Israel, Iran & War

Forget the Eurozone — this is surely the scariest news of the year.

From the Daily Mail:

  • Fears mount that Iran could be ‘nuclear ready’ in a matter of months
  • UN intelligence suggests Iran was helped by foreign experts – including rogue Russian scientist
  • Russia foreign minister says any military action would be a ‘serious mistake’
  • Condoleezza Rice: ‘We must do everything we can to bring Iran down’
  • Mahmoud Ahmadinejad remains defiant
Russia and China have expressed growing concern about a mooted American military strike against Iran over its alleged nuclear programme.The UN last week warned it had ‘compelling evidence’ to suggest Iran is secretly building an arsenal of nuclear warheads.

The UN’s International Atomic Energy Agency (IAEA) is this week due to publish a damning report on the findings fuelling fears Iran could be ‘nuclear ready’ within months.


Sticking my neck out a little, if a rampant communist dictatorship like the Soviet Union can have nuclear weapons for over forty years without nuclear apocalypse (not to mention ethnocracies like Pakistan and Israel) then I can’t see what the problem is with Iran having them. Surely a last ditch strike on a pre-nuclear Iran would confirm the scary post-Qaddafi reality that dictatorships, autocracies and theocracies are not safe from Western liberal interventionism until they have gained a nuclear arsenal?

More concerningly, a Western attack on a nation at the heart of Eurasia — and a friend to the other Eurasian autocracies, particularly Russia and China — is surely a message that America and Israel will do everything in their power to maintain the petrodollar status quo, something that rising powers like Russia and China find distasteful and disrespectful.

But the emerging reality of a multi-polar world will do nothing to stop the hawks from clawing and shrieking against the reality of change.

From Haaretz:

Former Secretary of State Condoleezza Rice has said she is sure the Israelis will defend themselves against the Iranians if they were to reach nuclear capabilities.

“I don’t have any doubt that the Israelis will defend themselves if the Iranians look as if they really are about to cross that nuclear threshold,” Rice told Newsmax in a TV interview.

I — on the other hand — have no doubt that the era of American-Israeli-British primacy is drawing to an end. The global system of floating fiat currencies is being gutted by years of competitive debasement. The international financial system is a house of cards, swaying in the breeze. Western industry has been gutted, and shipped to the East. Western capital is exported away to the East via humungous Western trade deficits. Western labour markets rot, beleaguered by high unemployment, evaporating skills, and huge inequality between the rich and poor. Western discontent is rising. Most dangerously, the West remains highly dependent on foreign oil — a supply that a new war, or some other black swan might disrupt — wreaking havoc.

So, as I wrote last month:

Sadly, we know how that aphorism from Winston Churchill goes: that Americans will do the right thing — after they’ve tried everything else.

Which is why I’m coming to believe that the military-Keynesian establishment might try and kill every bird with one stone — a new regional war in Eurasia, probably involving Syria, Iran and Israel. Let’s look at what that might accomplish:

  1. Create a new post-9/11-style hard-to-question patriotism — “There’s a war on — we all need to rally together around the flag — the complainers and protestors must hate America”
  2. Put America back to work — in weapons factories, and on the front lines.
  3. Give the economy a large Keynesian injection — through war spending.
  4. Take out Iran, a powerful enemy of America — and send a threatening message to other uppity Eurasian autocracies like Russia and China.
  5. Curtail civil liberties & censor the internet — “There’s a war on — we all need to rally together around the flag — and those who don’t must be working to undermine America”
John Maynard Keynes noted that in the long run, we’re all dead. I hope that in the short run, we’ll all still be alive.

Motherfucking Global

How times have changed for Jon Corzine.

Just a couple of months ago he looked like the prime candidate to take over Tim “No Chance of a Downgrade” Geithner’s poisoned chalice at the US Treasury.

Now he looks like he’s heading to jail for stealing money from clients.

Probably the most sage coverage of this saga comes from Roger Lowenstein writing for Bloomberg:

Thirteen years ago, when the hedge fund Long-Term Capital Management was desperately negotiating with Wall Street banks for a bailout, Jon Corzine, the chief executive officer of Goldman Sachs Group Inc. (GS), called John Meriwether, LTCM’s founder, and read him the riot act. Wall Street would invest, Corzine said, but “JM” would have to accept more controls, including strict supervision over his firm’s trading limits.

Corzine, I wrote soon after, “understood the flaws” at LTCM better than anyone. The firm had no controls over risk limits, no accountability to anyone who wasn’t a trader.

Essentially, Corzine forgot the lessons of LTCM‘s failed arbitrageurs, and went the hyper-leveraged Martingale path. The trouble is that unless you predict accurately, this kind of activity is a quick and easy road to bankruptcy. Leveraged 50:1, a 2% drop in asset prices can be a wipeout, and end in insolvency.

There are two key points, and one key question to take away from this:

  1. The American banking system is susceptible to a Euro-collapse — MF Global went down betting on a Euro-stabilisation. The web of derivatives extends across the global financial system, creating ever-growing fragility.
  2. None of the lessons of AIG and Lehman have been learned — the bailouts and stimuli saved a broken system, and allowed it to continue to be broken.

And the question:

  1. What effects will MF Global’s removal from the web of debt have on the financial system as a whole?

The first point is obvious (although Morgan Stanley will keep denying it, and focus instead on how Groupon is worth at least $100 a share). The second point has been obvious for a long time.

The question is much murkier. Is MF Global too big to fail without sending financial systems into freefall (a la Lehman)?

The answer seems to be “probably not”.

From TIME:

So far, the problems at MF Global appear to not be spreading to other banks. While MF Global has $40 billion in assets, it only owed about $2 billion outright to other banks. What’s more, more than half of that debt is owed to J.P. Morgan, which is one of the strongest banks around. There are other banks that are owed $6.3 billion from loans MF Global took out to make its Euro debt bets. But those debts are backed by the bonds that MF bought, and if they end up being good as Corzine claimed, then those banks should get their money back, as well as the profits Corzine hoped to pocket for his firm. MF Global does not appear to have the same type of derivatives exposure to other banks that led to the demise of Bear Stearns and Lehman Brothers.

Nonetheless, we will see what we will see when we see it.

Old Hatreds Flare Up…

It looks like I’m not the only political commentator to evoke the spirits of the past on Europe’s current breakdown (or breakdowns).

From the Daily Mail:

Greeks angry at the fate of the euro are comparing the German government with the Nazis who occupied the country in the Second World War.

Newspaper cartoons have presented modern-day German officials dressed in Nazi uniform, and a street poster depicts Chancellor Angela Merkel dressed as an officer in Hitler’s regime accompanied with the words: ‘Public nuisance.’

She wears a swastika armband bearing the EU stars logo on the outside.

Attack: A street poster in Greece has depicted Angela Merkel in a Nazi uniform with a swastika surrounded by the EU stars. The accompanying words describe her as a 'public nuisance'
The backlash has been provoked by Germany’s role in driving through painful measures to stop Greece’s debt crisis from spiralling out of control.

From a Greek perspective, it seems shatteringly obvious. For them, the Euro has become a battering ram for a kind of fiscal austerity that is set to benefit Germans (price stability) and penalise Greeks (austerity).

As advantageous as the Euro once seemed, it is becoming ever clearer that the union is suffering from deep political fracture. It is a union built without a common language (other than perhaps the belief in bureaucracy — and an unwillingness to give bankers haircuts), without a political head (or even a coherent political structure) without a common culture of work, and without an integrated economy.

That’s why decisive action is proving impossible, in spite of all the rhetoric.

Worse (because it shows contagion at work), it looks like Portugal is about to sink into the mud.

From Ambrose Evans-Pritchard at the Telegraph:

Cashflow problems (making it much, much harder to pay down debt) — that’s what you get when spend-as-much-as-we-want-and-then-print-money mediterranean nations entrust their nation’s monetary to stern-looking austerity-minded German central bankers.

Most startlingly, it looks like Paul Krugman finally got something right:

European leaders reach an agreement; markets are enthusiastic. Then reality sets in. The agreement is at best inadequate, and possibly makes no sense at allSpreads stay high, and maybe even start widening again.

Another day in the life.

Of course, his solution — much, much deeper integration, with a good dose of money printing — is politically impossible, so whether or not it would work (clue: it won’t) is irrelevant.

Meanwhile Americans smoke their hopium (“GDP is up! Stocks are up! The recovery is here!“) hoping that the whirling Euro conflagration will just go away.

It won’t just go away. The global financial systems is an interconnected house of cards — a full Euro breakdown will bring down American banks with European exposure, like Morgan StanleyHank Paulson was telling the truth — either the thing is bailed out (again and again and again) or it will collapse under its own weight.

Creditors — starting with China (who are acquiring gold and Western industrials at a rapid rate) — will be hoping that the system can hold on for a few more years while they try to cash out with their pound of flesh.

Debt-ridden Americans and European would be forgiven for accelerating its collapse…

How to Avoid the Inevitable (Clue: You Can’t)

Have Angela Markel and Nicholas Sarkozy saved the world from contagion? (Clue: they haven’t)

From the NYT:

PARIS — European leaders struggled Wednesday to reassure the world they were making progress in overcoming the two-year-old euro-zone debt crisis, with German lawmakers approving a proposal to strengthen an emergency bailout fund ahead of an emergency summit meeting later in the day promoted as the moment for a comprehensive solution.

The vote to expand the bailout fund, which passed by a strong margin in Germany’s lower house, came after Chancellor Angela Merkel, in a plea for domestic support, implored lawmakers to overcome their aversion to risk and put the might of Germany, Europe’s strongest economy, firmly behind efforts to get control of the crisis, which has caused economic anxiety and unnerved financial markets far beyond Europe’s borders.

Wow! German lawmakers decided to do the “right thing” and sacrifice a huge chunk of their GDP to appease institutional investors who hate the idea of losing their money due to their poor and failing business practices.

From Zero Hedge:

The only real question remains, is whether Merkel and Sarkozy will hold hands to add emphasis to their “we saved the world” announcement.

Key problem: creating a (sorely under-capitalised) bailout fund does not solve the problem of fiscal mismatch. The mediterraneans will keep spending money they don’t have (and never had), bankers will get their payoffs, and the German taxpayer will pick up the cost.

Great system, right?

Yes — if you love the idea of offering your hard earned capital as a sacrificial lamb to appease the bloodthirsty animal spirits of Wall Street and the bond vigilantes.

Fortunately (or unfortunately) the mediterranean predicament is so insolvent that the EFSF just won’t be able to give creditors a haircut-free future. And the ravenous CDS-hounds smell blood (CDS, by the way, is a completely preposterous innovation, effectively allowing investors to take out insurance against other people’s property — as the insurance industry knows all too well this leads to a lot of fires).

Just as with Wall Street in 2008, when investment banks and hedge funds naked-shorted each other to hell, a significant segment stands to gain a lot from a huge crash and depression.

In 2008 (before I started writing this blog) I called it cannibal capitalism. I still can’t think of a better term.

Eurotrash & Fragility

I haven’t covered the nascent European Financial Stabilisation Fund (EFSF) much lately, in spite of all the bureaucratic & ministerial scrabbling and wrangling to rescue the European status quo.

That’s mainly because I have grown (or shrunk?) to see most developments as irrelevant can-kicking.

At best, they can muster an American-style response: kick the can far into the future. But unless the underlying problems are solved (clue: they won’t be) then the system remains fundamentally broken.

That’s because monetary integration without integrated budgeting is a recipe for insolvency. Banana Republics can print money to pay their debts because they control their currency. Nations who don’t control their currency can’t devalue to pay their debts. They have to default, or hope for a bailout from the powers-that-be. And the problem at the heart of Europe is that fiscal integration is politically impossible (sorry Frau Merkel), for a myriad of reasons including (among others) nationalism, incompatibility, and the perception that the Mediterranean nations will leech off the more productive northern nations.

Of course, most of these constraints wouldn’t be there if the system was less fragile. In a fractional reserve banking system where (and this is crucial) the money supply (M2) is determined by private lending, a number of situations can lead to Irving Fisher’s debt deflation problem — with a shrinking money supply, debts become unrepayable, triggering a default cascade. These situations include bank failures, bank runs, credit contractions, price deflation and sovereign default — five phenomena that history teaches us are quite common. The scale of indebtedness makes systemic reform very difficult — creditors will demand that debts are honoured, so central banks continue with the instruments they have — competitive debasement, low-rates, expansionary monetary policy.

All that the sovereign debt crisis in Europe is revealing is the fragility in the systems — the fragility of the European political union, and the fragility of the fractional reserve banking system.

And if a fragile system isn’t allowed to collapse (or is not effectively reformed) when the problems are comparatively small (insert nonsensical rubbish about “systemic importance“, “economic infrastructure” and “too-big-to-fail” here) it will rumble on through many bailout-crisis-bailout-crisis cycles until it becomes too-fucked-to-bail, at which point the entire system collapses, and the debt is razed (either by default of hyperinflation or both).

The problem is that such climactic events usually have geopolitical implications: war, famine, upheaval, etc.

Six Weeks to Save the Euro? It was Dead on Arrival

Do we have six weeks to save the Euro?

From the Guardian:

George Osborne warned on Friday that the leaders of the eurozone had six weeks to end their political wrangling and resolve the continent’s crippling debt crisis.

Speaking in Washington, the chancellor said that the turmoil in the world’s financial markets meant there was now “a far greater sense of urgency” and mounting pressure on Europe from the G20 group of developed and developing nations.

“There is a sense from across the leading lights of the eurozone that time is running out for them. There is a clear deadline at the Cannes summit [G20] in six weeks time”, Osborne said. “The eurozone has six weeks to resolve this political crisis.”

 I don’t think so. I think the Euro was effectively dead on arrival. A fundamentally broken system; and that fundamental discord has now been transmitted around the world in the form of European sovereign debt, infecting the balance sheets of nations and institutions, creating huge counterparty risk, and raising the possibility of a tsunami of defaults.

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Another Sign of Coming Blowup?

Last week I asked:

Look at the following graph from the St. Louis Fed. It is the amount of deposits at the US Fed from foreign official and international accounts, at rates that are next to nothing. It is higher now than in 2008. What do they know that you don’t?

Here’s another sign that powerful insiders are increasingly running scared.

From Zero Hedge:

Back in the summer of 2007 two important things happened: the market hit an all time high, and the smart money realized what was about to happen (following the subprime and the Bear hedge fund blow up, it was pretty clear to all but Jim Cramer) and bailed out of stocks and into bonds, with Treasury holdings of Primary Dealers soaring at the fastest pace in history.

Finally, disgraced ex-President of the IMF Dominique Strauss-Kahn has weighed in, to confirm what everyone already knew.

From the Wall Street Journal:

The former International Monetary Fund’s Managing Director, Dominique Strauss Kahn, Sunday said Greece is unable to pay its debt and its creditors will have to take losses on the debt they hold.

“Greece got poorer, we can say Greeks will pay on their own, but they can’t,” Strauss Kahn said in an interview on French TV channel TF1. “There is a loss and it must be taken by governments and banks,” he said.

Yes — and so the real question, which nobody in a position of global or national authority has addressed — is just how will the global financial system be made to cope with the another Lehman-style cascade of defaults?

Europe to Geithner: “Go Away”

And what might put Europe and the global financial system to the sword? Recrimination. It’s not my fault it’s everyone else’s fault. Now former ECB policy-maker and Euro-hawk Jurgen Stark has weighed in to tell Euro-hopping U.S. Treasury Secretary Geithner (in less direct language) to shut up and go home.

From Zero Hedge:

Finger-pointing in the direction of Europe shouldn’t prevent others from putting their budgets in order and doing their homework before handing out advice to Europeans.

Of course, Stark has a point. Europe is a complete mess, European policy makers are stumbling and slumbering forward to the gates of Hades. But America? The American economy is a jaundiced sham; where Europe has maintained a sliver of its former industrial might (i.e. supply chains, heavy & light industry, consumer manufacturing) in Germany, Scandinavia and the Netherlands, America prefers to ship a significant majority of its consumption (and even a lot of its infrastructure) from China (and subsidise the shipping costs through massive military deployment).

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Big Change For Europe?

I am sure the Euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.

— Romano Prodi, EU Commission President, December 2001

So the intent for Europe was always that a future crisis would bring about the justification for a resolution to European financial disharmony — namely, that while countries in the Euro control their own budgets, they don’t control their own currency. This mismatch means that with countries pulling in different directions, the European Central Bank is posed with an unmanageable task — create one policy to fit a group of very different economies. At the time of the Euro’s creation, Europe adopted a cross-that-bridge-when-we-come-to-it approach: a crisis would produce the circumstances required to justify unifying fiscal policy, a policy that at the time of the Euro’s introduction seemed unnecessary (and now is deeply unpopular).

But what if disharmony — both in terms of the forces producing the crisis, and disagreement over how to handle the problems — has created such a huge turmoil that instead of crossing the bridge, Europe falls into the water beneath?

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Eurocide

Angela Merkel says that Europe won’t issue Eurobonds, presumably heeding the warning that handing over 133% of German GDP to bailing out PIGS may not go down so very well with the German taxpayer. From Bloomberg:

German Chancellor Angela Merkel attempted to shut the door on common euro-area bonds as a means to solve the debt crisis, saying that she won’t let financial markets dictate policy.

Joint euro bonds would require European Union treaty changes that would “take years” and might run afoul of Germany’s constitution, Merkel said. While common borrowing might arrive at some point in the “distant future,” bringing in euro bonds at this time would further undermine economic stability and so they “are not the answer right now.”

“At this time — we’re in a dramatic crisis — euro bonds are precisely the wrong answer,” Merkel said in an interview with ZDF television in Berlin yesterday. “They lead us into a debt union, not a stability union. Each country has to take its own steps to reduce its debt.”

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