Stephen Leeb | The Real Threat to Europe

This week in our musings, we have some thoughts of our own – and thoughts of others that we have found interesting….

The opening headline in this week’s NZ Sunday Star*Times Business section reads “Gold Production heads to $1b”. It seems that gold is starting to attract mainstream attention, even in New Zealand. Over the page, in Rod Oram’s piece, we find this fact reported:

The sum that we (NZ) owe the rest of the world – our net international liabilities – are now 90% of GDP, the third highest in the world after Iceland and Hungary – and are forecast to reach 100% of GDP by March 2014.

Finance minister Bill English correctly referred to this as “New Zealand’s largest vulnerability”.

I for one would like to know the ratio of our debt servicing costs to our income – this is actually a much more important number then the one above, for the simple reason that it defines our ability to pay our way. Suffice it to say that New Zealand’s vulnerability lies in its requirement to continually borrow from abroad, and therefore our interest rates are inescapably tied to overseas rates. The remarks I made last week about the effect on US debt repayments of rising interest rates apply to us in spades.

Now to some of the articles that have grabbed our attention this week…

  • William Engdahl: Euro slump due to Attack from Wall St and Washington

  • Stephen Leeb: The Real Threat to Europe, the US (Ed: and us)

  • Jim Rickards: Financial Warfare, and More

  • Mish Shedlock: New Proposals to keep Australia’s Housing Bubble from bursting


Euro slump due to planned Wall Street and Washington’s attack – William Engdahl

Germany’s Chancellor Merkel says the Euro currency is at risk and that Europe faces its greatest challenge since the EU was formed.

It comes as stock markets in Europe and Asia tumbled on the surprise news that Berlin was banning types of ‘short selling’ – where investors profit by betting that shares will drop in value.

The euro is under pressure after nations using it had to pull together to bail out Greece, which is struggling under a massive debt and from strikes that are bringing the country to a halt.

Many say the aid package came too late and that the crisis in Athens may be a prelude to the currency crumbling.

William Engdahl, author and economic researcher, thinks it is the greatest challenge since 1999 when the euro was created.

He said the crisis is the result of an orchestrated attack by the U.S. on the dollar’s main rival.

“The whole attack on Greece and the attack on the euro originated from a concerted strategy of Wall Street and US Institutions to permanently cripple or try to cripple the only alternative reserve currency anywhere in the world that can challenge the dollar,” Engdahl told Russia Today.

Stephen Leeb: The Real Threat to Europe, the US (Ed: and NZ!)

Stephen Leeb was trained as a mathematician and psychologist, and I have found him to be right on the money on a number of occasions. He’s another guy I listen to carefully when he speaks… In these remarks he discusses the indirect taxes that increasing energy and commodity prices impose, and his view on gold.

Don’t mistake us: the euro will disappear in time. It’s just that, for now, European nations are taking some positive actions that the market sees as reducing the risk of economic Armageddon. France and Spain have decided to cut benefit packages for their civil servants to reduce their deficits. Germany has approved of the massive bailout package to help Greece, which amounts to de facto quantitative easing.

If there were no further problems down the road, we might expect the euro to eventually bottom out at around $1.10 – maybe a dollar. The EMU might eventually unwind the recent quantitative easing and come through the current crisis intact.

Unfortunately, the road ahead is far from smooth. And the problems that lie ahead have far more to do with resource scarcity than Western governments’ excessive debt levels.

Let’s take an example from the U.S. (just because the data is readily at hand).

While some people enjoyed the weather this past weekend, I confess I spent my time crunching numbers. By doing so, I came to some poignant conclusions regarding the average American family’s energy costs in recent years. Between 2000 and 2005 (the most recent year for which government stats are available), energy expenditures per U.S. household rose from an average of $2,200 (or 4% of expenses) to $5,000 or 10% of expenses.

Although more recent figures on energy expenditures are not yet available, we know that household incomes have fallen since 2005 while energy prices have risen. So it’s fair to say that the average household pays an equal or greater percentage of its income on energy today.

That’s a huge after-tax increase in Americans’ cost of living. It’s like paying nearly $3,000 more each year in taxes – after you have finished paying Uncle Sam. This money doesn’t go towards fixing potholes, making education affordable, or stimulating the economy. Instead, much of this money goes overseas to enrich the oil-exporting nations.

Naturally, the same is true of increases in the price of virtually every other raw material the U.S. imports. Copper, nickel, zinc, platinum, and many other commodities have gained substantially over the past 10 years. And every resulting increase in the cost of living suppresses consumer spending, much as a tax would, but without any redeeming side effects.

Naturally, Europe faces similar problems. (Ed: – and so do we here in NZ) Like the U.S., it imports a lot of oil and raw materials. Admittedly, it has been further ahead than the U.S. when it comes to developing alternative energies. But now that Europe faces pressure to cut government deficits, alternative energy projects may take a back seat for a few years. (Instead, the new world leader in alt. energy is China and it is widening its lead every day.)

Going forward, the combination of greater fiscal restraint and rising commodity prices will put a lot of strain on Europe. It will probably lead to a sustained period of quantitative easing, which will pit European nations against each other.

In the end, resource scarcity more than sovereign debt will cause the biggest problems in both Europe and the U.S. It will restrain people’s ability to send their kids to college, pay for healthcare, or retire while they’re still young enough to enjoy it.

As for gold, we remain confident that gold offers us long-term security against market declines.  Simply said it is the world’s strongest currency in times of uncertainty.

Jim Rickards: Financial Warfare, and more

Jim Rickards, Senior Managing Director of Omnis Inc, is interviewed often by Eric King of King World News. King World News is a very important site for followers of the precious metals markets to keep a close eye on. Nothing of importance to these markets escapes Eric’s eagle eye. The full interview is carried on the site, and I urge you to check it out; I attempt to paraphrase the important points below.

Financial warfare: it may not be obvious at the time it’s happening – there is a slippery slope from open markets to closed markets to adversarial markets. Now, while China may not be engaged in actual warfare at the present time, it is certainly wielding a huge deflationary hammer against the US – thus contributing to Ben Bernanke’s worst nightmare, because of the impact deflation has on banks and on debt. Currently, we have apparent price stability because the forces of deflation, coming from China and elsewhere are balanced by the forces of inflation i.e. money printing by the central banks. However this is an unstable equilibrium – the balance can easily tip from one side to the other or shift back and forth.

Interestingly, gold is an investment that does well under both inflation and deflation.

It is interesting to speculate who the buyers are, now that gold is undergoing a correction; in any case these short term fluctuations are not of concern. Jim still has a short term target of $2000 per oz, and $5000 per oz for the medium term.

Credit default swaps do not form part of the free market – they form part of a rigged game. To be clear, the fiscal situation in Europe is a mess. However, CDS make the situation many times worse. With derivatives, you can attack a country with no money down. The $1T rescue package will not work; GS could create  $5T worth of shorts in the form of credit default swaps, which they can do over the phone. Governments, led by Germany are fighting back, however. Jim makes the point that these countries are important Nato allies; the investment banks have been allowed to run riot, but this situation may not continue.

Mish Shedlock: New Proposals to keep Australia’s Housing Bubble from bursting

(Ed: wonder what Steve Keen will say about this…)

Insanity Down Under: ING Says Thanks to Capital Appreciation, Paying Principal on Mortgage Loans is Unnecessary

from Mish’s Global Economic Trend Analysis by Michael Shedlock

Myths that home prices rise forever and interest rates stay low forever are alive and well in Australia. Please consider this amazing story of corporate insanity as described in the Sunday Telegraph – Revealed: The home loan that could save you a fortune.

ING Direct, Australia’s fifth largest lender, is preparing to sell loans that have no fixed term and no requirement to repay any capital along the way.

At current rates, the interest-only loans would cut repayments on a $300,000 mortgage by $5000 a year.

“People are needlessly being denied the chance to buy a property while prices spiral rapidly out of their reach” ING Direct CEO Don Koch said. “There is an urgent need to provide more affordable options and borrowers should be able to choose whether they want to repay the capital, or not.”

Mr Koch wants to position the bank as a “mortgage partner for life”, with borrowers carrying the same interest-only loan from property to property for as long as they wish, accumulating equity from rising house prices as they go.

Then, as they near retirement, they could sell their property for a big enough profit to pay off the original loan and buy a smaller place outright, leaving them mortgage-free. Or, they could keep the mortgage going and repay the original capital from their estate, after death.

Banks already offer interest-only loans, but borrowers often are allowed to keep them only for five to 10 years. Then they must start paying the capital.

But ING says this preoccupation with paying off the loan is unnecessary.

“There is no economic reason for banks to insist on regular capital repayment,” Mr Koch said. “It just makes the loan more expensive for the borrower.

Financial comparison website InfoChoice CEO Shaun Cornelius said the move was a welcome innovation: “Depending on the size of the loan, it could add hundreds of thousands of dollars to a borrower’s cash flow over their lifetime.”

Economic Idiocy

Koch’s proposal, seconded by CEO Shaun Cornelius of InfoChoice, is economic idiocy at its finest. No one “saves” anything by not paying down mortgages, the money is simply spent (most likely wasted) elsewhere. Moreover, home prices do not perpetually go up.

The US housing market has without a doubt proven both statements.

Ask any homeowner in the US who is headed for retirement and severely underwater on their home what they think of Koch’s hypothesis.

With so many underwater mortgages, only a complete fool think estates would be in a position to repay the original capital from their estate, after death, especially in countries where the bubble has not yet popped, such as Australia, Canada, and China.

Of all the proposals to keep the housing bubble alive in Australia, especially in light of what has happened in the US, this idea from ING needs to go straight to the top of the idiotic ideas list.

ING Direct CEO Don Koch is testament to the idea “there is always the greater idiot who never learns a thing from history, who instead proposes to do something that the market has recently proven preposterous.”

Simple Questions

By the way Mr. Koch, I have a few simple questions for you:

Are you aware of what interest rates were in the 1970’s and 1980’s?

“What happens when interest rates rise, perhaps even double, and your borrowers struggle to make even the interest payments?”

Alternatively, “Are you dumb enough to offer low rates forever?”

Either way. Mr. Koch, you and your banks are screwed, and it should not take a genius to figure that out.

Mike “Mish” Shedlock

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