Black Monday 2: Economic Boogaloo

[HenrikOlsen]

Doesn't this just show that people are desperately pulling Euros out of the countries they expect to implode very soon and that Spain and Italy are at the top of that list?
Basically there's a run going on against both countries and it's being kept as non-news to allow the big players (megavampyroteuthis and colleagues) to exit before the fall (and no, I don't mean autumn).

ETA Or did I misunderstand and it's simply a trade balance chart showing those two are in the death-spiral from hell.

[publius]

Doesn't this just show that people are desperately pulling Euros out of the countries they expect to implode very soon and that Spain and Italy are at the top of that list?
Basically there's a run going on against both countries and it's being kept as non-news to allow the big players to exit before the fall.

Yes, that's what's going on exactly, and that chart is reflection of that "run". However, how that is being "financed" so to speak is what that the problem is. Essentially, the system is allowing euros to be created at will to finance that capital flight. That's the lightbulb that went off in my head. The structure of the TARGET2 system allows this to be done. In small amounts, it would be fine -- sort of virtual particles being created and destroyed too fast for the energy deficit to matter -- but here the process is running away.

[publius]

Basically, we've got near a €1T check kiting scheme going on here, done at the inter-central bank level via the TARGET2 system.

If that near €1T were "settled", the transfers of euro from the negative central bank countries to Germany and the others, the reserves of those negative country banks would be destroyed and they would implode. IOW, their "vaults" would be emptied.

[publius]

Well, Germany beat Greece in the soccer game (prompting Drudge to put a big "Germany kicks Greece Out of the Euro" headline.

How are things going in Greece? Well,

http://www.myfoxny.com/story/1885587...after-fainting

The new Greek finance minister has been hospitalized after "fainting" shortly before he was to take the oath of office. His symptoms were "strong stomach pains, vertigo, nausea, sweating and fatigue." He must have been shown the real, second set set of books.

And the prime minister himself was admitted to a hospital for retinal detachment. His eyes must have bugged out looking at the real books.

[profloater]

Thank you Publius for finding that target2 chart. What I do not understand is how, with that trillion of Euros "floating" the Euro exchange rate holds up?

[publius]

Thank you Publius for finding that target2 chart. What I do not understand is how, with that trillion of Euros "floating" the Euro exchange rate holds up?

It's pretty much hidden, isn't it? It's a darned clever little trick. The TARGET2 balance all sum to zero (they must by defintion), so when you look at the whole of the ECB adding all the balance sheets together, all that float just cancels and disappears.

I didn't understand it until I was reading something and it finally clicked. This system can automatically finance trade deficits (between member countries), as well as capital flight. Well, what happened was, at first it was financing the trade imbalance when the finance system started to implode, and is now being (automatically!) called on to finance the capital flight that has now picked up.

If the system were forced to settle, Spain and Italy (and Greece, foregone conclusion, but too small relatively to worry with now) would essentially be bankrupt. All their reserves (and then some) would be in Germany (and Luxembourg, Finland etc)!

If the EU, the monetary union part, were to break up, this TARGET2 mess would have to be settled. And that means PIIGS are bankrupt, and/or Germany has massive losses.

[publius]

IOW, there is about €1T of euro in the system that is nothing but vapor, float. If it breaks apart, a lot of people, somewhere, are going to find they've got nothing when they think they've got €1T of something.

[publius]

I don't know if any of the other participants in this thread are as interested in this crap as I am, but here's the Fed's equivalent of TARGET2, on H.4.1. If no one is really interested, I'll shut up about it. Here's the link to the latest:

http://www.federalreserve.gov/releas...urrent/h41.htm

Now, we've got to the get into the weeds. Go to down to Table 9, Statement of conditions for the individual regional banks. Note the item near the bottom of the asset side, dubbed "Interdistrict Settlement Account". That's the equivalent of TARGET2 between the regional banks. Note it sums to zero, as it must. The regional banks with positive balances are owed reserves from those with negative balances. You'll see that right now, Philadelphia is the biggest debtor, with nearly $18B owed to the others. The two biggest creditors are Boston and NY.

Anyway, that is the interdistrict "float" in the system. Note how small it is relative to the total assest side (well, for Philly, it is pretty big relative their chunk of the total Fed assets, actually). This doesn't mean much really, but if one region consistently runs negative, it would mean dollars are flowing out of one region of the country, governed by that regional bank, to other regions, and when settled, would mean a reallocation of the assets and reserves amongst the regional banks.

In our system, the regions are just that, regions of the whole central bank system. We're one one country, with one monetarily sovereign government. Originally, the system was created with an eye for the regional banks acting independently, sort of a federal monetary system, overseen by the Board of Governors in Washington. As it worked out, all the action is in NY with ultimate control in Washington. Well, a better way to put it is the money power is in NY through Washington. All the other regional banks aren't big players, they just do what they're told while otherwise minding the mundane banking operations in their region.

In the ECB system, the "regions" are the individual countries, and the regional banks are the central banks for each country. That's the Bundesbank for Germany, and whatever the others call theirs. The interdistric settlement system is TARGET2, and the float is very large compared to the whole.

[publius]

Here's a good one:

http://www.youtube.com/watch?feature...v=1CLhqjOzoyE#!

This is the 2012 Economics commencement address at UCLA by Michael J. Burry. He's not exactly a dynamic speaker by a long shot, and you'll be tempted to give up, but the content gets pretty good and is worth it. Burry's claim to fame, as he himself puts it, is one who "bet against America and won." He predicted the subprime collapse, made his bets accordingly, and made $100M for himself during the crash. His message to Washington and Wall Street was if he saw it coming, why didn't they. He got investigated by the SEC and FBI afterwards.

He was going to be a doctor and was doing his residency in neurology at Stanford Hospital, but was doing investing on the side. He was working too hard and not getting any sleep, and *fell asleep standing up in the operating room, crashing into an oxygen tent around the patient*. He was thrown out of the operating room and thus ended his medical career. He then started a hedge fund, Scion Capital, and the rest is history.

One good line in the speech was, "Economists and financial practioners, examine your premises because there are contradictions before you."

Alan Greenspan was famously asked about Burry -- why did you not see what he saw -- and he replied that Burry's stuff was just a statistical illusion and he was a essentially a lucky coin flipper.

[Stug III]

If the EU, the monetary union part, were to break up, this TARGET2 mess would have to be settled. And that means PIIGS are bankrupt, and/or Germany has massive losses.

You do realise how stupid remarks like that make you sound? The EU and Eurozone are very different things with very different strengths and weaknesses. Without Googling, do you have any idea how much of the EU GDP is outside the Eurozone?

[publius]

...

And you realize what conclusions are most likely drawn from a post like that?

Without Googling, do you have any idea how much of US GDP resides in states through which the iconic old Route 66 passed?

[aquitaine]

Here's a good one:

http://www.youtube.com/watch?feature...v=1CLhqjOzoyE#!

This is the 2012 Economics commencement address at UCLA by Michael J. Burry. He's not exactly a dynamic speaker by a long shot, and you'll be tempted to give up, but the content gets pretty good and is worth it. Burry's claim to fame, as he himself puts it, is one who "bet against America and won." He predicted the subprime collapse, made his bets accordingly, and made $100M for himself during the crash. His message to Washington and Wall Street was if he saw it coming, why didn't they. He got investigated by the SEC and FBI afterwards.

Great find. Actually this reminds of something:

An interview with Michael Pettis, mostly about looking ahead to China's not too distant future.

[SeanF]

One good line in the speech was, "Economists and financial practioners, examine your premises because there are contradictions before you."

Mr. Burry something of a Randian, is he?

[Ara Pacis]

Mr. Burry something of a Randian, is he?

Randians... wish they would go shrug off already. I just realized that that is the current ideological war going on right now in economics. It's not Keynesians vs Monetarists or the older Communists/Socialists vs Capitalists, it's Randians vs... pretty much everyone.

[publius]

The new Greek finance minister, the one who "fainted" above, has now resigned. I don't think he was even officially sworn in. One look at the real books and he faints and must be taken to the hospital, and now he heads for the tall grass.

[Extravoice]

And now, Cyprus.

[publius]

Apparently, we've got more of this going on:



Rumor is supposedly Italian PM Monti threatened to resign if Germany didn't relent on eurobonds (shared debt). Supposedly Merkel told him to go ahead and make her day, and now he's denying the story.

Another funny things. We've got it in our heads that Helicopter is the big helicoptering money printer, but the ECB, under a German taskmaster has been more reserved. Well, look at this, the ECB's balance sheet:

http://www.bloomberg.com/quote/EBBSTOTA:IND/chart/

It's now over €3T, ramping up in the last part of 2011. Helicopter is just $2.85T or so. US GDP is roughly $15T. Eurozone, the part of the EU that is using the euro, GDP is about €8.4T. So the ECB balance sheet is much bigger than Helicopter's, relatively.

[publius]

Stockton, CA has filed Ch. 9 (or has voted to file) and now takes the title of largest municipal bankruptcy in US history:

http://www.latimes.com/news/local/la...,2285815.story

If it's any consolation, they probably won't hold the title of largest for too long.

[HenrikOlsen]

They also took first place as the most miserable city to live in, with the city's police corps cut to the point where they can't control crime anymore.

[publius]

Well, well, the zombie apocalypse theory looks more likely:

http://miami.cbslocal.com/2012/06/27...on-bath-salts/

There were no "bath salts" found in the "Miami Cannibal", nor any drugs like Meth, PCP ors LSD; only marijuana was found in his system. So there you go.

[Hlafordlaes]

Well, well, the zombie apocalypse theory looks more likely:

http://miami.cbslocal.com/2012/06/27...on-bath-salts/

There were no "bath salts" found in the "Miami Cannibal", nor any drugs like Meth, PCP ors LSD; only marijuana was found in his system. So there you go.

I refuse to believe that was a bad case of the munchies. Guy must be wacko.

[Ara Pacis]

I refuse to believe that was a bad case of the munchies. Guy must be wacko.

Maybe reefer madness wasn't all exaggeration.

[HenrikOlsen]

I suspect that we're seeing the emergence of a culture-bound syndrome here, possibly a variant of Wendigo psychosis.

[Extravoice]

Life imitating art? (If you can call Zombie movies art.)

[profloater]

so the euro summit ends with Germany reluctantly allowing the bail out fund to support banks directly and everyone cheers. But this means even more borrowing. German tax payers are destined to pay for other government overspend so maybe this piece of theatre will take us up to the german elections? Stock markets up on the news but for how long this time?

[Ara Pacis]

so the euro summit ends with Germany reluctantly allowing the bail out fund to support banks directly and everyone cheers. But this means even more borrowing. German tax payers are destined to pay for other government overspend so maybe this piece of theatre will take us up to the german elections? Stock markets up on the news but for how long this time?

Everyone compares the situation to WWI, but Germany paying for every one else's debts sounds more like the lead in to WWII.

[publius]

I wonder what the half-life of this latest "it's all fixed!" agreement will be. The last one was just hours.

[profloater]

some commentators are pointing out that this was just the talk, no money changed hands yet and the wobbly banks will have to offer even more collateral to actually get this ECB lending that will not appear as National debt. Merkel goes home saying the rules are just the same as before while the gang go home saying they wrestled major concessions. The big news would be an agreement for all countries (Germany) to stand behind all Eurozone bonds but have we reached the level already where this is not just politically impossible but actually impossible? Brinkmanship can go too far and meanwhile governments are having to pay out more than they can gather in very day.

[publius]

I've been meaning to post about the following, but was paying attention to other developments and so let it slide, but here goes: We've had a big scandal made public about a LIBOR rate manipulation scheme by Barclays. The chairman and CEO have resigned over it. Here's a wrap up piece in The Telegraph:

http://www.telegraph.co.uk/finance/n...orruption.html

Scroll down and clicky-clack on the related links to get started reading if you haven't already.

And Barclays is probably not the only one involved by a long shot. At any rate, they're calling it "LIeBOR", or "Lie-bor", whichever you like.

Barclays' CEO has vowed essentially that he's not going to take the rap alone and if he goes down, he's going to drag a lot more with him, including govt. officials. The latest is a claim that BOE officials were in on it and requested they do the manipulation.

But in the big picture, this is more evidence showing what a sham the whole financial system was/is. The curtain is coming down and revealing a rigged, rather than free, market.

[Extravoice]

This morning's headline reads "Jobless Claims Post Biggest Fall Since April," which you'd think would be good economic news. And yet Dow futures are down 38.

Using the wacky logic of stock market analysts, I'll attribute the drop to the fact that this somehow makes QE3 less likely.