[The world economy /
A call to arms->http://www.economist.com/blogs/freeexchange/2011/08/world-economy]


IT IS largely a gathering of central bankers; at the outset of her speech she apologised for not being one. Yet by far the most hard-hitting words at this year’s Jackson Hole symposium came from Christine Lagarde, the former French finance minister and new managing director of the IMF.
The world economy, she said, was entering a “dangerous new phase” driven by a sense that “policymakers do not have the conviction” to take decisions that are needed. That must change, and now. Ms Lagarde laid out a bold to-do list to support growth, including a forced capital injection into Europe’s banks, aggressive new action to deal with America’s foreclosure crisis, and a broad rebalancing of fiscal priorities.
The most headline-grabbing prescription was for Europe’s banks. More capital, Ms Lagarde argued, was essential to “cutting the chains of contagion” in the euro crisis. Without it there could easily be “the further spread of economic weakness to core countries, or even a debilitating liquidity crisis”. She called for what would essentially be a European version of America’s policy for its biggest banks in 2008—a mandatory capital increase using public funds if necessary. Those funds could come from the European Financial Stability Fund.


- It May Be 2008 All Over Again, But There Is One Key Difference

The financial press has been inundated with articles comparing what is happening in global markets now to events in the latter part of 2008. Sure enough, the surge in Treasurys from 100 to 143 in the last two months of 2008 following the Lehman bankruptcy is most comparable to the move in the same security from 122 to 140 in the two months since the beginning of July 2011. What is disturbing is that the bulk of this move has happened after the August 2 debt deal, and after the announcement of QE2.5 or "ZIRP through mid-2013" by the Fed on August 9. Additionally, stocks have also traded in a pattern very reminiscent to what happened during the first round of the Great Financial Crisis, but the lock up in capital market liquidity, especially in Europe, may be the most obvious parallel between the two time periods. That said, there is one key difference between 2008 and 2011. Bill Buckler, in the latest edition of his Privateer, demonstrates what it is...
A Race In Opposite Directions:

How scary is it? The best illustration comes from the $US Gold price. The “price” of longer-term US Treasury debt has risen by 14.75 percent since the beginning of July. Over the same period, the $US price of Gold has risen from $US 1482 to its August 19 spot future close of $US 1852. That’s a rise of $US 370 or 25 percent. Yet US Treasury debt and Gold are polar opposites in any sane evaluation of the financial system. Treasury debt is the foundation of the global monetary system. Gold is the pariah of the global monetary system and has been locked out of it in any official form for four decades.

With all the comparisons to the events of 2008 which have been appearing in the mainstream financial media, this comparison has been all but totally overlooked. Cast your mind back to the carnage of late 2008. During that period, almost everything was sold off. While it is true that Gold did not fall nearly as far as did most of its fellow “commodities”, it is nonetheless a fact that in the two months between mid September and mid November 2008, Gold fell from about $US 920 to $US 700. That’s about 24 percent.

There were two financial assets which boomed in late 2008. One was Treasury debt, the other was the US Dollar. While Gold and everything else was falling out of bed, the trade-weighted US Dollar index - the USDX - soared 21 percent from 73 to 88.2 between early August and late November 2008.

Compare that to what is happening now. Treasuries are soaring but the US Dollar is, at best, flat. And Gold in terms of EVERY major paper currency has gone ballistic. This time, things do look different.


- UK most indebted nation in the world reveals new study


A new study from brokers Tullett Prebon called ‘Project Armageddon’ has established the true scale of borrowing in Britain which amounts to a truly staggering £5 trillion or $8.3 trillion.
You would hardly think that reading the Sunday papers today that are monumentally self-complacent and seemingly reckon the UK light years away from Europe in terms of financial problems. Yes, they are in a far worse position.
Once pension fund liabilities and PFI contracts are included the total public debt is £2.46 trillion or 167 per cent of GDP. To that you have to add the £1.34 trillion in financial sector bailouts. The total public debt is therefore £3.6 trillion or 244 per cent of GDP or £135,000 per UK household.
Add mortgage debt
Then there is £1.2 trillion in outstanding mortgage debt and £210 billion in unsecured mortgage credit. Together public and private sector debt amounts to £5 trillion, or 340 per cent of GDP.
‘The biggest single debt increment during the period between 2002 and 2009 was mortgage borrowing, which increased £590 billion between those years,’ explains the report. ‘Many borrowers saw this as an investment, a view which was profoundly mistaken even though many policymakes and even bankers managed to delude themselves otherwise.’
Average UK property prices rose by 70 per cent in this period, until the 19 per cent fall between 2007 and 2008. But most of this private borrowing went into consumption and the public sector did exactly the same thing with its borrowing.
‘Equally worringly, UK external debt is 400 per cent of GDP,’ notes the study. ‘Far higher than countries such as Portugal, Spain or Greece and equates to $143,000 for each man, woman and child in Britain, again far higher than in most other developed countries.’
Bankruptcy possible
The study concludes that there is ‘a very real possibility of national bankruptcy’ but it notes that financial markets are not yet pricing this into UK debt. You have to wonder how long the very low interest rates available to British national debt can persist in view of the quite obvious massive credit risk exposed by this report.
‘Project Armageddon’ is actually pretty thin on predictions as to where this debt mountain will take the UK, apart from flagging up the inadequacies of current government policies, namely that they rely on the resumption of high rates of economic growth that are impossible with 70 per cent of the economy laden with debt.
You are left to draw your own conclusions about the merits of holding sterling-denominated assets with this sword of damoceles hanging over the economy. And the investment conclusion about the UK is surely don’t go there!





- As Lagarde Throws Germany And European Banks Under The Bus, Did She Just Truncate Her IMF Career?

This year's biggest winner from the botched DSK affair has been France's Christine Lagarde, who despite the dropping of all charges against the former head, is now in charge of the IMF. We admit that the ascension of Lagarde to the throne of the world's most irrelevant global bailout organization (what the IMF "does" is of not importance: the only thing that matters is who Beijing, and Chinabot, feels like rescuing today) happened even though we previously predicted that Germany would be very much against it. Well, Germany let it slide, and endorsed Lagarde.
That may soon change though, after the former finance minister essentially threw the entire European (read French, Swiss and German whose assets as a % of host GDP are ridiculous... yes, a technical term) financial system under the bus at Jackson Hole, a day after Bernanke said to wait until September 20 for QE3 clarity. Per Bloomberg: "Bolstering banks’ balance sheets “is key to cutting the chains of contagion,” Lagarde said today in the text of remarks at the Federal Reserve’s annual forum in Jackson Hole, Wyoming. Without an “urgent” recapitalization, “we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis." Lagarde, a former French finance minister who took the helm at the Washington-based IMF in July, said recapitalization should be “substantial.”Banks should look for funds in the markets first and seek public funds if necessary. One way to provide capital could be through the European bailout fund, she said." And now, one can see why Germany is fuming: not only will Germany soon have no choice but to fund the EFSF's sovereign bailout ration all on its own, which as we, and other have speculated, could be as large as €3.5 trillion (or about $5 trillion), but it will be Germany's duty to also fund the rescue of all banks on a parallel track. What is the additional tally? Why at least $230 billion in Europe alone in the next several months. Then again, when you get to $5 trillion, what's a few hundred billions between friends?
Europe is now entirely shut out from capital markets, as confirmed by the following Morgan Stanley chart.

And then just to make sure her message was heard loud and clear, Lagarde added:
Lagarde also warned that the world economy is in a “dangerous new phase” and called for measures that will ensure a sustainable fiscal path in the medium term while boosting growth now. Policy makers in advanced economies are under pressure to reduce their public debt just as their economies show renewed signs of economic weakness and unemployment fails to decline.
So just when Europe thought it had the collapsing situation under control (although not if one looks at the DAX, which has tumbled over 20% in August alone), here comes the IMF and tells the country it is its duty to bail out more, more, more. Then again, anyone who read our analysis back in late July about the transition of risk from the periphery to the core, could have seen the German rout (in both stocks and CDS) coming from a mile away. As a reminder: "The most ironic outcome would be if the eurozone, in an attempt to prevent further contagion at the periphery, simply invited the vigilantes to bypass Italy (recall how everyone was shocked that instead of attacking Spain, it was Italian spreads that got destroyed in a manner of days), and head straight for the country on whose shoulders lies the fate of the entire EUR experiment?" Which is why we believe odds that Miss Lagarde will be met with a metaphorically comparable "Sofitel maid" incident as the former IMF head, just went up by a lot to quite a lot.



- The Rescue That Missed Main Street

By GRETCHEN MORGENSON

FOR the last three years we have been told repeatedly by government officials that funneling hundreds of billions of dollars to large and teetering banks during the credit crisis was necessary to save the financial system, and beneficial to Main Street.
But this has been a hard sell to an increasingly skeptical public. As Henry M. Paulson Jr., the former Treasury secretary, told the Financial Crisis Inquiry Commission back in May 2010, “I was never able to explain to the American people in a way in which they understood it why these rescues were for them and for their benefit, not for Wall Street.”
The American people were right to question Mr. Paulson’s pitch, as it turns out. And that became clearer than ever last week when Bloomberg News published fresh and disturbing details about the crisis-era bailouts.
Based on information generated by Freedom of Information Act requests and its longstanding lawsuit against the Federal Reserve board, Bloomberg reported that the Fed had provided a stunning $1.2 trillion to large global financial institutions at the peak of its crisis lending in December 2008.



- Behind the Market's Sustained Panic, 27 Grave Concerns

By Lloyd Khaner Aug 23, 2011 3:10 pm

The debt crisis in Europe tops the list of worries causing head-spinning volatility.
The market has seen gains over the past couple of days despite serious doubts about Europe's economic future, a general crisis of confidence among investors and the fear that a global recession may be just around the corner.
"Lloyd's Wall of Worry" stands at 27 blocks today, slightly lower than last Friday's high of 30, but deep in the high-anxiety zone nevertheless. Value investors, while you wait for Friday's announcement from Chief Bernanke, keep hunting for bargains. Panic is still priced into these markets.
Click on the graphic below to read about the specific concerns facing investors right now, or scroll down for a text-only version of this column and an explanation of how it works.





- [Three cheers for the end of American empire /
A smaller America could be a stronger America->http://blogs.reuters.com/nader-mousavizadeh/2011/08/25/a-smaller-america-could-be-a-stronger-america/]


By Nader Mousavizadeh The opinions expressed are his own.
Last week, China quietly launched the aircraft carrier Varyag from the port of Dalian. The ship is expected to be deployed to Hainan province in close proximity to the strategic regions of Taiwan and the South China Sea. Amidst an atmosphere of existential gloom triggered by the debt-ceiling debacle and the deeper economic crisis, the reaction in the United States was dominated by the fear of a rising, militarist China challenging America’s global superiority. What few in the United States bothered to mention, however, is that the new Chinese carrier was built from an unfinished Ukrainian hull purchased in 1998 – and is the first and only aircraft carrier China has ever had. The United States, meanwhile, has eleven.
The real problem with the U.S. response was not, however, that it exaggerated the Chinese threat. It is that it greatly overestimates the benefits, to America, of the country’s continuing quest for global supremacy – politically, economically and militarily. To lament America’s decline from a dominant position of unaffordable and unsustainable strategic burdens is, in fact, to mistake an opportunity for a threat. For all of the past decade’s concerns around the world about the reach and military assertiveness of U.S. unilateralism, it seems increasingly clear that its principal casualty has been the U.S. itself. America is choking on the edifice of empire and the sooner it’s dismantled, the easier will be America’s return to a leading – not the leading – position as a dynamic, innovative economy.