The Keiser Report

Keiser Report: Interest Rates Apartheid

We discuss the Great Leap Forward in central banks’ central planning which has driven the Housewives of China to buy 300 tons of gold, an act of disloyalty to the central bank revolution. Max notices that Mrs. Wang has displaced Mrs Watanabe as the most important buyer in global financial markets.

In the second half, Max talks to Alasdair MacLeod of Goldmoney.com about everything to do with the physical and paper gold markets – from open interest to naked short selling by bullion banks.

Europe update

Alasdair Macleod: Europe is in Worse Shape Than Everyone Thinks

Peak Prosperity

From his perch in the United Kingdom, Alasdair Macleod provides an update on the ongoing economic crisis in Europe, which -- while largely absent from headlines in the US of late -- continues to worsen.

Due to bloated state-run programs and extreme malinvestment, EU governments find themselves in a box. Economic growth has stalled, and no amount of intervention seems able to get it going again. So in order to keep their economies moving forward, they are becoming increasingly rapacious in extorting tax revenues from wherever they can find them.

This, of course, is strangling the private sector  -- on which the government is counting on to grow the EU out of its recession (or depression, depending on which country in which you live). And so a vicious cycle ensues. Growing taxation reduces economic activity, unemployment worsens, the wealthy expatriate -- all leading to a declining income base to tax, and growing civil unrest.

These are desperate times. And the EU governments are taking increasingly desperate, and reckless, measures:

The Keynesians don’t understand why the growth isn’t there. They are very, very disappointed. And of course, their response is, the economy is not flourishing. You have to stimulate the economy more. The fact of the matter is that the average government size in the economy in the Eurozone is 50%. So 50% of every transaction is government.

Now that only leaves the private sector of 50%. The private sector, when it comes to recovering (recovery?), is carrying a huge weighted burden on its back. That burden is trying to tax the private sector horse who's carrying it. The tax burden is so great, the way in which they are doing it in most of these countries is that they are trying to preserve the public sector ,and they are trying to get the private sector to pay for it. The result is that there is no way there is going to be any growth at all.

If you look at countries like Spain, for example -- which has come out of this massive property bubble that's really been the reason for its downfall -- the property bubble has not unwound at all. You've got huge great levels of malinvestment, misdirection of funds in the wrong direction, the market has changed, people don’t want it anymore, and the market has got to adapt. And taxes are not going to be forthcoming until it has happened.

Unfortunately, governments have gotten themselves stuck into this position where they are not prepared to cut their spending enough. They think they can get taxes by taxing the rich, ratcheting up the taxes on anyone who you think has got any money -- but then people avoid it. Like in France, they just go abroad. It is that bad.

We are not seeing any recovery. The burden on private sector is far too great for that recovery to occur. Not only that, but the economies in the Eurozone are angled towards the wrong production. It is a huge great burden of malinvestment that needs to be addressed. You are not going to get any meaningful economic recovery without that slump happening.

Given that the slump is going to happens, you’ve got a choice: Either you get it over and done with and get it done quickly, or you have financial repression in the hope that over a long period of time something will turn up. Really, they are going for the latter rather than the former. But I don’t think they have got that much time. One of the things which Europe really does have a problem with is pension costs and the cost of health care for the elderly and all the rest of it. You think it is expensive in America; it is twice as expensive in Europe, on average. 

- See more at: http://www.peakprosperity.com/podcast/81072/alasdair-macleod#sthash.wSUSqtIy.dpuf

Alisdair MacLeod on the Euro crisis

Alasdair Macleod: All Roads In Europe Lead To Gold

Zero Hedge,

19 May, 2012

This week we bring back Alasdair Macleod, publisher of Finance and economics.org, because, as he puts it "every horror that we discussed last time we spoke is coming about". Especially scary since our previous conversation with him was less than three weeks ago...

Today's interview continues building on his excellent synopsis from last month that detailed the origins of the Eurozone crisis. The fundamental shortcomings warned of at the Euro's creation in 1997, combined with the excessive sovereign debts run up since then, have finally expressed themselves at a scale too large to be contained any longer.

Today, Alasdair details in-depth the huge and serious challenges facing Greece and the major Eurozone countries, and the likely impacts of the fast-dwindling options left remaining.

He sees no happy ending to this story, no outcome in which serious pain and permanent behavior change can be avoided. And for those looking for shelter from the unfolding economic storm, he sees few options besides the precious metals (which he believes are severely under priced at the moment): 

Greece

The Greek situation is entirely predictable: when you force enormous pressures on an economy and try and raise taxes from the private sector -- a private sector which isn’t used to paying taxes because usually they find away around it -- you start cutting pensions, you start cutting this, cutting that, and the people revolt. They haven’t a clue what they are doing, but we get the revolt nonetheless. It looks like nobody there can form a government; and it looks like there will be another election probably in June. That won’t resolve anything unless by some miracle, some sense gets knocked into people’s heads.

The other thing, which nobody has mentioned, is that there are about 90 billion dollars in derivative contracts involved in the Greek economy. This is not just government, but also local governments and towns and cities and all the rest of it. The counterparties to this $90 billion must be getting a bit worried about that, I would think because that looks as if it will default.

The people who have been most active in getting these derivative contracts going over time have been people like Deutsche Bank, Goldman Sachs and I suppose JP Morgan -- so you can see the problems aren’t just limited to the government and some unfortunate Greek citizens who are caught in the middle of this.

We are looking at potentially up to ninety billion dollars worth of derivatives which one side of those transactions is going to default. One side: it is not a balanced figure is it? I don’t know that it is necessarily as bad as that, but it is a problem that needs to be dealt with, addressed and contained. I think what they have to do as much as possible, is to try to work for a sensible outcome in this, which probably will involve Greece leaving the Eurozone, but maybe obtaining help from the ECB to set up a currency board. The reason I say that is that I think for Greece to return to the drachma would be complete destruction. You would have a situation where people who owe money in Euros would still owe money in Euros. If the Greek government tried to change that by law, for starts, that could only apply to loans taken out in Euros in Greece; whereas a lot of these have been taken out in Euros elsewhere in the European Union. In any event, I think if they tried to do a law on this, it would be a retroactive, which would be open to legal challenge.

Meanwhile, if you have deposits in a Greek bank, you can be sure the Greek government would say we are going to re-designate those into New Drachmas, which would impoverish the depositors. When it comes to trade, I think everybody would just stay well clear. To go back to a New Drachma, I think is the most destructive path Greece can have. Now, they could do that on the basis that, if the European Union wanted to make an example of Greece, then this is a way in which they could just let them go hang. The importance of that would be that the situation for Greece should be so bad that no other member of the Eurozone would contemplate leaving the Eurozone. That is a possibility. But I think that is less likely than coming to terms in such a way to give Greece an exit. But if they do get an exit, again, they’ve got to have an exit in such a way that it hurts enough and anybody else who wants to take that exit would see, well it is actually probably more painful than staying where we are. It is a very difficult balance to achieve.

The people who will do this, I don’t believe are the politicians. It would have to be the sensible people in the ECB and perhaps some of the more backroom boys who could put together some sort of face-saving mechanism without this becoming too much of a political hot potato. It is very, very tricky, it really is, and quite honestly, the way political governance has been going in Europe, the chances of them getting some sort of orderly withdraw in the interest of continuing relationships, et cetera, I think are actually probably slim. That is what we are up against: this is not easy. There is no precedence for this at all and I know that lots and lots of people are saying it has got to return to the Drachma; I just think that a New Drachma would collapse almost immediately. I think that a currency board in the Euro is actually a more sensible result given where we are.  

France

France is a mess. They have outstanding debt of 1.3 Trillion Euros, something like that. Their debt/GDP is around about 85-90% going on a hundred quite rapidly. That is a very liquid and nasty situation. Unemployment is running close to ten percent.

It is almost impossible to employ anyone in France because the taxes are so high. Do you know the total tax that you pay as an employer, more than doubles the salary that you pay an individual? This is absolute craziness, but it is been like that in France forever and a day. The result is an awful lot of the market is black market.

 Spain & Italy

Spain is a worse situation. Government debt alone is just under a trillion. A trillion dollars equivalent, I should say, and that is a lot of money. That is a lot of money. Italy is over two trillion dollars. That really is a very, very big one, so this contagion must not be allowed to happen. 

Germany

Their economy is performing reasonably well, but it is not performing well because they are doing well for Europe; they are doing well because they are selling the most cars, machine tools and everything else to China, to Brazil, to Russia. Africa’s a great growth area. Europe, as far as Germany is concerned is dead. Which of course brings us on another question; that is why should Germany continue to support all these bust Europeans? There is a sort of conscience if you like about the last two world wars, but there is going to come a point where that wears pretty thin I would have thought. The trouble is that it is all very well, everyone turning around and saying, Germany has to help. Actually, what they are saying is that Germany’s citizens should give up their savings, their hard won savings to rescue a project, which is obviously dead or deceased. I think Germany really should bust out as soon as possible and I am sure that there are an increasing number of businessmen and bankers in Germany who are beginning to feel that way. 

On Gold

People who have gold or silver, I think actually had a very rough ride over the last couple of months. A lot of them are wondering what on Earth is going on because every time you get good news, gold seems to rally along with equities, but every time there’s bad news and gold actually should be giving you some protection, it goes down the swanny.

I think the problem there is that the whole system is run by people who went to college and were taught keynesian economics. In my day, when I first went into the stock market and I enjoyed that first bull market in gold when it went from thirty-five bucks to eight-fifty, the traders and investment managers were all practical people. They all cut their teeth, all learned their trade the hard way. Some of them had degrees in college, but generally it would have been something like classics or history or something like that. If they got a degree in economics, they probably would have left because they never would have understood it in those days. But now it has changed. Everybody who is employed has a degree and if they are anything to do with investment strategy, or the investment business, it is all economics degrees. So they have been brainwashed in the keynesian thing. This sort of neoclassical approach where gold is yesterday’s story, paper money is the future. They really do believe it and it is the opinions of these people who drive the markets in the short term.

The result is that gold and silver have become very, very seriously mispriced. I don’t think I have seen a stretch like this as I can remember; by stretch, the difference between perhaps where it should be. We must be careful not to tell the market what the price should be, but it is so underpriced at a time of enormous systemic stress, that I think when gold and silver snap back into a more sensible, logical valuation relationship with the markets, the move actually could be very, very sharp and quite large. If gold ran up through the $2,000 level very quickly, which I think is a very strong possibility, because it is been held down so much, that could bring other problems. The central banks, who might have sold gold and not told us about it will find that they are embarrassed. I think also the bullion banks in London who operate a fractional reserve system with gold, exactly the same way as to do with any paper currency, will be hurt very, very badly on the run. Any shorts in the futures market equally could be hurt very, very badly. We have a situation, where there is a potential for a huge run in gold and I personally wouldn’t be surprised to see it.