THE DEATH SPIRAL OF THE LIBERAL DEMOCRACIES

 

 

In nearly every European Union member state, public spending, and in particular spending on welfare and benefits, is accelerating at all levels, from municipalities and social insurance systems all the way up to the European Commission, while the economy of the private sector at best stagnates and its industrial core sectors visibly erode.

The economic imbalance, in which a contracting private sector is  unable to finance a continuously expanding state apparatus and the state has to plug the gap by continuous borrowing, is already  causing  in the bond markets.  Yields (real interest rates obtained when governments have to sell their bonds for less than face value, have been rising steadily for years, making the servicing of government debts increasingly expensive. As long as financing the needs of public  spending continues to grow under the ruling ideology of an all-encompassing state this financial burden will fuel the need for ever higher taxation and a destructive race among parties of government to squeeze taxpayers at every level. Such an irresponsible approach to financial polit can only result in economic chaos.

But it seems that like America's Democrats, European liberal leaders are prepared to throw away their citizens' prosperity for the sake of virtue signalling.

Naturally, when it comes to fleecing European taxpayers, the European Commission will be at the front from the starting signal. Brussels is currently preparing its seven-year budget framework, set to exceed €2 trillion beginning in 2028.

Apollo News recently reported that the European Parliament is even demanding a further 10 percent increase in this budget ceiling. Excess, wastefulness, and a complete detachment from economic reality are driving the EU’s relentless search for new sources of tax revenue.

To this end, Commission President Ursula von der Squeeze'em-til-the-pips-squeak commissioned the Center for Social and Economic Research (CASE) last year to produce a study examining the potential of a wealth tax across the entire EU. 

There is no point in any attempt at a “redistribution” policy, so long as the central redistribution mechanism which leads to an ever increasing wealth gap remains in place: an above zero inflation target.

THIS is the reverse robin hood, distributing wealth from the lower, middle, and upper middle class all the way to the top.

When “money” (or currency, rather) continually loses value (by design!), and “assets” increase in value, then the defining characteristic is how your wealth is split. The closer to the top of the food chain you are, the faster you get rich. This is by design, and nothing can stop it so long as we don’t have sound money with a zero inflation target.

The fiat money system and bank laws grant financiers like Larry Fink and the banks ways to leverage their wealth into multiples of what the capital investment really is. Obviously, the political machines running Europe are following suit but without oversight. The ability of government to borrow against future revenues allows almost infinite short-term revenues. And,  the exceptional power to change laws allows the politicos to think they MAKE the future by over spending revenues. 

They starve the golden egg-laying goose to allow more spending and when the health of the golden goose becomes questionable the bond markets apply rising interest rates. The politicos become tone deaf and resort to further starvation of the goose. 

Government refuses to take heed and instead resorts increasingly short-changing the food going to the golden-egg-laying goose. The goose lays fewer eggs and the government punishes the goose by reducing the quality of the food (reduction in the value of the currency). 

When that causes still fewer eggs, the government resorts to plucking the goose through wealth and inheritance taxes. No surprise, the goose produces even fewer eggs. Just watch what happens not just to cities like NYC but to whole countries around the world (Cuba, Venezuela, Zimbabwe, etc.) Total control over taxation by government ends up as self-indulgence by government that ultimately kills the goose. 

Only the USA is somewhat protected by its role as issuer of the dominant reserve currency. 
While the BRICS+ bloc have plans to engage in currency wars with the aim of promoting the Chinese Yuan as a reserve currency to rival the dollar such a project would take decades to make any serious impact on the balance of world trade

Because other nations will always need to buy dollars to settle international trades, US government agencies and commercial ventures can dictate prices.

And that is how the European Union and other nations like UK and Japan have thrown themselves into a death spiral. But with the governments of the EU and the rest of the developed world hooked on virtue signalling policies like Open Borders and Net Zero, the will to take those hard decisions that could break a nation out of the death sipn just does not exist.

FROM THE ARCHIVE. 

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UBS To Buy Credit Suisse With Guarantees From Swiss Government (but its not a bail out OK?)

After two days of playing table tennis with clients' savings and investments held by failed bank Credit Suisse, the price for acquisition by UBS (formerly Union Bank of Switzerland,) has been agreed at  CHF 3BN (US$3.25 billion), or 0.76 per share, meaning shareholders of Credit Suisse will receive 1 share in UBS for 22.48 shares in Credit Suisse. As part of the deal, the Swiss National Bank is offering a 100 billion-franc liquidity assistance to UBS while the government is granting a 9 billion-franc guarantee for likely losses on dodgy assets that are part of the deal. In effect this is a taxpayer-funded bailout (but don't call it that.)

Most significantly, however, the bank's entire AT1 tranche - some CHF16BN of Additioanal Tier 1 (AT1) bonds, a $275BN market - will be bailed in and written down to zero, to wit: "FINMA has determined that Credit Suisse’s Additional Tier 1 Capital (deriving from the issuance of Tier 1 Capital Notes) in the aggregate nominal amount of approximately CHF 16 billion will be written off to zero."

This wipe out bail-in will be the biggest loss yet for Europe’s $275 billion AT1 market, far eclipsing the approximately €1.35 billion loss suffered by junior bondholders of Spanish lender Banco Popular SA back in 2017, when it was absorbed by Banco Santander SA to avoid a collapse.

AT1 bonds were introduced in Europe in the wake of the 2014 global financial crisis to serve as a backstop when banks start to fail. They are designed to shift losses to bondholders or be converted into equity if a bank’s capital ratios fall below a viable level, effectively padding its balance sheet and allowing it to stay in business.

The bonds were by Friday already trading at levels usually reserved for companies about to go bust. A slice of the bank’s $1.65 billion note, issued less than a year ago, changed hands at about 35 cents on the dollar, according to trade reporting system Trace.

And while it may be counterintuitive, according to the Swiss bail-in regime, AT1 debt is above equity in the loss absorption waterfall.

All this is very vague and technical but what it means is that while the takeover is agreed in principle, the  deal may yet fall apart is, as banking industry insiders have warned, more nasties emerge as UBS auditors scrutinise the accounts of Credit Suisse. Once a paragon of banking integrity, Credit Suisse has been known to be in trouble for over a decade and has only stayed afloat this long due to certain creative accounting practices of dubious legality disguising the black holes in its balance sheet.

What is truly frightening is that many more banks are rumoured to be in similar or even worse trouble due to reckless lending during the years of insanely low interest rates.

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Former Bank of England Chief Blows The Gaffe On Post COVID Economic Crisis

 BBC Breakfast, like most of mainstream media, obsessed over the Conservative Party leadership contest and who it will throw up as our next Prime Minister throughout the weekend just gone, giving a platform to contenders and their supporters and critics, and also to various talking heads from the opposition Labour Party who were all keen to describe in detail what the government had got wrong, but rather coy when required to detail how Labour would have done things differently and how their policies would have produced a better outcome.  

However the most significant comments on the many headed crisis that awaits the new
Prime Minister came from a guest who is not linked to any political party: Lord Mervyn King, who was governor of the Bank of England between 2003 and 2013. Asked about the narrative being spread by some Liz Truss supporters, perhaps in a bid to undermine her successor and set in train events that will lead to another gangland execution,  that financial markets ‘bullied’ Truss out of her plans and out of office, King gave a clear explanation of what had gone so badly wrong for Liz Truss and her hapless Chancellor Kwasei Kwarteng:

“Markets are not in charge. Governments and central banks are. Markets respond to the announcements made by government and central banks. And central banks have lost control of inflation, government lost control of the public finance; not surprising that markets respond to that.

“I think all central banks in the west, interestingly, made the same mistake. And during Covid, when the economy was actually contracting because of lockdown, central banks decided it was a good time to print a lot of money. That was a mistake. That led to inflation. We had too much money chasing too few goods. And the result was inflation. That was predictable. It was predicted, and it happened. So that’s one problem we have to try to get out of. But the public finances both in the United States and the United Kingdom were not put on a sustainable track. And markets responded to that.

 

King’s words highlighted several important factors that led to the mayhem that followed on the heels of the ill - fated mini-Budget, reportedly authored by Kwarteng and Truss themselves, and the economic chaos it plunged the country into. He stressed that the economic crisis is global, that the UK is not the only country experiencing higher interest rates or borrowing costs, as the economic climate is changing for everyone (albeit it’s happened faster in Britain, with far more international attention). This will not be well received by the people who still cannot accept that in a democratic vote we chose to leave the European Union and thus try to twist every negative news story in a way that enables them to blame it on Brexit. Unfortunately for them, Joe Public is all too aware that all the economically significant EU member states are as far or further up shit creek than we are.

The former central banker's verbal lashing did not spare the central banks. King made it crystal clear that mistakes had been made by all central banks in the west, though it was obvious he rated the Bank of England’s decision to dither and dally on actions to curb inflation as the biggest of all central bank cock ups, also lambasting their decision to print uncontrolled amounts of money in order to appease politicians and purveyors of 'The Science.'

While the cost of wrong headed and utterly ineffectual COVID reponse schemes like furlough (paying people to stay off work,) – roughly £70bn in total – did require the Bank and Treasury to work hand-in-hand, it has been a point for contention for a while now just how much money printing took place (the Bank created more money in the first year of Covid than it had in the decade leading up to it).

NB when we say 'printing money' in relation to governments and central banks, it is not a case of simply turning the speed of the printing presses up to eleven, money is created by selling bonds - in effect a contract to pay interest at a fixed rate on a certain sum for a specified number of years before redeeming the bond at face value.

Not only did the Bank oversee an astoundingly huge increase in the money supply; government policy saw cash flow into the national economy through furlough, business support support schemes, etc), yet central banks meekly went along with political denials that such reckless economic management would have  no inflationary consequences, which was bollocks of course.

 At one point in the show King blamed on the economics profession directly: 'If I were to blame anyone,’ he said, ‘I would blame the economics profession for encouraging [central banks] to print money [like] it didn’t matter.’

He also stressed that markets are not political in the way party politics are, forming policy and reacting to world events but instead are responding to a particular tax cuts or set of performance statistics  – on the wider scale they are responding to the sustainability of financial plans, the ‘sustainable track,’ as King called it. 

The recent mini-Budget that sank the government of Liz Truss was evidence that politicians are not taking fiscal discipline seriously after the loonytoons public spending splurges of the pandemic responses. It was a time when public debt has skyrocketed and deficits in peacetime hit record highs. It appeared to be a tipping point beyond which the philosophy of debt driven economies and rational behaviour parted company. All politicians are having to grapple with the consequences now, unfortunately few seem to realise that.

But perhaps the biggest impact of King’s appearance was not simply what he said, but how his contributions influenced what followed. Asked by The BBC's Laura  Kuenssberg what direction the UK ought to be taking, King was warning about the ‘more difficult’ decision to come, including austerity and possibly ‘significantly higher taxes’ to fund public services, both to get the books in order but also to avoid passing on a staggering bill to future generations.

His comments echoed as unsuccessful Tory leadership  contender refused to comment on any public policy, economic and otherwise, insisting that she would ‘not being drawn into the detail’ on decisions that presumably she would need to start making in less than a week, were she to become leader and by tradition Prime Minister. This included not talking about how she might reduce the UK’s deficit, which is thought to be required to regain market confidence and get things back on track – no doubt in part due to the serious lack of popularity spending cuts will have at a time when the cost of living crunch is worsening.

‘You heard from Penny Mordaunt,’ King pointed out, ‘we will probably hear in a minute from Keir Starmer (leader of the opposition Labour Party), that public expenditure isn’t going down, if anything it will go up. Therefore taxes will have to rise to fill the gap which is there at present. That doesn’t make a very happy picture for the next few years.’

Indeed, that’s exactly what happened when the Labour leader sat down in the hot seat, refusing to be pulled in on discussion of spending cuts, while insisting that some areas, including the usual Labour Party sacred cows, needed a funding boost. Starmer singled out healthcare, declaring ‘of course the NHS needs more money’ (he followed up later with vague talk of reform as well). With healthcare spending on track to account for almost 45 per cent of day-to-day government spending in the next few years, at some point Starmer will have to lay out just how high he thinks that number should go, and where exactly the money might come from.

King’s main point, that these are difficult times indeed, has been echoed by our new Prime Minister, Rishi Sunak, and by every politician of every party who has been given chance thecise their vocal cords in public since . Very few of those politicians however, are ready to discuss the remedies publicly, nor are they prepared to seriously discuss spending cuts. 

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Italy More Likely To Exit Eurozone Than Greece As Italian Bond Collapse

by Phil T Looker, 28 November, 2016

We said in September, when the world had returned from its summer vacation, that after the shock Brexit vote in which the British public voted by a slim but significant marging to quit the EU that the in the race to be next out of the EU exit door and first to leave the Eurio single currency was truly on and Italy was leading by a distance.

Since then things have just got worse and worse for the globalists and recent news that Italian bond yield were surging confirmed our impression. People not familiar with bond trading jargon might think that surely it is a good thing if yields are surging. Not so; bonds are what national treauries sell to fund their deficits and capital spending. Each bond has a face value in $ £ or € one thousand units. The bonds carry a fixed interest rate (coupon value), usually 3.5% for UK bonds. The yield is a bit more complex. Central banks underwrite bonds by buying them from the government at face value (the Bank Of England is not actually owned by the government, a fact which surprises many people).

The central banks then try to sell on the bonds at face value. Occasionally, if a currency is considered rock solid bonds may sell above face value. Usually the selling price is lower. The yeild therefore is the real rate of interest, calculated by working out the interest rate paid by the coupon value as a percentage of the actual price paid. I should point out here that bond markets deal in basis points, rather than percentage points. A basis point is one hundredth of one percent. How can they make a profit on such small margins? Work out for yourself a hundredth of one per cent of a billion in Dollars, Pounds or Euros. Not a bad days wages it it?

So when news reports say bond yields are surging, it means bond prices are collapsing. OK, what of Italy and why is the Eurozone debt crisis back on top of financial news and about to flood back into main news?

It is no longer Greece, but Italy which is now the country that is most likely to leave the Eurozone within the year if the markets are telling the truth (and they usually are). Commenting on the collapse of Italian bonds, Sentix Global Investor Survey writes: "This development underscores the importance of the referendum to the Constitution in Italy on December, 4th."

Sentix adds that while it looked as if a "castle peace" had been concluded a few months ago, the euro concerns are gradually rising again among investors. But this time it is not Greece that dominates the agenda. Although for example the pension funds in Hellas are collapsing, the euro exit probability has fallen to 8.48% - the lowest level since 2014.

Italy is now the focus country number 1 in the Eurocrisis! The precarious situation of the Italian banks, the political questions surrounding the Constitutional Treaty at the beginning of December, and the economic turmoil of the past have placed the country at the centre of this latest chapter in the Eurozone's ongoing financial crisis.

With the Italian referendum on constitutional reform due on December 4, and the 'NO' campaign currently leading in polls. The political risks of the likely NO vote and the stuttering economy, combined with the precarious state of many major Italian banks is fuelling uncertainty. And the likelyhood that if the government loses the referendum the Italian government will fall and anti EU parties will dominate the next governing coalition in Italy all makes what has been dubbed as Quitaly look more likely.


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