Magnifying a Magnificent Debt Bubble

Posted on September 20, 2011 by MN Gordon

Last week it was discovered that, Kweku Adoboli, a 31-year-old equities trader for the Swiss bank UBS, had gone rogue.  In a remarkable misadventure he managed to blow $2 billion of other people’s money at his employer’s expense.  Apparently, UBS noticed a big fat gaping hole in its trading records Wednesday night and promptly arrested Adoboli the following morning.  We don’t know what this has to do with anything, but, perhaps, it offers a valuable example of the current state of European banking.

By now you know that Greece is broke and that even after several bailouts by the European Union they can’t seem to get their act together.  In short, the Greek government promised far too much and borrowed far too much money for far too long.  No doubt, Greece behaved like reckless idiots.

But, it goes both ways. In addition to the Greek government, which borrowed more money than it can possibly repay, is the culpability of the European banks that overextended them credit.  The banks behaved like reckless idiots too.

Why did they lend Greece so much money?  Why did they imperil their finances and the finances of the European banking system making an abundance of bad loans? Continue reading →

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The Economic Shredding Machine

Posted on September 16, 2011 by MN Gordon

Like the U.S. Treasury, President Obama’s recent jobs proposal is bankrupt.  Quite frankly, we weren’t counting on much.  But that doesn’t mean we still weren’t disappointed by its burdensome emptiness.

The most remarkable thing about the President’s latest jobs creation plan has nothing to do with the actual substance – or lack thereof – included in the initiative.  To the contrary, it’s the idea behind it that’s most noteworthy.  In short, the President actually believes the government can use borrowed money to stimulate the economy.

If this were true, the trillions of dollars already spent would have produced an epic boom and job creation renaissance.  By this point in the recovery unemployment would be down and opportunities would be abundant.  Obviously, none of these things have taken place.  Instead, according to a recent Bloomberg National Poll, only 9 percent of the population is confident the economy won’t slide back into recession.

The government, as we’ve seen, is extraordinarily capable of spending boat loads of borrowed money.  Yet there’s no documented proof or empirical evidence that supports the notion that this can grow the economy.  Moreover, simple logic shows it actually shrinks the economy. Continue reading →

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The Revolt Against Absurdity

Posted on September 13, 2011 by MN Gordon

Credit default swaps insuring Greek debt rose in price yesterday to cover a 98 percent chance there will be a Greek default in the next five years.  But perhaps it will happen sooner.  Greece is playing games with its austerity targets and Germany’s had enough of their antics…

“‘Greece is ‘on a knife’s edge,’ German Finance Minister Wolfgang Schaeuble told lawmakers at a closed-door meeting in Berlin on September 7 […],” reported Bloomberg. “If the government can’t meet the aid terms, ‘it’s up to Greece to figure out how to get financing without the euro zone’s help,’ he later said in a speech to parliament.”

Without Germany’s backing of another Greek bailout, a Greek default is imminent.  Should this happen things could get real ugly real quick for Europe’s biggest banks who extended credit to the Greek government.

One indicator Germany will be opting not to bail out Greece – again – is the anecdote they are making contingency plans to protect German banks should Greece fall short of meeting its austerity targets.  There’s also a nasty rumor floating around that Moody’s Investors Service may downgrade the credit rating of France’s largest banks – like BNP Paribas and Societe Generale – this week because of their Greek debt holdings. Continue reading →

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Why U.S. Treasuries are No Longer the Safest Investment in the World

Posted on September 9, 2011 by MN Gordon

The world’s a humbling place.  It’ll change right before your very eyes and you don’t even know it…until it’s too late.  Where markets are concerned this can be an expensive and chastening lesson.

Not long ago it was common knowledge that ‘house prices always go up.’  This key insight spread across the land like wildfire.  Everyone just knew it was true.  But, in a great way, it was true until just the moment it wasn’t.  That’s when the impossible happened – house prices went down.

Before that everyone knew that all you had to do to retire a millionaire was ‘buy and hold’ an S&P500 index fund.  It was mindless and fantastic.  Any idiot with a 401K could do it. Then again, that was before the stock market whipsawed true believers for over a decade running.

These days everyone who’s anyone knows that ‘U.S. Treasuries are the safest investment in the world.’  In fact, on Tuesday, as if to prove the point, something happened that has never happened before – Ten-Year Treasury yields fell to 1.91 percent.  In other words, people are so confident in the U.S. government they’re willing to loan them their hard earned money for 10 years, for practically free.

Here at the Economic Prism we watched in shock and disbelief Continue reading →

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