those concerns with an unprecedented gold purchase — the third largest over the past decade.

Similarly, the University of Texas stunned the market with its announcement of a $1 billion physical gold purchase. Kyle Bass, the hedge fund manager and board member who recommended the UT purchase, said, “Central banks are printing more money than they ever have, so what’s the value of money in terms of purchases of goods and services. I look at gold as just another currency that they can’t print any more of.”

Adding inflation to systemic risk, gold’s best days may still lie ahead

Since 2001, gold’s bull market has been driven principally by systemic risks, not by inflation — a circumstance that should give us all pause. Add rampant inflation to the mix, and you have the impetus for even stronger demand in the months and years to come. Mexico and the University of Texas are not alone in hoping to shore up their balance sheets with gold. The list in fact grows longer by the day.

Robin Griffiths is the highly-regarded City of London chartist who plies his trade at Cazenove, reportedly stock broker to the Queen. Citing “loose monetary policy,” “money printing” and Fed chairman Ben Bernanke’s “trashing of the dollar” he believes gold’s bull market could go into hyperdrive. “I think it will all be over by 2015,” he says, “a lot of it depends on how aggressively paper monies get printed from here on in. I think $3,000 is an absolute minimum target. I can believe in targets certainly above $5,000 and it’s theoretically possible to go to $12,000. . .”

Those targets should be taken with a grain of salt as should the 2015 timeline, but it gives you an idea what some contemplate for the gold price in the face of an accelerated inflationary, or even hyperinflationary, assault on the dollar’s value. Ultimately, what the parabolic increase in cash food commodities over the past year is telling us is that gold’s best days may still lie ahead.

King Ibn Saud’s 35,000 British Sovereigns

Gold’s historic undervaluation versus oil

The Wikileaks/Financial Times revelations on significant gold buying interest in the Middle East — notably Iran’s central bank, Jordan’s central bank and Qatar’s sovereign wealth fund — brought to mind the story of Saudi Arabia’s King Ibn Saud and his sale of oil concessions to the major oil companies. In payment he received 35,000 British Sovereigns — a coin many of you hold in your own sovereign wealth funds. The good king understood the difference between the value of gold and the value of a paper promise.

At the time (1933), the British Sovereign’s value stood at $8.24 each, or $288,365 for the lot. The price of oil was about 85¢ a barrel, and a British Sovereign could buy about ten barrels.

Today those same Sovereigns would bring a little less than $12 million at melt value ($338.00 each) and a barrel of oil is selling for about $115. Thus, a British Sovereign can buy a little under three barrels of oil — a statistic which gives you an inkling of gold’s current undervaluation.

For gold to buy the same amount of oil now that it did in 1933, the price would have to go to nearly $5000 per ounce — an interesting calculation for those who think gold is overvalued and in a bubble.

In the gold market where there’s smoke, there’s fire. If members within one class of investors — e.g., central banks, sovereign wealth funds or hedge funds — you can be assured that other members of that same group are similarly involved. Recent activity within the hedge fund industry with respect to gold is exemplary. It follows then that if Iran, Qatar and Jordan — themselves threatened by the popular Pan-Arabic uprisings — are acting on their interest in gold, can Saudi Arabia, the United Arab Emirates and Kuwait be far behind?

If so, they will join several nation-states and a bevy of hedge and sovereign wealth funds in the pursuit. The problem they will encounter is an old one. There simply is not enough physical gold available at any given point in time to satisfy the needs of any one of these major players, let alone all of them. All of this, of course, will resolve itself in the price for which the metal sells.

I note with interest that Barclays Bank — one of the five members of the London Gold Fix and an institution well-situated to experience first-hand the interest in physical metal — has predicted a top price for 2011 of $1620 per ounce. Predictions by other Fix members are equally bullish. Scotia-Mocatta predicts a high range of $1500 to $1600 with a possibility of a spike higher. Deutsche Bank is predicting $1511 per ounce for 2011 and $2000 per ounce for 2012. Both Societe General and HSBC, the two remaining members, are calling for a top-end price of $1550 per ounce. These bullion banks are in a better position than most to ascertain the sources of physical demand, and they know better than anyone the extent of global interest among key players. By the way Goldman Sachs, though not a member of the Fix, is still widely monitored for its opinion on gold. It has set a price objective of $1690 per ounce for 2011. (my emphasis)

Short & Sweet

THE RECENT SHARP GOLD AND SILVER PRICE CORRECTIONS of early May caused a wave of purchases in India. In fact bullion dealers reported some of the best volumes this year. India accounts for roughly 20% of annual gold demand. Financial Times reported that “in Mumbai’s bustling Zaveri market, the gold hub of India’s wealthiest city, traders were suffering from no such jitters. Indeed, they were fiercely elbowing one another to grab as many shiny bars as possible last Friday amid expectations that falling prices would cause demand to soar.” At USAGOLD, we talk about what we call the “India indicator.” When there is profusion of callers with an Indian accent, we start looking for the market to put in a bottom.

BLOOMBERG REPORTS THAT “SALES OF GOLD COINS are on track for the best month in a year amid the worst commodities rout since 2008, a sign that bullion’s longest bull market in nine decades has further to run, if history is a guide. The U.S. Mint sold 85,000 ounces of American Eagle coins since May 1 as the Standard & Poor’s GSCI Index of 24 raw materials fell 9.9 percent. The last time sales reached that level, bullion rose 21 percent in the next year. Gold will advance 17 percent to a record $1,750 an ounce by Dec. 31 and keep gaining in 2012, the median estimate in a Bloomberg survey of 31 analysts, traders and investors shows.”

By Michael J. Kosares for USA Gold

By permission USA Gold

www.usagold.com

Michael J. Kosares has nearly 40 years experience in the gold business and is the founder/owner of USAGOLD-Centennial Precious Metals, Inc. He is the author of The ABCs of Gold Investing: How to Protect and Build Your Wealth With Gold as well as numerous magazine and internet articles. He is frequently interviewed in the financial press and is well-known for his ongoing commentary on the gold market and its economic, political and financial underpinnings.

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