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We Give Up!

The idea that there were pain-free solutions to the mountain of debt the world has taken on was always a delusion. But it was one that the leaders of the US and Europe in particular have clung to ferociously. Until now. In just the past few days they’ve all, it seems, been forced to recognize the futility of their situation, and have simply given up. Consider:

A Greek default has been portrayed as a practical impossibility because it would tear the Eurozone apart and break several of the continent’s largest banks. But now that Italy has begun to implode, the EU and ECB have decided that Greece is, relatively speaking, expendable.

As Italy sinks, France is leaking
After having maintained for the past few years that Greece neither could nor would be allowed to default, EU leaders have finally given in. Of course, the word now is that this can be a default that doesn’t trigger a credit event, in which payments on credit default swaps come due. Good luck with that. The credibility of Europe in the financial markets is shot. Gone. Trillions more in taxpayer funds will be thrown at the issues, but it doesn’t matter anymore.

Not coincidentally, the change in attitude on Greece comes at a time when Italy has come under intense pressure. It’s time to cut losses. Getting Greece done will open up space and time to “save” Italy. Or so undoubtedly goes the reasoning. It’s not going to work.

Italy is not the EU periphery; Italy is very much in the heart of Europe. The country’s nominal GDP is over $2 trillion. And its debts are staggeringly high.

The US debt ceiling
Negotiations over how much spending to cut and revenue to raise before the US extends its debt ceiling are at an impasse, which is just as well, since even the most extreme proposed cuts were a drop of water in a flooding river. But even this turned out to be too much, and now they’re considering just raising the debt limit while spending and borrowing continue unabated.

McConnell proposes giving Obama debt ceiling power

The top Republican in the Senate proposed on Tuesday giving President Barack Obama sweeping new power to, in effect, unilaterally increase the nation’s debt limit to avoid a first-ever default on U.S. obligations.

The new mechanism would take the place of the current White House debt negotiations among congressional leaders and Obama. Those talks over spending cuts and tax increases have grown increasingly acrimonious.

Minority Leader Mitch McConnell, R-Ky., offered a new plan to allow the president to demand up to $2.4 trillion in new borrowing authority by the summer of next year in three separate submissions.

Those increases in the so-called debt limit would automatically take effect unless both the Republican-controlled House and the Democratic Senate enact legislation specifically disapproving it.

The past year’s spike in oil and food prices — and the attendant worldwide instability — spooked US policymakers. And with the end of QE2 they’ve been desperately hoping that the economy would continue to grow unassisted, allowing Washington to stop flooding the world with credit. Not happening. Hiring has ground to a halt, home prices continue to fall and the system gives every sign of slipping back into recession. So — with oil near $100 a barrel and gold at an all-time high — the Fed is offering to ease again.

Fed weighing further easing, Bernanke says

Just two weeks after completing a second extraordinary effort to juice the moribund U.S. economy, the Federal Reserve is contemplating more “untested” steps, the head of the central bank said Wednesday.

Federal Reserve Chairman Ben Bernanke says the central bank is examining several untested means to stimulate growth if conditions deteriorate, even though the central bank believes the temporary shocks holding down economic activity will pass. The Fed at the end of June completed a plan to buy $600 billion worth of Treasury bonds in what markets have dubbed “QE2.”

“The possibility remains that the recent weakness may prove more persistent than expected and that deflationary risks might reemerge, implying additional policy support,” Bernanke told the House Financial Services Committee, in the first of two days of testimony about the economy and monetary policy….

…“One the temporary shocks that have been holding down economic activity pass, we expect to again see the effects of policy accommodation reflected in stronger economic activity and job creation,” Bernanke said.

But there are a “range of uncertainties about the strength of the recovery and the Fed must engage in “prudent planning” to explore ways for stimulating demand, he said.

Bernanke discussed three approaches to further easing in his prepared remarks.

One option, Bernanke said, would be for the Fed to provide more “explicit guidance” to the pledge that rates will stay low for “an extended period.”

Another approach would be another round of asset purchases, or quantitative easing, or for the Fed to “increase the average maturity of our holdings.”

Finally, the Fed could also reduce the quarter percentage point rate of interest that it pays to banks on their reserves, “thereby putting downward pressure on short-term rates more generally.”

“Of course, our experience with these policies remains relatively limited, and employing them would entail potential risks and costs,” Bernanke said.

Bernanke was clear to stress that easing was not the only option under consideration and that the next Fed move could well be to tighten.

The broad consensus of Fed watchers has been for the Fed to hold rates steady until the middle of next year and then begin to exit from its ultra-low policy. Only a few economists had predicted an easing. But that was before the June unemployment report, which showed the labor market was just about dead in the water.


Some thoughts:

  • This was inevitable because “extend and pretend” is by definition a temporary strategy. It works for a while but only for a while. And now it’s ending everywhere, all at once.
  • We’ve entered a new phase of the global financial collapse that began in 2000. Any one of these capitulations — a Greek default, followed inevitably by either more PIIGS defaults or EU bailouts of surreal size, the admission that the US government will run trillion dollar deficits essentially forever, and a massive new Fed stimulus plan — would by itself be enough to destabilize the global economy. Toss them all into the mix at once and you get chaos.
  • “Chaos” in this case would mean spiking prices (oil is up today and gold and silver are soaring), wild interest rate volatility as bond vigilantes finally wake up and do to the US what they’ve recently done to Greece and Portugal, and crashing economies as rising uncertainty leads businesses to stop hiring. Welcome to the end of the Age of Paper.



33 thoughts on "We Give Up!"

  1. Pingback: Bankers armageddon
  2. In a Saturday post, Mish quoted the senior economist of a Copenhagen bank as saying: “I am just back from Italy and Russia and what really strikes me is how people have given up, and I mean totally given up. To my mind we are entering extremely difficult time where balancing EU, US debt and social tension makes for a black Swan event.”

    Thanks, John, for the very timely piece… you seem to have gotten the psychology exactly right!

  3. The only pain that need be applied is that which is directed to those who have caused so much pain. The rich parasite-maggots who have stolen from the workers and the environment for their own gain.

  4. Things are definitely getting interesting but I would caution against assuming that the decision makers in the US and Europe have recognized the futility of their efforts to solve the various problems cited in this piece. Pragmatism – the global philosophy du jour – is both intellectually dishonest and self evasive. Consider the kind of internal dialog of the craven:

    That Greece “could not and would not be allowed to default” was then. Now it can and shall. Both assertions were and are equally valid within their respective contexts of time and knowledge. Besides “default” was never really defined and to impose some precise definition now retroactively to enforce old contracts is an abberration of modern logic and practical realities. Thus no “credibility” is lost. On the contrary. Overly simplistic rigidities enforced blindly are the bane of an enlightened and nuanced European UNION.

    That the US Federal government needs to begin to address its annual budget deficits soon is debatable. But now is certainly not the time. Government spending represents a large portion of GDP so any reduction in spending will shrink our fragile economy before it has time to provide more revenue. Therefore, spending cuts must be offset by higher taxes to avoid any shortfall. Even the Federal Reserve Chairman warns of risking possible financial chaos on the alter of fiscal discipline. And to force the president to revisit this issue every few months during an election year is the height of petty partisan politics. No wonder he’ll veto any such proposal.

    That previous monetary stimulus has been stimulative is a tautology and thus self-evident. But what should be done next, when, and to what extent is a mystery. Recent economic weakness may be ephemeral, but maynot be. It could be due to this or it could be due to that, or neither, or both, to some extent, though not necessarily quantifiably so. When the Fed speaks the world listens, and it always gets its way.

  5. Take a look at the most recent chart for US consumer confidence, based on a recent article from ZeroHedge. Thanks to Tyler & ZeroHedge.


    I ask you one thing. Suppose this chart was instead a stock value, and you drew in the upper and lower limits for the trading band on the data … what would you say is the general long-term trend in the value for this “stock”?

    Need we say more?


  6. Has the One World Leader saddled up yet…?

    And this one caught my eye (Italy):

    “The country’s nominal GDP is over $2 trillion. And its debts are staggeringly high.”

    2 F’ing $Trillion…!!!??? What in the bloody hell are they manufacturing and exporting in Italy that prints out a nominal GDP stat of $2T…?

    Regarding the ‘QE’:

    It’s been quite entertaining these past 4 – 5 months watching/reading the punditry – even many in the hard asset camp, wring their hands and gnash their teeth over QE ending – for good, and how we had better prepare for the ramifications – blah, blah. From grown – and in many cases, highly educated individuals, no less… All proclaiming how we are about to get a fiscal/political slap of common sense upside our heads, and that the profligacy that has become known as government spending in all it’s glorious permutations, was going to end hear & now, you betcha… Oh, and that pressure from groups like the (non Ron Paul) ‘tea party’ were going to snap the reins on all the government waste – except for pentagon spending and war, but we won’t mention that here because that’s spending we need to – well, keep us ‘safe’ & all that…

    In any event, where are all the Bob Hoye’s, Steve Hochberg’s and Christopher Laird’s right now anyway, telling us to hunker down with those valuable greenbacks…?

    1. Phyiscal FRN’s will have their day when the black hole really starts to suck. keep enough handy so you can make it until sundown, then get your PM’s out.

  7. Hey kopavi,

    I have a problem measuring the impact of recent warnings from all the rating agencies due to their own lack of credibility. I just don’t know how to weight them.

    The ratings agencies are reactive. Would anybody be taken by surprise if US credit is downgraded?

    1. “Would anybody be taken by surprise if US credit is downgraded?”

      Well, no one who is paying attention. The readers of this blog, Zerohedge, folks who read Chris Martenson, Jesse’s Cafe, Mish, etc. all pretty much would wonder why it took so long. Perhaps 25% of the population would be stunned speechless. The remaining 73.8% of the population don’t have a clue what a rating agency is and really don’t give a rat’s butt in any case.


      1. I’m beginning to think the US will default and the Treasury will simply begin printing money. But that money will not say Federal Reserve Note, because it won’t be. Kind of like when JFK minted money supposedly backed by silver.

        The US would then have 2 currencies like a lot of places, one convertible and one not. Want to buy gas? You’ll need real money. Want to pay rent or buy groceries, you can use the unlimited supply Treasury minted funny money.

        This will result in inflation and shortages but it won’t affect people in power because they will be paid in Federal Reserve Notes.

  8. Does anyone have a serious clue about the possibility that Moody’s or any other rating agency will downgrade US bonds? To me it sounds like bluster and arm waving for some political purpose and I can’t remotely see a downgrade any time soon. Then again these are strange times.



  9. It’s a pretty fair bet that within a year, and most likely a lot sooner, we are going to see very large numbers of people in the streets in Europe. These people will be unemployed and have no hope of getting jobs anytime soon. There will be major unrest, and possibly political chaos in some of the more unstable countries. No doubt this is what European politicians have been struggling to avoid – but it is written on the wall at this stage. Their best efforts should be directed at breaking up the euro and segregating Europe financially. At this stage is is “every man for himself”, and the debtors will pay.

    The same scenario is also coming to Japan and the USA. It’s just a matter of timing. When the China-USA economic linkage is severed (US bond yields soar, renminbi also soars) that will be the sign of the Second Great Depression. All global economies will tank.


  10. The chaos that is to follow, is the inevitable result of allowing the financial ‘elite’ to run the show with their debt based monetary system. An approach that has failed time and time again as the debt always grows exponentially. There are many proposals for alternatives such as the UKs Postive Money proposals. Gold backed currencies still wont provide a solution, if a nations currency is issued as a debt by a private bank. Jen O Parsons predicted a crisis of this nature back in 1972 in his book The Dying of Money (an excellent read). So much time has passed and so little has been learnt.

  11. The Bible established a debt elimination plan every 50 years called a Jubilee. The last great market crash in 2008 came on the very day of the start of that Jubilee year. God intended for people to be forced to forgive debts at regular intervals to prevent debt slavery and worse. Usury was forbidden as well.

    Interest is a Ponzi Scheme that devalues money. The only way to repay more than you borrowed is to borrow still more.


    Obeying God’s commandments is the only way out, but men in power refuse.

    The money system is the Beast of Revelation. It will be reborn under a new name. Meet the new boss, same as the old boss.

    New Living Translation:
    “And with all the miracles he was allowed to perform on behalf of the first beast, he deceived all the people who belong to this world. He ordered the people to make a great statue of the first beast, who was fatally wounded and then came back to life.”

    I am not sure who the ‘miracle worker’ is. Obama and Bernake seem to have run out of tricks. Until the Final Trumpet blows it will be more of the same old, same old. Nothing changes but the day on the calender.

    You don’t see U-Hauls following hearses. He who dies with the most toys, dies anyway. Better to have your name written in the Book of Life than to have lots of money.

  12. What happens during a long-term debt deflation once expansion of debt in a debt-based fiat world can no longer occur as debt begins to go parabolic? Martin Armstrong believes we are witnessing the collapse of socialism and I am inclined to agree, although the U.S. has a good helping of fascism as well.

    I just cannot believe we will see the end of paper anytime soon simply because that is the only way a group of government sociopaths can defy the will of the people. In my minds eye, I would like to see an economic collapse whereby governments worldwide are forced to go back to a free-market system and central banks are thoroughly discredited. However, I am afraid it is only a dream.

    Brad, you’re probably right in your previous musings, in that some businesses are not appropriate for free-market control due to conflict-of-interest and the nature of man (insurance, high-security prisons). But, man, I would be willing to endure some shortcomings to see Goldman and J.P. Morgan bite the dust.

    1. No buts Jason. We’re on the same page with Goldman & J.P. Morgan. Sure wished I’d learned sooner that the easiest way to rob a bank is to own one.

  13. Quick Hits:

    How is Bernanke’s “prudent planning” any different than “fine tuning” popular during the mid to late ’70’s?

    In an editorial published by the Financial Times July 11, George Soros points out that the Euro is an incomplete currency because it has a central bank but no treasury. In other words the ECB is a monetary policy making institution absent a centralized fiscal policy making institution. Soros asks for a European solution. Is political union, or in the least a central treasury, next for Europe? I’m not certain how you centralize the treasury w/o political union. If so, Germany finally conquers Europe.

    McConnell’s gambit might be smart politics but bad for the country. Historically, we have always cut spending while raising taxes. This is a time for pragmatists. not gamers or demagogues.

    Is this the end of the Age of Paper as JR suggests? To paraphrase Soros, defaults might be inevitable but need not be disorderly. Seems to me very smart people are predicting either anarchy or martial law. Each might well be proven right.

    1. McConnell’s ploy is the usual Republicrat sell-out. Won’t fly. And Never mind that globalist sociopath Soros; EU is going to fall apart, and that’s all good. Martial Law? In USA? Administered by Dictator Obama?! My own militia unit is ready to rock and roll, and so are millions of other armed working class and middle class Americans: Gunfighter Nation.

  14. Yes, indeed, history is repeating itself!!!
    Now you know why I can’t seem to bring myself to work on my 2010 taxes… it is futile and I don’t see the point of giving money to a government that is so quickly debasing it. When I have some money, I go out and buy either some silver bullion or storable food. When I cough up the money for the IRS, I want it to be the more debased money of the future, while I use this week’s better money with more purchasing power.
    Personally, I believe that all of us should quit paying taxes altogether. Given that there is so little industrial capacity left in America (thanks to NAFTA and GATT) and the middle class is imploding. Even with their expanding staff, the government can’t hunt us all down.

  15. Suffer the pain now or die later seems to be the bottom line of all this mess. Most Americans are not aware of the history of our monetary and financial systems, but I’ll attempt to give a “quick view for review”:
    (1) “The Fed” was founded in the Wilson Administration in 1913. “The Fed” was the third attempt to have a central banking system (the first two failed when both times the Congress denied renewals of their 20-year charters). This same year (1913) the 16th Amendment established what today is called the federal income tax and the IRS. One should read the book “The Creature from Jekyll Island” to see why I mention this first tier of truth…that this mess we are in today world-wide was in actuality all planned in order to “spread the wealth.”
    (2) “The Fed” has caused the American dollar to drop in spending power by 97% between 1913 and 2011, 30% or so in just the last 18 months or so.
    (3) This monetized debt default situation has occurred before on the North American continent: (1) The “continental dollar” collapsed in the 1780s and The Federal dollar took its’ place, (2) in 1865, the Confederate States of America currency collapsed pretty much 100% when Lee surrendered to Grant, and the U S dollar and also the value of bank notes was stated as being “renewed” as the currency of these United States (but then it was also backed with gold and other precious metals until late in the 20th century), (3) in 1965, The L B Johnson Administration found a way to utterly disavow the social contract that silver and gold certificates demands for payment in exchange for silver and gold respectively were no longer lawful, and (4) during the Nixon Administration the US dollar was taken off 100% from the gold standard.
    So why should anyone be surprised to learn that Obama is using the Keynes theory that full devaluation of a paper currency disavows the repayment of debts denominated by that same paper currency (a twisted way to explain not only a type of planned taxation but also how inflation and hyperinflation may simply be used as a means to an end: To eliminate the national debt by devaluation of the related “debt instrument” “fiat” currency of “The Fed” and start the new world order quasi currency game all over again (in 2011 or 2012?)?
    At least more than a little food for thought, is it not? History is simply repeating itself as it has for centuries before when “fiat” currency is produced without backing of precious metal reserves and content in the coinages.
    Respectfully submitted,

    Thomas Avery Blair
    Enrolled Agent

  16. Dear Frank Brady: thanks for your astute observation. The idea that anyone anywhere in any government is acutally looking out for our interests or seeking real solutions is preposterous. Even if they were well-intentioned, they are far too clueless to salvage anything. The only question is: who will replace the current power mongers when all this comes crashing down and, given historical precedents for such events, how horrific will the replacements be?

  17. Surely it is obvious that the sole purpose of the U.S. government at this point in history is to transfer money from the people who earned it and give it to the Banks. TARP, the bailouts, and QE1, QE2 (and soon, apparently, QE3) benefited one group and one group only: The Banks.

    It is equally obvious that the role of the Democrat and Republican political parties is to distract the people from this theft by generating a lot of political “sound and fury” that pits the people against each other.

    We are totally screwed.

  18. Announcing QE3 so soon after the end of QE2 was unexpected. Bummer. Can one presume that there will be another mindless bounce in the markets celebrating yet more liquidity for the banks? I guess any further shorting is out and gold and silver are in, huh.

    Just how long is this road, how many cans are there??


  19. Sometimes the obvious is the least considered. The crisis is global in nature and will require a global solution. A global meeting to rebalance world fiat with world asset values is the only real solution. A global reset of world gold prices to 10-15K per ounce would give support to debt levels and breathing room for a longer term solution, which might include a floating gold price set by world currency/fiat requirements, a quasi gold standard if you will. In the case of the US with over 8000 tons of gold ( assumption needs confirmation), this would be like a do-over when we were kids.

    1. Too Bad, so sad. There is no gold in Fort Knox. There is no money in the Social Sec “Trust Fund”. Etc. Do you get it? We have been and are being robbed blind by a hostile regime. CRASH THIS PONZI NOW!

  20. I wanted to believe that our government knew what it was doing—–but in the back of my mind my understanding of how men lie and steal and compete for power told me NOT to trust them. Same old story—different period in history. Nero lied till the end—-and Rome still burned to the ground. Our government cares NOT if you lose your job—your home—your self worth. All they know how to do is LIE and PRINT money. They will take everything you own without a single thought of your wife & kids who might get hungry down the road, [or right now] In 1929, October—-the great depression began. Every house had a porch and your neighbor would come by in the evening to chew the fat—ask about your family. We knew one another back then—and we had better hearts. When this depression hits “EVERY HAND WILL BE AGAINST HIS NEIGHBOR” as the bible prophesied. This will be hell on earth and much fear will come. I’m an old man now—I don’t have much of a chance of living through this. But I do pitty you young folks. You will need to learn fast—-or die with me. Pray——

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