Breakdown coming

I was in Florida in 2005 and saw the effects of Hurricane Wilma. Southern Florida was without power for 2-3 weeks. Breakdown starts to occur once a region is without power for even 24 hours. Gas stations shut down, because the pumps require power. The few that are open have mile-long lines and heavy police presence to prevent fights and robberies. Grocery stores quickly run out of food and don't get restocked because there is no gas for the delivery trucks. Burglar alarms don't work because they require electricity. Computers and the internet in the area shut down.

I don't foresee that kind of breakdown. But I think a different kind of breakdown could occur if there is no debt limit increase by midnight on August 2. It doesn't matter if the government actually runs out of cash by that time or not it is the perception that counts. Here is what could happen: The social security checks don't go out because the Treasury department wants to make a point and is conserving cash to pay the bondholders. A "silent revolt" starts to occur among the populace. People don't pay their mortgages and credit cards in order to conserve cash. (To a large degree this is already occurring). Businesses don't pay their taxes on time. Suddenly the government and banks have huge cash flow problems. A recession instantly starts, and everyone starts to shift into survival mode, and businesses lay off workers in order to survive. Even if the debt ceiling is quickly raised, the damage is already done. People discover the joy of not paying their mortgage. The government bails out the banks (again) which exacerbates the situation. The breakdown is of economic law-and-order.

How do you restore economic law-and-order again? Foreclose on every house in the country? Have everyone declare bankruptcy? I have no idea. But August 2 I think is only a symptom of a much larger problem. It's not a problem for everyone. It's not a problem for people who are debt-free. But it is a huge problem for the banks who have abused the system and put people into economic slavery.

That is why there is no panic over August 2. Some 40% of the population is cheering it on. Another 40% is totally oblivious to it. And the remaining 20% is in denial, saying that it can't possible happen. Believe it buddy. At 12:01 AM on August 3, this will be a different country.

Gotthard Base Tunnel

A new modern day Wonder of the World is being built in Switzerland - the Gotthard Base Tunnel. It is 35 miles long and will open in 2016, vastly improving traffic flow. However, Germany may be reneging on plans for a much-needed feeder line to it.

I just like to point out good news when I see it.

Time to panic?

The Senate just killed "Cut, Cap and Balance". Because it takes at least a week to get legislation reviewed and passed, there is now no chance of getting the debt ceiling raised by August 2. Intrade now sees only 33% chance of a deal, but that is wishful thinking.

It may be possible to have a short-term extension of a few weeks, but Obama has previously rejected any short-term deal in his famous "Eat our peas" speech.

The good news is that Treasury has enough cash to pay bills through August 14. So Monday, August 15 is doomsday. Hey, that's still 3 weeks away, nothing to worry about mate.

Castle under construction in Missouri

There is a castle named "Pensmore" under construction in Missouri. It is made entirely from concrete and steel and is designed to be tornado-resistant. Very cool.

The US is holding the world hostage

From: http://www.spiegel.de/international/world/0,1518,774666,00.html

"Democrats and Republicans are so hopelessly embroiled in a religious war that compromise and pragmatism are just dreams from a far-off era of reason. … The influence of the Tea Party movement … can not be overestimated. … The movement sees traditional politics as corrupt and regards Washington as a den of iniquity. … They see the other side as their enemy. Negotiations with the Democrats, whether it's about appointing a judge or the insolvency of the United States, are only successful if the enemy is defeated. Compromise, they feel, is a sign of weakness and cowardice."

"Playing poker is part of politics, as is theatrical posturing. That's fair enough. But what America is currently exhibiting is the worst kind of absurd theatrics. And the whole world is being held hostage."

"Irrespective of what the correct fiscal and economic policy should be for the most powerful country on earth, it's simply not possible to stop taking on new debt overnight. Most importantly, the Republicans have turned a dispute over a technicality into a religious war, which no longer has any relation to a reasonable dispute between the elected government and the opposition."

"If it continues like this, the US will be bankrupt within a few days. It would cause a global shockwave like the one which followed the Lehman bankruptcy in 2008, which triggered the worst economic crisis since the war. Except it would be much worse than the Lehman bankruptcy. The political climate in the US has been poisoned to a degree that is hard for us (Germans) to imagine. But we should all fear the consequences."

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Is it time to panic yet? Nah, give it another week.

46% chance of default

There is a 46% chance that there will be no deal made by midnight July 31 according to InTrade. Interestingly enough, there is a 22% chance that there will be no deal even by Aug 31.

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Wow, this just jumped to a 60% chance of default, with a 29% chance of no deal by Aug 31. Of course because of low volume it doesn't take much to make this change, but still these are people who have bet a little money on it. If you are certain that there will be a deal in the next two weeks then you could easily double your money.

France - lender to the PIIGS

Read this: As Italy sinks, France is leaking.

France owns 511 bn of Italian debt, and another 400 bn of other PIIGS debt, probably mostly Spanish. Oh and by the way, tiny Belgium (population 11 million) has 119 bn of exposure and the Netherlands (population 16 million) has 244 bn of exposure. So most of the big banks in these countries are likely to go down with the PIIGS.

The McConnell plan

Mitch McConnell's backup plan is to allow the federal debt limit to be raised by another $2.5 trillion without any concession on either side. It doesn't deal at all with the skyrocketing national debt. So in other words, he caved to the Democrats. He blinked. How embarrassing.

"We’re certainly not going to send a signal to the markets and to the American people that default is an option.” Why is default not an option? Isn't it better than continuing to borrow an infinite amount of money? Doesn't the problem have to be dealt with at some point and why not now?

I understand the need for a backup plan, but it should be for a temporary increase. Two words, heck no. Go back to Kentucky you RINO.

Europe in trouble

The Greece 2 year bond yield is 31.11%.
The Portugal 2 year bond yield is 18.25%.
The Irish 2 year bond yield is 17.77%.
Meanwhile, the German 2 year yield is 1.26%.

The Spain 10 year bond yield is 6.03%.
The Italy 10 year bond yield is 5.68%.
The Belgium 10 year bond yield is 4.29%.
Meanwhile, the German 10 year bond yield is 2.67%.

The Euro dropped 2.1% today against the Japanese Yen, 1.7% against the Swiss Franc, and 1.5% against the US Dollar. The price of gold in Euros went up 1.9% in one day, to 1103.09.

The Belgium stock market dropped 2.61% today. The Portuguese market dropped 4.3%, Spain dropped 2.69%, Italy dropped 3.96%, Greece dropped 2.57%, and Ireland dropped 1.47%. Even Germany dropped 2.3%.

So what now? Maybe the markets will recover tomorrow. Or is this the start of something really bad?

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Update: Italy needs 630 bn euros over the next 3 years to finance its budget deficits and to rollover expiring debt, Spain needs 380 bn euros, and tiny Belgium needs 150 bn.

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The original post was July 11. This update is as of July 14. The Irish 2 year bonds now yield 20.87%. The Greek bonds improved slightly to 30.35%. Gold is now at 1119 euros.

Excellent news

Once a quarter, I update projections of the national debt based purely on recent trends. The latest trend, based on the quarter ended 6/30/2011 and the previous 6 quarters, is that the debt will rise 2.59% per quarter, or 10.7% annually. This is much better than the previous projection showing annualized increases of 12.9%.

With this, I can project out as follows:
9/30/11 14714
9/30/12 16289
9/30/13 18032
9/30/14 19961
9/30/15 22097
9/30/16 24462
9/30/17 27079
9/30/18 29976
9/30/19 33184
9/30/20 36734
9/30/21 40665

The numbers look much better than previous projections, and are certainly sustainable. I just want to see what happens once the debt ceiling is lifted before breathing a sigh of relief.

The hurdles to bailing out Greece

I may have my facts wrong, but it appears that there will be 5 votes in the next 2 weeks over the Greek bailouts and if any of them fail, then Greece will default on July 20.

Vote #1, on June 28 or 29, in the Greek Parliament on tax increases and spending cuts of E28.4bn.

Vote #2, on Thurs June 30, on selling Greek assets such as shares in electricity and telecom companies to raise E30bn.

Vote #3, in a special meeting of banks by July 3, to agree to extend the length of their loans by 7 years. This appears to already be a done deal: Banks "understand very well" that they must "voluntarily" participate in the Greece bailout, said Christian Noyer of the ECB.

Vote #4, on Sun July 3, in a special meeting of eurozone finance ministers. Apparently, this requires unanimous approval, and Austria is poised to block it.

Vote #5, on Tues July 5, the German high court will begin hearings on whether the bailout violates the German constitution. However, it may not rule for some time.

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Update: None of these seem to be a problem. However, there is a 6th hurdle to overcome, that of the rating agencies, that may be the fatal flaw.

A funeral for the Euro

It is now illegal to buy and sell gold and silver futures

See: http://www.zerohedge.com/article/trading-over-counter-gold-and-silver-be-illegal-beginning-july-15

"We wanted to make you aware of some upcoming changes to FOREX.com’s product offering. As a result of the Dodd-Frank Act enacted by US Congress, a new regulation prohibiting US residents from trading over the counter precious metals, including gold and silver, will go into effect on Friday, July 15, 2011.

In conjunction with this new regulation, FOREX.com must discontinue metals trading for US residents on Friday, July 15, 2011 at the close of trading at 5pm ET. As a result, all open metals positions must be closed by July 15, 2011 at 5pm ET."

Comment: The way I understand this, the above article overstates the regulations. It is not illegal to own gold or silver, or to buy or sell them, or to enter into a contract for purchase in which physical delivery will be made within 28 days. However, it is illegal to enter into futures contracts unless the person is a sophisticated investor with a net worth of over $1 million.

"There is an exemption for commodities which are actually delivered within 28 days. While the CFTC wanted an exemption in which commodities would need to be delivered within 2 days, various coin collectors were able to lobby congress for a longer delivery period."

The Stock Market Crash of 2011

First, read this blog post: The Stock Market Crash of 2011.

The author is predicting that, based on S&P 500 charts, the market will within the next week briefly drop below the lows of mid-March, then bounce back up about 3%, and then about July 5 the market will crash 20% through about August 15, at which point the Fed will panic and initiate QE3. I don't quite understand it, but it makes sense.

I prefer to look at the Dow Jones numbers as I find them easier to follow. Right now the Dow is at 12,000. The March low was just above 11,600 on March 16, actually 11,613. So if the Dow drops below 11,600 in the next 2 weeks, even briefly, then that is a signal that the crash is coming even if it doesn't start right away.

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On a related note, I find it interesting that at the same time that the Treasury doesn't need money, because of the debt ceiling, that the Fed has quit buying. The Treasury will need massive buying beginning August 1, when the debt ceiling will be raised. So QE3 will have to begin about mid-August to provide the funds, and some of this money will go back into the stock market.

So bottom line, sell all your stocks by the end of June before the crash begins.

Kitco raided

Europe

There are some similarities between the US and Europe.

The President of Europe is Jose Manuel Barroso, the President of the European Commission. He has been in power since 11/22/2004. The European Commission is located in Brussels, which could be considered the capital of Europe. However, the President is elected by the European Parliament instead of by popular vote.

The European Parliament is the counterpart of the House of Representatives. It meets in Strausbourg, France.

The European Council is the equivalent of the Senate, and it meets in Brussels. However, instead of having elected representatives, it is made up of the heads of state or government of the EU member states. The European Council of Ministers aka the Council of the European Union is made up of ministers who deal with specialized issues. For example, if they are dealing with agriculture policy, the ministers of agriculture meet to discuss it.

The European Court of Justice is the equivalent of the Supreme Court, and it meets in Luxembourg. It is made up of 27 judges. Most decisions are made by chambers made up of three or five judges. The language used is French.

The European Central Bank is the equivalent of the Federal Reserve, and it is based in Frankfurt, Germany. Its president is Jean-Claude Trichet.

The European Defense Agency is the equivalent of the Pentagon. However, it has a budget of only about 30 million Euros/year as opposed to the $600 billion annual budget of the U.S. military. In practice, NATO handles the security of Europe.

Credit-default swaps on Greece soared 435 basis points to 2,189

http://www.bloomberg.com/news/2011-06-16/greece-ireland-portugal-lead-sovereign-credit-default-swaps-to-records.html

Here is what I think will happen: Greece will pretend to agree to austerity measures, the IMF and EU will bail them out again (which really isn't that expensive, I just saw a price tag of $17 billion), and they will kick the can down the road for another year. And the default swap insurers will make out like bandits - for now.

Is the Federal Reserve the International Lender of Last Resort

First, there is a policy statement advocating this from 1999:
An International Lender of Last Resort,The IMF, and the Federal Reserve
Summary: "Under existing institutional arrangements, the IMF cannot serve as a genuine LOLR. Specifically, the IMF cannot create reserves, cannot make quick decisions, and does not act in a transparent manner in order to qualify as an authentic international LOLR. The Federal Reserve, however, does meet the essential requirements of an international LOLR. It can quickly create international reserves and money, although it has not openly embraced international LOLR responsibilities."

Second, there is evidence that the Fed did in fact act this way during the 2008 financial crisis:
Exclusive: The Fed's $600 Billion Stealth Bailout Of Foreign Banks Continues At The Expense Of The Domestic Economy, Or Explaining Where All The QE2 Money Went
"Courtesy of the recently declassified Fed discount window documents, we now know that the biggest beneficiaries of the Fed's generosity during the peak of the credit crisis were foreign banks, among which Belgium's Dexia was the most troubled, and thus most lent to, bank." Dexia borrowed $31.5 billion from the Fed on 10/24/2008, which, it should be noted, has all been paid back.

So the truth is that the Fed is the international LOLR, and the dollar is the world's currency.

The College Scam

Africom

Camp Lemonnier, is a former French foreign legion base and it is now the only US military base in Africa. It is the de facto headquarters of the US African Command, (official site) which however remains officially headquartered in Stuttgart, Germany. It seems that Africom has a vision for Africa which nobody else has.

The way I understand it, Africa is divided into 7 regions:
1) Southern Africa, headquartered in Gaborone, Botswana, which I previously posted about
2) West Africa (ECOWAS), headquartered in Abuja, Nigeria, previously posted
3) Central Africa, headquartered in Libreville, Gabon
4) East Africa, headquartered in Arusha, Tanzania
5) Arab Maghreb Union, headquartered in Rabat, Morocco
6) Horn of Africa/IGAD, including Kenya and Sudan, headquartered in Djibouti
7) Egypt, which is in a class of its own

Here is an alternative point of view: New Colonialism: Pentagon Carves Africa Into Military Zones. "The U.S. is not dragging almost every nation in Africa into its military network because of altruism or concerns for the security of the continent’s people. AFRICOM’s function is that of every predatory military power: The threat and use of armed violence to gain economic and geopolitical advantages."

Libya has been hostile to Africom and the US/NATO activities there could be an attempt to establish bases in Africa.

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Update: There is some Africom presence at Cap Draa, Morocco. Also at Camp Simba, Manda Bay, Kenya.