"Full Fledged Panic" - World Economic Crisis Moving to a New Stage UPDATE:Euphoric Stocks Bubble While Wages Plummet

[Ephilant]

Some time ago, the IMF issued a paper on the effects of sovereign default. First thing they did in the intro is to make sure they distanced themselves from the findings, just in case...

After 39 pages of quoting and distilling research, the authors conclude:

Overall, emerging-market governments need to be aware of the potentially adverse effects for their domestic economies of negative country-risk perceptions by international investors and rating agencies. Government actions affecting sovereign risk (for example, threats to default on sovereign debt or delayed debt renegotiations) may have unintended consequences for the country’s corporations. Put differently, emerging-market governments interested in fostering the development and growth prospects of domestic private firms should avoid policies or rhetoric that negatively influences the country’s sovereign spreads and rating.

Basically, "say what we like to hear, or else..."

It would however seem that if somebody doesn't play ball, e.g Greece and Tsipras, the effect on "international investors and rating agencies" is one of panic, and the only answer is a sustained campaign of mis-information by "allied forces" (media, politicians, financial institutions) instead of an open minded listening to what the other party might ACTUALLY be saying...

Here is the full study.

[barrym]

As an example I would cite the recent cases in the US against the New Jersey based pharmaceutical company "Johnson & Johnson".

It is well worth your while checking these guys out, and more importantly, what they have been up to.
Suppose this kind of penalty was applied in let's say Ireland re. the immorality of the gains made due to the lack of implementing bank regulations...

Was a $1.1 billion fine enough? Probably not, but it's a start.

Bit of mixed metaphor here, pharmaceutical co's are always getting slapped for launching drugs before the testing was completed, (another) aspect of amoral/immoral capitalism. The common aspect of the thing is that the FDA in the US has been caught several times turning a blind eye. In our case the regulator didn't even look....

There may well be a philosophical aspect to the economic crisis, but the latest German slap down for the Spanish tells the truth, banks must be protected, nothing else matters.
Take a look at what would happen if any bank in Europe was let go, even our incompetent bunch, then we really would have fully fledged panic. Not that I think banks are worth saving, the problem is 'the markets' which is, in effect, the banks; all those guys you see on tv staring at screens work for banks.....

[Count Bobulescu]

4) JPMorgan Chase was warned about its risk controls. "A small group of shareholder advocates delivered an urgent message to top executives at JPMorgan Chase more than a year ago: the bank’s risk controls needed to be improved. JPMorgan officials dismissed the warning from the CtW Investment Group, the advocates, who also cautioned bank officials that the company had fallen behind the risk-management practices of its peers. Now, after disclosing a $2 billion trading loss at JPMorgan in May and watching the bank’s market value drop by more than $25 billion, those officials are expected to follow one of the group’s recommendations, strengthening the board panel that oversees risk. Still, that will not address weaknesses that critics say undermined the power of the bank’s chief risk officer. According to two former traders at the chief investment office and outside specialists, the chief risk officer was not focused on the huge credit market bets the chief investment office made that eventually went bad." Nelson Schwartz and Jessica Silver-Greenberg in The New York Times.

5) Tougher capital rules for big banks are coming. "Regulators trying to promote both sound financial institutions and economic growth are getting an earful from big banks about tougher capital rules. Citing their own studies and ones by independent economists, the banks say holding too much capital would force them to cut back on lending and raise the cost of loans, imperiling the fragile economic recovery. But some economists say regulations requiring plumper buffers for the largest banks are unlikely to crimp lending. The Federal Reserve is expected to propose specific rules Thursday, with more coming later. The requirements, which are aimed at staving off a repeat of the 2008 financial crisis, have been criticized by the banks as excessive. Yet J.P. Morgan Chase & Co., one of the institutions railing against the tougher rules, recently bolstered the case for them, after disclosing a trading loss of more than $2 billion." Victoria McGrane in The Wall Street Journal.

[fluffybiscuits]

http://www.altassets.net/private-equ...-accounts.html

Not just in the US and Europe this happens , seems to be a worldwide problem. The link above was found after your post Eliphant prompted me to read up a small bit on it. Falsifying account information in order to meet profit forecasts is a serious breach of not only ethics but can be counted as fraud as well depending on what jurisdiction the company is. Again the material accumulation of wealth is the driving force behind a lot of big business and they will step on the small man if they will even turn a profit of a couple of hundred.

[C. Flower]

Paul Sommerville is one of the very few who is looking at the world economy as a whole, and is realistic and honest about what he sees -

http://www.independent.ie/business/p...d-3133640.html

But does he have any kind of solution? From what I remember of him from the Vincent Browne Show, he agrees with austerity, which protects the wealthy and accelerates deflation.

AS THE eurozone hurtles towards the abyss, political paralysis reigns. Ineffective policymaking compounds the problem and a disorderly break-up of the euro can no longer be ruled out.

Most commentators believe that this cannot happen as European leaders will do everything to save the single currency.

But "official" experts are always the last to realise the obvious. Just because they wish it not to happen does not mean they can stop it.

Botched financial manoeuvring has done little to dent the delusion that politicians can control the world economy. They cannot. They merely react to each phase. They may delay the inevitable, but they can't prevent it.

This was the biggest credit bubble in history and it will take much longer to resolve. The crisis comes in waves as the market turns from pessimism to optimism, from despair to euphoria.

The short-term panacea -- the ECB's long-term refinancing operation -- has come to a shuddering halt.

May was a bloodbath for the financial markets. Commodities plummeted, capping the biggest monthly slump since 2008, as Europe's escalating debt woes dimmed prospects for demand while Chinese manufacturing slowed.

The S&P GSCI Spot Index of 24 raw materials tumbled 13 per cent in the month. The index declined 6.4 per cent the last week of May, a fifth straight drop and the biggest since September. Wheat, heating oil, cotton and gasoline led the losses.

Crude oil prices sank 4 per cent on Friday, June 1, alone, after it had dropped 17 per cent in May -- the biggest monthly decline since December 2008. Copper fell 12 per cent and is down nearly 18 per cent since its February high. In May cotton prices dropped 20 per cent, the biggest decline among GSCI components. Coffee fell 11 per cent, the sixth straight monthly decline.

Stocks were no better. The FTSE suffered its worst month in more than three years, down 8 per cent. The MSCI Asia Pacific Index fell 10 per cent, the steepest monthly decline since October 2008, when global markets tumbled after the Lehman Brothers' collapse.

Across the globe the slowdown became evident.

India's economic growth weakened to a nine-year low last quarter, GDP increased 5.3 per cent last quarter from a year earlier, the least since 2003, Inflation accelerated to 7.23 per cent in April, the fastest pace among the largest emerging economies. A sharp slowdown in India's foreign trade added to the woes of Asia's third-largest economy; its currency, the rupee, has declined about 19 per cent in the past year.

Reports showed China's official Purchasing Managers' Index eased to its weakest reading this year and Germany's manufacturing sector contracted at the fastest pace in almost three years.

Finally, when many thought things could not get much worse, the USA announced monthly job numbers weaker than expected, leading to near panic as traders rushed for the exits in all asset classes.

It is important to realise that Greece is now irrelevant. Whether they find a temporary solution to keep it on life support or expel it from the euro, their debts are unserviceable and unpayable. The wheel may be still turning but the hamster is dead. Secondly the idea that Spain will be able to get out of this mess without external help is laughable. Thirdly, and most importantly, the ideas such as eurobonds and European universal bank guarantees will be fiercely opposed by Germany, but also, crucially, do not solve the problem, merely helping to hide it temporarily. Lastly, the ubiquitous calls for "growth" are mostly vacuous nonsense. Being in favour of growth is like being in favour of world peace. Unless the huge debt overhang is tackled, growth strategies will favour banks, not the real economy.

The problem now is that the market is addicted to the crack cocaine of stimulus. Last week we saw a fierce rally as China lowered interest rates and the Federal Reserve's QE3 was anticipated. But even with ultra-low interest rates the demand for credit is falling. Deleveraging is only just beginning and that is why the money supply is contracting, and no amount of statements declaring the worst is over will change that. Governments pin recovery hopes on cheap credit, but new debt has gone out of style.

Banks also are hoarding cash by buying government bonds to save themselves.

Credit is the lifeblood of the world economy and its contraction is an ominous warning of an intensifying deflationary trend. Sovereigns take over the lending by issuing IOUs, but eventually the debts overwhelm government efforts to inflate. The idea that sovereigns can inflate at will is challenged by the bond markets -- hence the austerity measures already forced on governments that have been reckless. The level of outstanding debt is unsustainable and will become unserviceable and unpayable. The endgame is debt restructuring and debt forgiveness. The longer we avoid that harsh truth, the longer it will go on.

Politicians will do everything to keep the show on the road without tackling the underlying causes, so another round of stimulus must be on the cards.

This may bring some respite -- but as the man says: "If you can hold your head while all about are losing theirs, you don't understand the enormity of the situation."

[Count Bobulescu]

Speculation has been building in the US of late that turmoil in Europe could cost Obama the November election. Reasoning being that turmoil could affect the US economy and when an incumbent is seeking reelection the contest is less about a choice between two candidates, and more about a referendum on the incumbent.

The idea that the 2012 election in the United States will be decided by the actions of a handful of leaders in Europe is gaining traction. Fast. "Could Europe cost Barack Obama the presidency?" Asks Niall Ferguson in Newsweek. In the Washington Post, Dana Milbanks writes, "if you really want to know who will win the White House in November, you should ask the Europeans." Politico's Ben White agrees: "If Europe takes a sharp turn for the worse...the American economy could easily slip back into recession or even depression and a very close election would likely slip out of the president’s grasp."

Wonkbook readers will know I've long been in sympathy with this argument. Back in October, I wrote, "in 1992, James Carville, an adviser to Bill Clinton’s presidential campaign, used to constantly remind his candidate, 'It’s the economy, stupid.' In 2012, it may well be the European economy, dummkopf."

A caveat, though: It doesn't have to be this way. Europe is an economic shock. But policymakers have a range of shock absorbers meant to help the the United States ride out bumps in the global economy. Congress can cut taxes, put people to work building roads and bridges, and provide money to state and local governments who might otherwise have to make layoffs, to name just a few options. The Federal Reserve can cut rates, tell the market to expect an extended period of easy money, or buy assets.

But while policymakers have these shock absorbers, they don't seem interested in using them. Republicans in Congress are staunchly opposed to further bills to support the U.S. economic in the short-term. That's what President Obama's now-infamous Friday press conference was actually about. "Given the signs of weakness in the world economy, not just in Europe but also some softening in Asia, it's critical that we take the actions we can to strengthen the American economy right now," he said. But then he said that "the private sector is fine" -- a statement he later walked back -- and his original message got lost.

Mangled messaging aside, it's a case Obama has made before: More jobs spending, in addition to helping a weak labor market, would provide insurance against further turmoil on Europe. But no one expects Congress to take his advice.

Similarly, the Federal Reserve is practicing a form of "watchful waiting." If economic conditions get much worse, they promise they'll do more. Probably. But they're not pulling out the stops right now, nor are they expected to unleash any particularly massive policy response even in the event that they do act.
So amidst global economic turmoil, America's economic policymakers are likely to do nothing, or close to it. That means the future of our economy -- and arguably the outcome of our election -- is in the hands of others. It doesn't have to be that way. But, for now at least, it is.

[Count Bobulescu]

Fed: Americans’ wealth dropped 40%.

http://www.washingtonpost.com/busine...y.html?hpid=z1

The net worth of the American family has fallen to its lowest level in two decades, according to government data released Monday, driven by a more than 40 percent drop in their stakes in their homes.
The Federal Reserve’s detailed survey of consumer finances showed families’ median wealth plunged from $126,400 in 2007 to $77,300 in 2010 — a 39 percent decline. That put them on par with median wealth in 1992.

[ang]

German newspaper Handelsblatt has done its own version of the recent Economist cover demanding that Merkel save the world economy -



http://www.businessinsider.com/hande...onomist-2012-6

[yehbut_nobut]

More cheery reading from our friends at FEASTA

Trade Off: Financial system supply-chain cross contagion – a study in global systemic collapse

Overview

This study considers the relationship between a global systemic banking, monetary and solvency crisis and its implications for the real-time flow of goods and services in the globalised economy. It outlines how contagion in the financial system could set off semi-autonomous contagion in supply-chains globally,

As the globalised economy has become more complex and ever faster (for example, Just-in-Time logistics), the ability of the real economy to pick up and globally transmit supply-chain failure, and then contagion, has become greater and potentially more devastating in its impacts. In a more complex and interdependent economy, fewer failures are required to transmit cascading failure through socio-economic systems. In addition, we have normalised massive increases in the complex conditionality that underpins modern societies and our welfare. Thus we have problems seeing, never mind planning for such eventualities, while the risk of them occurring has increased significantly. The most powerful primary cause of such an event would be a large-scale financial shock initially centring on some of the most complex and trade central parts of the globalised economy

We consider one scenario to give a practical dimension to understanding supply-chain contagion- a break-up of the Euro and an intertwined systemic banking crisis. Simple argument and modelling will point to the likelihood of a food security crisis within days in the directly affected countries and an initially exponential spread of production failures across the world beginning within a week. This will reinforce and spread financial system contagion. It is also argued that the longer the crisis goes on, the greater the likelihood of its irreversibility. This could be in as little as three weeks.

Wildeep!
http://www.feasta.org/2012/06/17/tra...emic-collapse/

[Count Bobulescu]

JP Morgan Chase’s loss could reach $9 billion. “Losses on JPMorgan Chase's bungled trade could total as much as $9 billion, far exceeding earlier public estimates, according to people who have been briefed on the situation. When Jamie Dimon, the bank's chief executive, announced in May that the bank had lost $2 billion in a bet on credit derivatives, he estimated that losses could double within the next few quarters. But the red ink has been mounting in recent weeks, as the bank has been unwinding its positions, according to interviews with current and former traders and executives at the bank who asked not to be named because of investigations into the bank. The bank's exit from its money-losing trade is happening faster than many expected. JPMorgan previously said it hoped to clear its position by early next year; now it is already out of more than half of the trade and may be completely free this year.” Jessica Silver-Greenberg and Susanne Craig in The New York Times.

Regulators are investigating the bank’s risk models. “Regulators have stepped up scrutiny of J.P. Morgan Chase & Co.’s internal controls by asking the bank to demonstrate that its risk models are designed and working properly, according to people close to the situation. The Office of the Comptroller of the Currency, the bank’s primary regulator, has requested reviews of models that measure the possible effects of everything from trading losses to interest-rate moves, the people said. A change in one of these models contributed to losses in the bank’s Chief Investment Office, a once-obscure unit that manages $370 billion in excess cash. The change effectively increased the amount of risk traders were allowed to take…The OCC has since April of last year required all banks it regulates to put together reviews and justifications of these types of models. It doesn’t require banks to submit them unless they are specifically requested, as they have been in the case of J.P. Morgan.” Julie Steinberg and Dan Fitzpatrick in The Wall Street Journal.

[DCon]

Another investment company in the US has been stealing client money.

Clients would generally be farmers, using futures to hedge future earnings

Farmers on Tuesday fumed at the prospect of financial losses, or at a minimum a lengthy wait for the return of frozen funds, due to alleged mismanagement at brokerage PFGBest, and some said they had been burned for the last time.

The U.S. futures industry reeled as regulators accused Iowa-based PFGBest of misappropriating more than $200 million in customer funds for more than two years, a new blow to trader trust just months after MF Global's collapse.

PFGBest revealed to clients on Monday that their money had been frozen and that they would be allowed to liquidate open trading positions but not withdraw funds or make new trades until further notice.

The total shortfall at PFGBest represents more than half of its client funds but is modest relative to the estimated $1.6 billion missing from MF Global's accounts.

Unlike MF Global, which is believed to have misused customer funds in a mad scramble to meet margin calls on proprietary trades in its waning days, PFGBest's abuse seems to have extended back years, according to regulators. There is no indication yet of how or why the missing money was used.

http://www.reuters.com/article/2012/...86A00A20120711


the scandal emerged when the CEO attempted to kill himself recently.

According to zerohedge, the alleged regulator had been receiving forged documents from the CEO with his version of the bank balance and had accepted this without any further proof

According to a just released Reuters report, the head of MFG(lobal) part 2, PFG, whose story we broke yesterday, Russell Wasendorf Sr. "intercepted and forged bank documents for more than two years to cover up hundreds of millions of dollars in missing money, a person close to the situation." Once Wasendorf realized he was caught, and knew the implications of his actions would be exposed for the whole world to see, he tried to commit suicide, and failed. "Wasendorf, 64, is reported to be in a coma after a suicide attempt Monday morning, according to a complaint filed by the Commodity Futures Trading Commission on Tuesday that accuses Wasendorf and Peregrine of fraud." And while crime happens all the time, what is truly stunning is that as we reported previously, the CFTC gave the firm a clean bill of health in its January inspection of Peregrine Financial Group. That's 6 months ago. The CFTC, as a reminder, was it regulator. The entity whose sole charge is to make sure that firms at least have real, not rehypothecated, cash in their segregated client bank accounts. PFG never did for the past two years. And somehow the CFTC missed this. MF Global was a warning shot, and the CFTC missed it entirely. And not only that but 2 months later ir pronounced PFG clean. For this Gensler has to be fired immediately, and with prejudice.

More from Reuters:

The source offered new details on how Wasendorf allegedly carried out the deceit, which involved the forging of confidential documents that the NFA uses to verify a broker's cash balance with its depository institution.



Wasendorf intercepted these documents after they were mailed by the NFA, the broker's first-line regulator, to U.S. Bank, where PFGBest had said it had well over $200 million on deposit, the person said. The NFA has said the account actually held just $5 million this week.



Wasendorf had set up a post office box in Cedar Falls, Iowa, according to a second person involved in the matter. It was to that post office box that NFA sent the documents, which were addressed to the bank.



The post office box was neither in Wasendorf's name nor registered to the bank, the second person said.



Wasendorf then forged signatures and fabricated bank balances on the documents and simply mailed them back to the Chicago-based NFA, the person said.



Calls to spokespeople for PFGBest and NFA were not returned. A woman who answered the phone at the home of Wasendorf declined to comment.

http://www.zerohedge.com/news/pfgs-c...gave-all-clear

[Count Bobulescu]

No US city had declared bankruptcy since 2008. In the last two weeks three California cities have declared. Stockton, Pop. 300k, followed by San Bernardino 210k, became the 1st and 2nd largest ever to do so.

http://www.csmonitor.com/USA/Latest-...going-bankrupt

[MPB]

No US city had declared bankruptcy since 2008. In the last two weeks three California cities have declared. Stockton, Pop. 300k, followed by San Bernardino 210k, became the 1st and 2nd largest ever to do so.

http://www.csmonitor.com/USA/Latest-...going-bankrupt

It won,t be long before the State of California does the same.

The EU is,nt the only sham Union with member States too big to bail.

[C. Flower]

Not a recent commentary, but nonetheless, accurate:

‘[The credit economy] reproduces a new financial aristocracy, a new variety of parasite in the shape of promoters, speculators and simply nominal directors; a whole system of swindling by means of corporate promotion, stock insurance, and stock speculation.’

“On the eve of the crisis, the bourgeois, with the self sufficiency that springs from intoxicating prosperity, declares money to be vain imagination. Commodities alone are money. But now the cry is everywhere, money alone is a commodity! As the heart pants after water, so pants the soul after money.’

(‘Capital’ Vol 1 p.138).

“Compensation of a fall in the rate of profit by a rise in the mass of profit applies only to the total social capital and to the big firmly placed. The new additional capital, operating independently, does not enjoy any such compensating conditions. It must still win them, and so it is that a fall in the rate of profit calls forth a competitive struggle amongst the capitalist, not vice versa.”

(‘Capital’ Vol. 3, p. 251)

“The chain of payments and obligations, due at specific dates, is broken in a hundred places. The confusion is augmented by the attendant collapse of the credit system, which develops simultaneously with capital, and leads to violent and acute crises, to sudden and forcible depreciations, to actual stagnation and disruption of the process of reproduction, and thus to a real falling off in production.’

(‘Capital’ Vol 3, p. 249.)

‘In a system of production, where the entire continuity of the reproduction process rests upon credit, a crisis must obviously occur - a tremendous rush for means of payment – when credit suddenly ceases an only cash payments have validity. At first glance, therefore, the whole crisis seems to be merely a question of the convertibility of bills of exchange into money. [getting bonds repaid. C.]... At the same time, an enormous quantity of these bills of exchange represent plain swindle, which now reaches the light of day and collapses.’

(‘Capital’ Vol 3, p. 478).

[C. Flower]

Many trillions of QE in the US and Japan are now driving an insane stocks/equities bubble.
At the same time, wages are going down, and companies are holding trillions on their books to avoid paying
tax.
It seems that we have reached a stage in which it is booming for one small class and slumping for the rest of us.
There is no economist who thinks this is sane or sustainable.
It is pure robbery of the poor by the rich.

In Ireland only Paul Somerville seems to be commenting.

http://www.independent.ie/business/p...-29194676.html

http://www.independent.ie/business/w...-29277973.html