An unfettered pack of lies

When we tell young people that in 1986 we were naive enough to believe the authorities who told us that the radioactive cloud had stopped at the French border, you attract, and rightly so, a few sniggers and mocking smiles.

When I tell these young students that it will perhaps be their turn in 20 years time to be the object of derision by their own children, surprise quickly gives way to incredulity and a certain amount of concern.

Let’s look again at the facts. Facts have this annoying tendency to be difficult to change although…

On 14 March 2011, a terrible earthquake ravaged Japan, following by a devastating Tsunami. Among the areas affected was the Fukushima Daiichi Nuclear Power Plant composed of 6 reactors which have since been experiencing difficulty. Chernobyl only had a problem with 1 reactor. We can therefore summarise the situation as Russia 1, Japan 6.

Since 14 March, the information provided by the Japanese authorities has been very limited, perfectly controlled and little short of the communication methods we used to see in the former USSR.

Let’s recall the accident at the Swedish nuclear power plant in 2006. The operators almost lost the nuclear reactor in less than 30 minutes owing to a fault in the cooling circuit allied to an electricity power failure (which really takes the biscuit for a nuclear power plant which is supposed to produce electricity), which was in turn linked to maintenance work. The safety systems (to keep things simple the back-up generators) were simply not turned on. A catastrophe was assured in 30 minutes this being the time needed for the start of fusion within the core of the reactor according to the articles and the experts who were at the time in agreement about the seriousness of this incident. For 15 days, the cores of the nuclear reactors in Japan have no longer been truly cooled…..but of course this does not cause any problem.

There is smoke escaping on virtually a daily basis from one or other of the damaged reactors, but of course this does not pose any problem.

The drinking water in Tokyo is from time to time unfit for consumption but the next day when the shops have run out of bottled mineral water and the entire population can no longer be supplied…the water becomes drinkable again. The sad alternative is to either let the population drink irradiated water or to die of thirst.

In brief, this accident which is jeopardising the “survival” of nuclear reactors potentially risks being more serious than the accident at Chernobyl. As stated by the Japanese prime minister: “the situation at Fukushima is unpredictable”.

But let’s get back to our little retrospective. Check it out for yourselves by calling on your memory (you will see that this works well) or by searching the internet for all the podcasts for this period which are to a large extent still online).

On Tuesday 15 March the European Commissioner for energy stated that it is “the apocalypse”.

Financial markets across the planet are in free fall. The mega crash is fast approaching and it risks making the subprime crisis in 2008 seem like a mere trifle.

The next day, on Thursday 17, there was a great change in how information was broadcast and managed. A helicopter took off with some buckets of water to pour onto the smoking reactors “trusting to luck” (look back over the videos to understand the accuracy used).
Thanks to these wonderful images, the Press unanimously spoke with effect from Thursday of “Glimmers of hope at Fukushima “. The markets are rebounding, the main thing is safe (our money).
The Japanese can calmly go on exposing people to radiation.
Using the following link you can see around ten good definition aerial photographs of the various buildings at the Fukushima power plant. They are not very reassuring.

On Friday 18, some tankers from the Tokyo fire service also arrived to hose down the smouldering ruins which, I remind you, officially did not explode. In fact there were huge explosions witnessed by the entire planet, but they were not serious. Obvious they were just controlled degassing activities (hydrogen) which exploded but nothing to be alarmed about, the reactors are fine, honestly!. Thanks to this, the Press were unanimously able to lead with headlines such as “Encouraging Progress at Fukushima”!
I advise you to read the report entitled, “the Battle for Chernobyl” which provides an exhaustive clarification on the risks and challenges faced by the ex-Soviet empire in order to limit the extent of this nuclear catastrophe. It is important to note that hundreds of helicopters, thousands of armoured vehicles and more than 500,000 men were used to construct the sarcophagus around the damaged reactor. At Fukushima the problem is multiplied by six. How are they going to deal with it?

It is therefore certain at the time that I am writing these lines. We are faced with an unfettered pack of lies which we are forced to watch powerless as it unfolds. Except for the fact that the internet exists today and we have more chance to keep ourselves informed. We are experiencing a real Chernobyl 2 !!

Multiple under-estimated economic consequences

Is there any hope left? Doubtlessly there is, and being an optimist by nature, I want to believe that solutions can be found. Nevertheless, the official radioactive pollution is now spread over more than 100 km. Tokyo, the capital, is situated less than 250 m from the Fukushima nuclear plant. The entire North of Japan has been substantially affected, not to mention all the areas which have been wiped off the map by the double whammy of the earthquake and the tsunami.

The French government has just set up a special unit in order to plan as best as possible for the shortage of components which will certainly affect France starting from April leading to certain production stoppages and probably measures of technical unemployment in certain industries.

Apart from the losses in human lives, the cost of this double catastrophe (natural and nuclear) is far from being known and is certainly currently be played down. The last assessment talks about more than 28,000 who are dead or missing. There is more than 350,000 left without shelter in the North-east of Japan, 70,000 people have been evacuated within a 20 km radius around the plant. Between 20 and 30 km, 136,000 other people are waiting to be evaluated after being confined to their homes for more than 15 days.

Japan as the second largest economy in the World (or the third according to how China is classified) is a vital link for globalisation. Japan is heavily affected and faces a number of major challenges:

- A nuclear catastrophe which is absolutely not being overcome and which may eventually lead to a drama in the event of any worsening of the situation in one of the affected reactors.

- debt of more than 200% of GDP (by means of comparison, France has a debt ratio of around 80% to GDP whereas that of “bankrupt” Greece is 120%). At the time of the Kobe earthquake, the debt ratio of the Japanese state was only 85% of GDP (this was in 1995). The reconstruction effort risks leading to an unsustainable increase in this country’s debt which will speed it towards unprecedented economic difficulties. On 15 May 2010, the alarm bell was also sounded by the IMF and the rating agencies on the non-sustainability of Japanese short-term debt.

- Industry virtually at a standstill. The Japanese are the inventors of the Just in time methods which, even if they have convinced the World, demonstrate their limitations in the event of catastrophes. The consequence of the total absence of any stock is the halting of numerous production activities leading to massive shortages on supermarket shelves which still remain empty at the present time. No more water, less and less food, major power cuts which no longer make it possible to manage stocks of fresh or deep-frozen products.
With regard to the major international companies the example of aircraft manufacturer Boeing is striking with Japanese companies building 35% of some models of aircraft.

- A currency value which is spiralling upwards. The massive purchases of the Japanese yen and companies who are liquidating their overseas assets in order to repatriate them to cope with the National reconstruction effort have propelled the Yen towards an historical high. Added to the “natural” appreciation of the currency is major market speculation on fund repatriation forecasts.
The consequence is that a currency which is too strong triggers a significant decrease in exports, given that a brutal increase in the value of the currency cannot be offset by an increase in productivity especially in a country ravaged by a natural catastrophe of this size. Nevertheless, in the medium term and bearing in mind a expansionist monetary policy, the Yen should find a more acceptance exchange rate.

- Japan is a country with a very heavy population density. Many people but not many habitable spaces. On average, the price of real estate is the most expensive in the World. Banks therefore there have particularly large outstanding real estate loans. In the region of Fukushima, more than 70,000 people have already been evacuated. In Ukraine, next to Chernobyl, the town of Pripiat is still a ghost town 25 years after the explosion of the reactor. There the banks did not have any loans. There were only 45,000 inhabitants. What will become of bank debts in this case? How will the losses (because they are large) be managed? Might we again face a major international banking crisis as the extent of the Fukushima nuclear catastrophe appears? Imagine the extent of the impact on real estate debts in the event of the evaluation of Tokyo which houses 35 million people…..a situation which it is quite simply unimaginable from a financial perspective. The economic system could not cope, or would cope with great difficulty. Perhaps this is why the situation in Fukushima is no longer alarming after 17 March 2011.

- Japan is an aging country, whose current population of 127 million has been decreasing since 2005 and is set to be halved between now and the end of the century to reach 60 million inhabitants.
But how can these debts be repaid without economic and demographic growth, Mechanically and mathematically, the less the number of inhabitants the bigger the total debt per head of population.

- The Fukushima nuclear accident has revived the fear about nuclear power. In the United States, no nuclear reactor has been built since the accident at Three Mile Island in 1979. After Chernobyl, there has been no further development of any nuclear power plant in USSR, the same will be true of Japan after Fukushima. In German 7 reactors have already been halted because they were deemed to be too dangerous.
The only rapid and credible replacements for energy in the short-term are Gas and obviously Petrol whose prices might be propelled to highs in the coming weeks. Economist are agreed, however, that a barrel of petrol whose price exceeds 120 dollars leads the World economy into a recession. As at 4 April the price of a barrel of petrol was still rising and seemed to have sustainably settled at over 110 dollars.

Towards an acceleration of changes which are already being felt

It is therefore to be feared that all of the cumulated factors discussed present a global systemic risk to the global economy which might be hard to redress in the aftermath of Fukushima and the slow agony of this nuclear cataclysm being witnessed in Japan. Perhaps we are witnessing the premature disappearance of a Nation, of the slow dawn on a Empire.

You wanted to save money in the short-term despite the life of mankind, you will lose mankind and you will lose money because there is no wealth without mankind.

Indeed, even oysters risk deserting our New Year’s dinner tables. Affected and decimated by a mysterious illness, our producers have ordered spats from Japan in Sendau. Japanese producers are also lacking our oysters.

It is still not time to make the tally. Having said this, the Fukushima accident may well be the signing of the death warrant for the nuclear industry which is a dangerous industry and about which we neither know how to manage the dismantling work nor how to manage waste and whose costs are not taken into account in the operating prices for this energy which is more expensive than people think when all this indirect costs are included. This is not to mention the price to be paid in terms of a catastrophe which are quite simply unbearable both in financial terms as well as in human suffering. The “‘homo economicus ” will have to learn another form of sobriety.
From Peak Oil to the depleting of raw materials, from the challenges faced by agriculture in feeding our planet to the sharing of water (threatened resource) the World is changing.

The Japanese cataclysm will undoubtedly hasten these changes.

Translated from an article by Charles SANNAT

In last nights website update resistance was listed at 1437.50-1446 and the high so far is 1439. Support was listed at 1419-1425 and the low so far is 1430.

London Gold Fix $1434.50 +$2.00

There is a lot of cross current news this morning moving gold.

Gold prices were showing some positive action initially overnight despite minor strength in the Dollar versus the Euro and a few others. The gold market got marginal support from suggestions from the US Fed Chairman Monday night who labeled inflationary pressures as transitory, as that seemed to suggest that the Fed chief was a little less confident that inflation would indeed remain in check. In other words, the trade seemed to take the Fed comments overnight as a sign that inflation pressures were being acknowledged but were not fully entrenched yet. However, the Fed Chairman also suggested that recent price gains were probably temporary and that left the gold market somewhat confused. Indeed — he looked nervous during the discussion.

The gold market garnered some support from news of a credit downgrade of Portugal overnight, especially since the ratings suggested that the status of that debt remained under review.

Gold traded in the 1434 to 1439 area up until the London open. However, outside market action have limited gold prices early in the trade today, as some commodity markets like corn corn and soybeans started out on a softer footing–at least initially.

The gold market was also undermined by news of further Chinese tightening action overnight. The Chinese moved 25 basis points on lending and deposit rates and that event probably increased overhead resistance in the US gold market this morning near the 1440 area. Still — the last few rate increases from China had almost no effect — pretty much about what we’ve seen so far today. Over the last four hours — gold has tried to break below the 1430 area. Each hour has

The gold market will also be watching the GOP budget proposal release later this morning, as aggressive deficit reduction efforts could also be seen as a limiting development for gold prices. Paul Ryan has rolled out the plan and the big number is 6.2 TRILLION DEFICT REDUCTION OVER 10 YEARS —– The proposal was just released — so it will take a few days to see how the market absorbs this and how the debate unfolds.

Meanwhile the US BUDGET DEFICIT CEILING runs out FRIDAY — and the politicians are going back and forth in threats to not extend the ceiling on the Republican side.

While equity markets in Asia were mixed during overnight trading, stock indices in Europe are generally lower this morning. The Dollar was slightly higher against most of the major currencies during overnight trading, although posting a substantial loss versus the Pound.

A credit ratings downgrade of the sovereign debt of Portugal by one level this morning. Euro zone Retail Sales during February were down 0.1%, lower than expected. Major US economic numbers released this morning include a survey of US non-Manufacturing industries grew less than expected, but it wasn’t a barn burner.

GOING TO THE GOLD CHART — today we show the daily chart and the short term cycles we follow on the website. Orange circles are when the stronger trends usually peak — and the blue circles are when the weaker trend usually ends. While not all points work — take February for example — there is enough to at least keep an eye on developments. The trend is still up —- watch 1439-1444 as a key area.

On the downside — there has been a test every hour since 7AM EST of the 1430 area but so far it is holding— and that puts SUPPORT for the remainder of the day at 1425-1430. As long as price is above that area — its still up.

In summary —- the trend remains up —-We think that 1439-1444 is the PIVOT PRICE AREA TO WATCH — and closes above 1444 would increase the potential for the upside. PRICE ALWAYS RULES — but these short term trends need to be watched going into Wednesday. AS LONG AS PRICE HOLDS 1425-1430 support today — continue to favor higher.

by Bill Downey

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In last nights update resistance in gold was listed at 1437.50-1446 and the high so far is 1439. Support for today was listed at 1419-1425 and the low so far is 1427.60

London Gold Fix $1432.50 +$1.50 LME

While the Dollar is slightly higher early, the Greenback remains within striking distance of last week’s lows. With the gold market overnight seeing a rather hot ECB inflation reading and seeing crude oil prices claw out another fresh new high for the move and a host of commodity prices trading higher, the gold bulls feel somewhat confident to start the new trading week.

Some players in the market expect some dovish comments from the Fed’s Bernanke today and after dovish dialogue from the Fed’s Dudley at the end of last week, the threat of rising US rates may become an issue but so far — it seems to be just talk. There is a G20 meeting mid-month so that’s something we’ll have to keep in mind.

Some players think that news of a release of RAD into the ocean in Japan is a limiting issue for gold, but one could also suggest that development could ultimately be inflationary if Japan is forced to seek alternative protein in the grain and livestock markets.

The Commitments of Traders Futures and Options report as of March 29th for Gold showed Non-Commercial traders were net long 213,983 contracts, an increase of 3,448 contracts. The Commercial traders were net short 264,085 contracts, an increase of 1,242 contracts. The Non-reportable traders were net long 50,103 contracts, a decrease of 2,205 contracts. Non-Commercial and Non-reportable combined traders held a net long position of 264,086 contracts. This represents an increase of 1,243 contracts in the net long position held by these traders.

While equity markets in Asia and Europe were mixed during overnight trading, early indications are for the US stock market to open today’s session with moderate gains.

The Bank of Japan’s Tankan survey of Japanese manufacturers projects that business conditions in Japan will worsen during the next three months as a consequence of the Sendai earthquake.

A Libyan envoy has traveled to Greece to begin discussing an end to hostilities in that nation. The US State Department is flying their employees out of Syria due to continued unrest.

Euro zone PPI during February was up 6.6% year-on-year, in line with market forecasts.

Going to the charts ……………..

On Friday’s update we discussed the tendency for gold to move higher after the USA unemployment data and after hitting a low of 1412, gold rallied back to the 1430 area for the close.

Coming into today and the 1439 high — it really comes down to whether gold is going to burst through the 1444 area this week. A WEEKLY Friday close above 1436 — and 1444 is needed to add to the upside potential. Although the trend is still up — the stronger trends we watch are due to peak here between today and Wednesday and a weaker trend is scheduled to begin and last into mid-month. Price always rules — and turn points are secondary — so we would want to see price begin to react and show weakness before we consider that the weaker trend has kicked in. But it’s something we need to be aware of should gold begin to trade lower. First Targets for this coming week to watch for is the 1440 to 1453 area. I’m looking to sell 1/2 my long short term gold positions from 1406 and 1418 should we trade up to the 1450 area.

The chart shows two red arrows —- the lower arrow shows the Feb lows how the market pulled back to 1325 on four occaisions in one week but was not able to break lower. The same condition happened last week — where there were four pullbacks to the 1410-1412 area — all of which produced a nice bounce back up. The lows were right on the lower purple channel line on the chart. This kind of action usually favors higher prices.

Thus, from a swing trade standpoint — as long as we remain above the 1408-1410 price area on a closing basis — the trend is still up.

Resistance is the 1439-1447 area today and first support is the 1427-1432 area.

In summary — the gold market trend is still up. A daily close above 1436 and/or 1444 would be helpful and favor higher prices into Tuesday/Wednesday. Going forward —- as we mentioned — the potential for gold to peak this week and begin a sideways to lower trend into mid month is a consideration when we look at short term cycles. However the seasonals do favor higher overall into the month of May so an April pullback — should still garner higher prices into month end and early May should we get a pullback. The trend is still up.

by Bill Downey

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No-one has a crystal ball to look into the future. However, this did not stop Rob McEwen, Chairman and Executive Director of Minera Andes and US Gold Corporation, from voicing any doubt in his belief that if the current trend continues the price of gold might reach $5,000 an ounce over the next three to four years.

McEwen based his predictions on the constant demand for gold from sovereign states, central banks and investment funds which are quoted on the stock market. Moreover, he justified this time frame and the forecast of $5,000 based on the historical price of metal and the ratio for the Dow Jones share gold index since 1970.

“Gold is used as an insurance by poor governments”, stated the executive during a mining conference being held in Hong Kong. What is certain is that no-one is in a position to say that McEwen does not put his money where his mouth is: this businessman has ensured that some 90% of his own personal assets are deposited in physical gold and he added that he owns a 31% shareholding in Minera Andes and 20% in US Gold Corp, both based in Toronto.

Currently the price of gold is over $1400 an ounce owing to the fear of investors about the situation in Libya and Japan. Since last year, the doubts caused by a global economy not managing to recover from the international financial crisis which broke out in 2008, has made gold into the asset preferred by investors who are looking to get out of “paper money”.

In these times, the economic uncertainty has become more accentuated owing to the risk of default by Portugal which is in the middle of a political and economic crisis which has led to the fall of the Prime Minister José Sócrates. According to some European sources, the financial rescue of Portugal will cost in the region of $100 Billion.

In last nights website update resistance was listed at 1438-1445 and the high so far today is 1438. Support was listed at 1418-1423 and the low so far is 1430.50

London Gold Fix $1434.00 -$8.25

In the early action today, April gold prices are sitting roughly $10-12 below the Thursday highs. A large portion of the corrective action was seen at the end of the prior trading session and prices this morning are trading in the mid to upper 1430’s. A margin rate increase in silver was probably the catalyst for the sell off on yesterday….. but it was certainly coincidental that we mentioned if a sell off into options expiration on Monday for Gold was in play that Thursday would be the most likely day.

Many gold players continue to think that the Euro zone crisis will provide support to gold prices going forward, as the fear of contagion or knock on influences have returned to the forefront.
Others in the trade noted that gold was able to gain in the face of weak US economic readings and that is considered a change of pace from the pattern that was seen in the beginning of March. In other words, some traders think that a series of weak US data points are capable of extending US QE and that in turn might give rise to a future inflation problem.

The Dollar is holding against most of the major currencies but is still fighting to get back above 76 and still remains in trouble on the charts as we close out the week.

Japanese authorities have suggested that one of the Fukushima reactors was leaking due to a broken core has increased an already dangerous condition.

Syria protests have been escalating as demonstrations are being driven by political demands. Economic issues and inflation concerns are behind the unrest. There are scheduled protests in UK also this weekend.

In today’s gold action, price is in a trading range and is very choppy. With the weekend approaching, yesterday’s downdraft, options expiration on Monday, the middle east and Japan situation, and traders moving from the April contract into June–it has created a lot of cross currents in today’s trade. Support for the remainder of the day is the 1420-1425 area and resistance is the 1438-1444 area. A close above this area would tend to favor the upside going into next week.

I cut my short term position in gold in half last night so as to lighten up for the weekend. Should there be a pullback into options expiration on Monday — I’ll look at adding it back in the 1415-1420 area or at the lower purple trend line on the chart.

In summary — yesterday’s pullback seems more manipulative action — and price should remaining choppy and range bound for the remainder of the day. The charts and the trends still look up into the first week of April. If there is a pullback early next week we’ll look at the price patterns and see if there is a good setup.

by Bill Downey

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After its tenth consecutive year at a high, and after closing 2010 with a 25% increase, the price of gold will continue the same trend in 2011.

Precious metal experts, financiers and market analysts from different countries all agree that the combination of factors which encourages a high price for gold will continue to benefit the sector in 2011 and investors will continue to see gold as a safe haven in the face of a very delicate global economic situation.

Those who had already made an investment in gold are looking at the global context to decide if this is the time to take profits or else continue their investments in precious metals.

Those who had not however, especially in Europe, now see gold as the best value protection for their savings and investments or for anyone seeking to diversify their holdings. But the measures adopted by the Central Banks have also contributed to encouraging the increase in the price of this commodity.

Analysts from UBS have upwardly revised their forecasts for the price of gold. The reason is the uncertainty generated in the European financial system, the weakness of the dollar and the growth in inflation in Asian countries which are leading to growing debts in Western countries and an excess of liquidity in the USA.

Jim Rogers, the commodities investment guru, said that gold will continue to rise over the next decade, although it may fall off before it reaches historical values adjusted for inflation.

Anne-Laure Tremblay, a precious metals strategist from BNP Paribas, stated that “the price of gold is being helped by a weakly backed dollar and solid investment demand”.

Bill Bonner, of Moneyweek and the Daily Reckoning, stated recently “Back in the real world, gold is trading at about $1,400 an ounce, up from less than $500 five years ago. That’s a 23% annualised return, far outstripping the gains on stocks (1.1%) or bonds (6.1%). Fear is driving a lot of the rise.”

According to a report from Swiss private bank Sarasin, one of the main developers of sustainable investment products in Europe, “the price of gold over recent months has been mainly driven by investment demand. This is principally reflected by the growing quantities of gold held in exchange-traded funds (ETF)”.

“The outlook for metals will remain positive next year. There is sufficient demand from the investment perspective in order to maintain a relatively upward trend, particularly in gold”, said Darren Heathcoat, operations manager of Investec Australia in Sidney.

For its part, the German newspaper Handelsblat remarked in one of its columns that investors who are temporarily betting on gold “can rub their hands”. It added that central Banks have moved from being sellers to buyers of this metal and this is an unequivocal signal about the safest place for investors.

Through a presentation by Sabine Schels, a global commodity strategist from Bank of America – Merrill Lynch, the Bank says it expects that raw material prices will rise next year as a result of a strong growth in emerging countries. She went on to say that they envisaged the price of an ounce of gold would exceed the $1500 threshold during 2011, despite the unfavourable outlook for developed economies during the next few quarters.

According to Schels, some emerging economies such as China or Brazil could implement more rigid monetary policies in order to control inflation and facilitate growth. This could possibly translate into an important brake on the price of raw materials, depending on the sources. However, it would be compensated (and maybe even exceeded) by increasing Government spending on improvements of their infrastructure and housing, for example.

The Bank of America representative announced their view that oil prices could temporarily exceed the $100 a barrel threshold, using as a reference Brent Crude, which currently hovers at around $90 a barrel. Similarly, she added that Copper could easily achieve new historical records in 2011.

“Of course the European debt crisis, as well as the risks of inflation in China, have recently fuelled the States nervousness when the announcement of the second round of Quantitative Easing came from the Fed, especially as we believe there will be a shortage of raw materials in 2011″ explained their analyst.”

In this same context, reported by the newspaper El Economista, Alan Valdes, Director of Investment at Kabrick Capital, stated that gold will certainly reach $1500 an ounce by the end of the year, oil has attained its peak during the last two years, Wheat will exceed its records of the past three years, cotton is more expensive than during the civil war… and as long as the dollar does not rally up, then commodities will continue to climb.”

Bank of America – Merrill Lynch predicts that the price of gold will reach a maximum of $1500 an ounce in 2011 and thus continue its trend of recent years, allowing it to further increase yields of 2010.

For Schels, investors’ fears over the Eurozone sovereign debt crisis have resurfaced with the financial aid granted to the Ireland, which caused the devaluation of the euro at the same time that the dollar was losing its value. The eyes are now firmly on Portugal and the impact that it could have on the deceleration of the Spanish economy.
According to this analyst, all these factors reinforce the idea that gold will continue to be an alternative refuge and safe haven for savers and investors, causing its price to rise still further during 2011.

Time is running out for the dollar

Gold is linked to the US dollar and in a simple equation strong dollar = weaker gold, weak dollar higher gold price. The future strength of the dollar depends on the economic prospects for America and they are not good, therefore the dollar will weaken and gold strengthen. On top of these there are moves afoot to remover the dollar from its status of reserve currency which to date has been a factor supporting for the dollar.

Earlier I reported that Europe can no longer support its very expensive social welfare programs and the shrinking working population will not be able to support the growing pensioners with there over generous pensions and of course the ugly head of unemployment.

I also indicated that the US viewed the European situation with derision as its old fashioned ideas dictated that its time was over.  “Judge not lest you be judged” as written in Mathew 7.1 is very applicable to the American situation.

The prosperity of the USA after World War II led to an explosion of population  who were labeled the  baby boomers  and they total some 78 million. These now approach retirement and will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars.

The U.S. is bankrupt, tax, retirement benefits and health care are in a mess

Neither spending more nor taxing less will help the country pay its bills.  With a $4 trillion fiscal gap the US have three courses of action or a combination of the three – reduce significantly the benefits of the “baby boomers” – huge tax increases – print more money, which is the current policy.  Realistically printing money needs to be supported by the reduction of benefits and increases in taxes.

Additionally last month the IMF has effectively pronounced the U.S. bankrupt by stating  “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

Rather than be judgemental of Europe the U.S. should look at themselves and realize they are potentially in a worse financial state than Greece

For some time now both Russia and China have been pushing for an alternative to the dollar as the reserve currency. While the West has been forced to sell  off assets to compensate for loss or to pay off debt, cash rich China has been buying assets, in particular gold and using those assets as a form of currency to offset the increasing fragile dollar. This is all part of a long term strategy to boost their own currency the Yuan to become an internationally accepted currency.

If that was not enough in the last few weeks the United Nations report “World Economic and Social Survey 2010: Retooling Global Development” called for the creation of a new global reserve currency to replace the U.S. dollar as the single major reserve currency.
“The dollar has proved not to be a stable store of value, which is a requisite for a stable reserve currency,” it said.
It suggested that the reserve should be based on  the existing  Special Drawing rights  (SDRs) created by the IMF to supplement member countries reserves: but with a new basket to reflect the changing weight of global economies  and include emerging countries currencies ( the Yuan) thus downgrading the importance of the dollar.
“To summarize, reducing dependence on the dollar through increased use of a created currency made up of a basket of currencies such as the SDR could be a significant step towards greater stability in the world economy,” the report concluded.

Compare the dollar to the British Empire, once the greatest the world has known, which  has now out lived its usefulness and faded into the memory of once what was. The dollar has not yet fallen that far but it is well on its way and gold will become more important and stronger as a result.

Maurice Hall

We need to go that way to avoid the rocks

The European Union is facing an economic and political crisis that threatens the single currency, exposes greed, bureaucratic strangulation, unsustainable social welfare programmes, raises questions on protectionism and the very fabric of the free market. If that was not enough, the weakness of its leaders becomes apparent and two of the giants France and Germany support a different solution. There is a very English phrase “ to muddle through” and that is what European leaders have been doing and hope they can continue doing so as not to put emphasis on radical change that can upset the apple cart either internally or externally. Muddling through depends on growth.

The European Union is still the world’s largest economy supporting over 500 million people of diverse race, cultures and languages. However, the EU is facing both an economic and a political crisis as governments and companies cannot easily borrow money and the euro wobbles. Initially the weakness of the euro was shrugged off as speculation and Anglo-Saxon conspiracy, but the real problem is that social welfare in many countries is so protected and expensive that it is strangling the economies. Europe has to grow just to maintain its welfare systems and innovation just to pay for increasing old age pensions and unemployment is not inspirational. Of the 27 countries in the EU only Poland managed positive growth in 2009, while it is true that recently many have now turned positive, but it can only be described as mediocre. Outside of Europe the perception is that the protectionist policies for citizen welfare indicate that there is no longer the guts to tackle the problems. A sick Europe benefits nobody and arguably, were it healthy, then the worst of the global crisis would be over.

It is the courage of Europe’s leaders to initiate structural reform that comes into question. As Jean-Claude Juncker, prime minister of Luxembourg, said memorably in 2007-  “We all know what to do, but we don’t know how to get re-elected once we have done it.”  Many of Europe’s problems stem from election seeking misallocation of public spending with years of subsidizing powerful interest groups, increasing civil service payrolls, early retirement schemes, job protection and unemployment benefits. Between 2005 and 2030 the working-age population of the European Union will shrink by 20m, and the number of those over 65 will increase by 40m. In Belgium only 35% of citizens over the age of 55 work. It is almost impossible to sack a person in Spain, great for those in work but for the 40% youth unemployment that it generates, it is immoral.   European leaders underestimate the realism of the voters and proposals in the UK and Netherland to raise the retirement age to as high as 70 have met with moans but no angry protest.  In France, according to an opinion poll proposals to increase the retirement age were unjust and did produce the usual French protest, few disagree that the current state pension scheme faces insolvency.

The single market does not truly exist and the EU is almost a third less productive than its American counter parts in services, because countries hide behind national barriers and so do not gain full economies of scale. Anyone who has worked in a multi national industry knows how difficult it is to get policies implemented, products introduced or to comply with a European directive that has been interpreted 27 different ways into national law. No company with any sense would open a factory or an office in France, Italy and some other EU countries, where protectionist employment laws could kill that company. I personally know of a case where a multi national company was trying to tighten its purse strings to remain solvent and Italian law forced that company to increase the salary of Italian employees and maintain periodic pay rises. In desperate times protectionism has raised its head. In France with Mr. Sakozy suggesting that French cars for French drivers should not be made in former Eastern bloc countries and the EC had to intervene to stop Germany offering incentives to a consortium proposing to buy the failing Opel company, to keep the German factories open to the detriment of more cost effective plants elsewhere.

This crisis has the ability to pull countries closer together or pull them further The key is Germany where they are furious that they have to bail out other countries until they realize that they created the situation in the first place. Germany companies have done very well and the economy has grown with exports particularly to Greece where they have risen by 130% in the last 10 years. So how did Greece pay for these exports. with loans from German banks. Therefore, it is essential that they and the French to a lesser extent rally around the single currency as they are sat on a large amount of southern Europe sovereign debt. That has been the pattern the industrious north has done well but those around the Mediterranean have been affected by the sun leaving the idyllic life but unable to pay for it. Great for a holiday but not for life, in fact Greece has become the most obese in Europe where once they had one of the healthiest diets.

The alternative approach is to a number of separatist theories with retraction from the Euro or a North South divide where the super efficient North have a strong euro and the languid south another. Which would France join?

Practically what can EU leaders do and which direction can they take and what have they done so far?  To date there have been last gasp austerity measures that may well in the short term pacify the bond market but is a risky course of action. These measures will inevitably lead to a weakening growth rate and increased unemployment. The same arguments were the difference between Labour and the coalition in how to solve the UK’s financial problems where at least there is time as the UK’s debt has the longest due date of all in Europe. Now Spain, Greece and Portugal face a log hard struggle to rebalance their economies

Markets have lost faith in the euro and the hope was that the economies of the 16 countries that use the euro would converge. The struggle to regain creditability with markets has lead to a divergence on the course to be taken by Germany and France. Germany has gone for stricter rules and discipline on borrowing and spending, sanctioning governments who fail to toe the line to the extent of freezing funds for EU mega projects and suspension of voting rights. The French favour a system of redistribution from richer to poorer members with some fiscal and social harmonization.

Germany’s proposals are unworkable, the reaction to losing voting rights is unacceptable particularly to the former communist countries where there has been such hard work to lead to democracy. Stopping funding on EU mega products where they cross boarders could penalize other countries. To redistribute, as the French recommend, to save the euro would require an equally unacceptable step towards political union.

What is the likely outcome?. It is likely to be a  form of compromise with temporary rescue packages, informal and semi formal discussions and agreements – in other words a muddle through.

It is possible for the EU to agree and force through essential legislation when it is a matter of survival. A key demand to European business is an EU wide patent that has been stuck for years over the status given languages in Spain and Italy. On 1^st July the EC forced this through to be valid in all 27 countries. Another example of the power of the EU market is where Germany was told it could not spend taxpayer’s money to protect Opel jobs in Germany without the same support to other countries. It is possible that the people understand the need for a free market economy better than their leaders where in a recent pole 73% of Germans and 67% of French said they were better off in a free market. Interestingly a greater percentage than in the middle of the boom and greater than America. We have already mentioned the need to pay for pensions and the less than feared reaction to raising the pension age. In the countries brought to the brink of disaster, the civil unrest was much less than expected and dominated by public sector workers with safe jobs. The leaders should have courage as this crisis gives the excuses for radical reform and there are hints that citizens are prepared to take there medicine.

However, the best bet would be a muddle through and hope for the growth that is needed to sustain it. An opportunity lost.

Maurice Hall

Originally the regulators, the Committee of European Banking Supervisors (CEBS), were only to look at the biggest European banks but they expanded the list to include 91, after there were some worries over some medium sized banks.  Collectively these 91 banks represent 65% of the European banking sector and the number and size of banks vary from country to country but must be at least 50% of each countries banking sector.

The failure rate was lower than expect as many experts predicted that as many as 12 would fail. Of the seven that failed 5 were from Spain (Diada, Espiga, Bianca Civica,Unnim and Cajasur, one from Germany (Hypo Real Estate) and one from Greece (ATEBank).

By conducting these tests it was hoped that international confidence would be restored to help finance economic recovery and to overcome the worry that European banks were either not strong enough to withstand a double dip recession or have large exposure to countries that might default on their debts. Also to identify any vulnerable bank so steps can be take to strengthen them. The aim is to continually test out the resilience of banks in the EU periodically and undertake a continuing program of improvement.

The banks were tested in scenarios where different assets might fall significantly in value, such as the collapse of a property market and if this resulted in losses so great that the banks capital was wiped out, then insolvency would result. E.g. if a loan cannot be recovered the bank writes down its capital by the amount of the loss and the investors take that loss and if the banks assets cannot repay all of its borrowings then insolvency follows.

The banks that failed will have to agree a plan over given time period to resolve their shortcomings.  The five Spanish banks to fail were regional savings banks with heavy losses due the downturn in the Spanish property market, but savings banks have been undertaking a restructuring process by the Bank of Spain so the overall picture in Spain is was considered sound.

The British Bankers Association said that work had already been  put in to strengthen UK banks and the four major UK banks RBS, Lloyds, HSBC and Barclays exceeded the standards set.  Also tested and passed was the Spanish giant Santander who own Abbey, Bradford and Bingley and the Alliance & Leicester in the UK, as was the Bank of Ireland who provide the banking services for the UK Post Office.

There are market concerns as although the EU set the parameters for these tests, they were conducted by national regulators who may have been lenient on their own banks. The test is against a ratio of tier one capital (capital of the highest quality) which is a core measure of the banks financial strength and a measure of insurance against loss. The trouble is that some of the forms of capital used in the test proved useless against losses in the recent crisis, thus the measure is more favourable to the bank. This pales into insignificance against the real problem with these tests and that is there is no test against sovereign debt, which is what brought us to crisis with Greece on the verge of bankruptcy.  So this appears to be more of a political exercise, as the EU will not even contemplate that a country within it, would default on its debt

However, the test that confidence has returned will be if today, the interbank lending market makes it easier for banks to borrow.

Read full report and results

Maurice Hall