Huge Value-Added Tax Increases in Europe Show Why Washington Politicians Should Never Be Given a New Source of Tax Revenue
Daniel J. Mitchell
The most important, powerful, and relevant argument against the value-added tax in the short run is that we can balance the budget in just five years by capping spending so it grows at the rate of inflation, a very modest level of fiscal restraint.
The most important, powerful, and relevant argument against the value-added tax in the long run is that more than 100 percent of America’s long-term fiscal problem is too much spending.
So why even consider giving politicians a new source of revenue such as the VAT, particularly since this hidden form of national sales tax helped cause the European fiscal crisis by facilitating a bigger welfare state?*
And now Europeans are doubling down on that failed approach, thus confirming that politicians will rarely make necessary spending reforms if they think more revenue can be squeezed from taxpayers.
Here’s a chart taken from the recent European Commission report on taxation trends in the EU. As you can see, the average VAT rate in Europe has jumped by nearly 2 percentage points in just five years.
As I explained last week, European politicians also have been increasing income tax rates, so taxpayers are getting punished when they earn their income and they’re getting punished when they spend their income.
Which helps to explain why much of Europe is suffering from economic stagnation. Given the perverse incentives created by redistributionist fiscal policy, it makes more sense to climb in the wagon of government dependency.
For more information, here’s my video that describes the VAT and explains why it’s a bad idea.
*The same thing is now happening in Japan.
View full post on Cato @ Liberty
The next Great Depression is already happening – it just hasn’t reached the United States yet. Things in Europe just continue to get worse and worse, and yet most people in the United States still don’t get it. All the time I have people ask me when the “economic collapse” is going to happen. Well, for ages I have been warning that the next major wave of the ongoing economic collapse would begin in Europe, and that is exactly what is happening. In fact, both Greece and Spain already have levels of unemployment that are greater than anything the U.S. experienced during the Great Depression of the 1930s. Pay close attention to what is happening over there, because it is coming here too. You see, the truth is that Europe is a lot like the United States. We are both drowning in unprecedented levels of debt, and we both have overleveraged banking systems that resemble a house of cards. The reason why the U.S. does not look like Europe yet is because we have thrown all caution to the wind. The Federal Reserve is printing money as if there is no tomorrow and the U.S. government is savagely destroying the future that our children and our grandchildren were supposed to have by stealing more than 100 million dollars from them every single hour of every single day. We have gone “all in” on kicking the can down the road even though it means destroying the future of America. But the alternative scares the living daylights out of our politicians. When nations such as Greece, Spain, Portugal and Italy tried to slow down the rate at which their debts were rising, the results were absolutely devastating. A full-blown economic depression is raging across southern Europe and it is rapidly spreading into northern Europe. Eventually it will spread to the rest of the globe as well.
The following are 20 signs that the next Great Depression has already started in Europe…
#2 Unemployment in the eurozone as a whole is sitting at an all-time record of 12 percent.
#3 Two years ago, Portugal’s unemployment rate was about 12 percent. Today, it is about 17 percent.
#4 The unemployment rate in Spain has set a new all-time record of 27 percent. Even during the Great Depression of the 1930s the United States never had unemployment that high.
#5 The unemployment rate among those under the age of 25 in Spain is an astounding 57.2 percent.
#6 The unemployment rate in Greece has set a new all-time record of 27.2 percent. Even during the Great Depression of the 1930s the United States never had unemployment that high.
#7 The unemployment rate among those under the age of 25 in Greece is a whopping 59.3 percent.
#8 French car sales in March were 16 percent lower than they were one year earlier.
#9 German car sales in March were 17 percent lower than they were one year earlier.
#10 In the Netherlands, consumer debt is now up to about 250 percent of available income.
#11 Industrial production in Italy has fallen by an astounding 25 percent over the past five years.
#12 The number of Spanish firms filing for bankruptcy is 45 percent higher than it was a year ago.
#13 Since 2007, the value of non-performing loans in Europe has increased by 150 percent.
#14 Bank withdrawals in Cyprus during the month of March were double what they were in February even though the banks were closed for half the month.
#15 Due to an absolutely crippling housing crash, there are approximately 3 million vacant homes in Spain today.
#16 Things have gotten so bad in Spain that entire apartment buildings are being overwhelmed by squatters…
A 285-unit apartment complex in Parla, less than half an hour’s drive from Madrid, should be an ideal target for investors seeking cheap property in Spain. Unfortunately, two thirds of the building generates zero revenue because it’s overrun by squatters.
“This is happening all over the country,” said Jose Maria Fraile, the town’s mayor, who estimates only 100 apartments in the block built for the council have rental contracts, and not all of those tenants are paying either. “People lost their jobs, they can’t pay mortgages or rent so they lost their homes and this has produced a tide of squatters.”
#17 As I wrote about the other day, child hunger has become so rampant in Greece that teachers are reporting that hungry children are begging their classmates for food.
#18 The debt to GDP ratio in Italy is now up to 136 percent.
#19 25 percent of all banking assets in the UK are in banks that are leveraged at least 40 to 1.
#20 German banking giant Deutsche Bank has more than 55 trillion euros (which is more than 72 trillion dollars) of exposure to derivatives. But the GDP of Germany for an entire year is only about 2.7 trillion euros.
Yes, U.S. stocks have been doing great so far this year, but the truth is that the stock market has become completely and totally divorced from economic reality. When it does catch up with the economic fundamentals, it will probably happen very rapidly like we saw back in 2008.
Our politicians can try to kick the can down the road for as long as they can, but at some point the consequences of our foolish decisions will hunt us down and overtake us. The following is what Peter Schiff had to say about this coming crisis the other day…
“The crisis is imminent,” Schiff said. ”I don’t think Obama is going to finish his second term without the bottom dropping out. And stock market investors are oblivious to the problems.”
“We’re broke, Schiff added. ”We owe trillions. Look at our budget deficit; look at the debt to GDP ratio, the unfunded liabilities. If we were in the Eurozone, they would kick us out.”
Schiff points out that the market gains experienced recently, with the Dow first topping 14,000 on its way to setting record highs, are giving investors a false sense of security.
“It’s not that the stock market is gaining value… it’s that our money is losing value. And so if you have a debased currency… a devalued currency, the price of everything goes up. Stocks are no exception,” he said.
“The Fed knows that the U.S. economy is not recovering,” he noted. “It simply is being kept from collapse by artificially low interest rates and quantitative easing. As that support goes, the economy will implode.”
So please don’t think that we are any different from Europe.
If the United States government started only spending the money that it brings in, we would descend into an economic depression tomorrow.
The only way that we can continue to live out the economic fantasy that we see all around us is by financially abusing our children and our grandchildren.
The U.S. economy has become a miserable junkie that is completely and totally addicted to reckless money printing and gigantic mountains of debt.
If we stop printing money and going into unprecedented amounts of debt we are finished.
If we continue printing money and going into unprecedented amounts of debt we are finished.
Either way, this is all going to end very, very badly.
View full post on The Economic Collapse
A week ago, my colleague Marian Tupy wrote movingly about his personal encounter with Lady Thatcher. Although I never had a chance to speak with her at any length, I echo his sentiments in my recent piece for the Spectator (U.K.), where I argue that both the substance of her policies and the symbolic value of her actions – such as her visit to Gda?sk in November 1988 – played an important role in post-communist transitions:
Symbols matter. In Czechoslovakia, the communist party newspaper, Rudé právo (‘The Red Law’) chose to ignore the Gda?sk episode, providing instead a short notice about her talks with the Polish government about ‘the need to energise economic cooperation between the two countries’. But there was no coming back. In Poland it took less than two months since Thatcher’s visit for the Polish regime to recognise that it was fighting a losing war and start talks with Solidarity, which would lead to dismantling of communism in the country. Czechs and Slovaks had to wait for another year.
The concluding paragraph:
In short, her success in fixing the British economy gave Eastern Europe an example to aspire to. Thanks to her example, Eastern Europeans of the early 1990s understood well that bold and sometimes painful reforms were a necessary condition for Western levels of prosperity. Somehow, I doubt that the current generation of Western leaders are inspiring the same sentiments in citizens of emerging democracies of the world.
View full post on Cato @ Liberty
Malting barley premiums rise as Europe shivers
Malting barley premiums have rebounded from last year’s historically low levels to unusually high ones – and may rise further still – in another sign of the impact of cold weather on hopes for European Union cereals production.
The premium of malting barley over feed grain in France, the EU’s top malting barley producer, for the 2013 crop has risen to E50-55 a tonne, well above average levels which consultancy RMI Analytics pegs at E35-40 a tonne.
The rise also represents a sharp recovery from levels below E10 a tonne seen for the 2012 harvest, for which malting premiums were depressed both by hefty EU spring barley plantings, after a cold winter forced significant reseedings of autumn-sown fields, and by the unusually strong demand for feed.
The change in sentiment reflects the cold weather which slowed development of autumn-sown cereals and the progress of spring plantings, from the UK in the west to parts of the former Soviet Union in the east.
UkrAgroConsult on Thursday trimmed by 1.5% to 52.4m tonnes its forecast for the Ukraine grains harvest this year, thanks to the cold, saying "late resumption of winter crops’ vegetation and late sowing of spring crops may have a negative impact on average grain yield".
Consultancy Adas this week estimated spring barley plantings in the UK at 15% complete, down from a figure of 85% a year ago, although some trade estimates show sowings considerably more advanced.
The UK typically grows enough to rank as a reasonably-sized exporter, besides meeting the needs of its brewing and distilling industries.
In France, farmers had 75% of spring barley, the main source of malting supplies, in the ground as of late March, down from 97% a year before.
However, the biggest concern appears over Central Europe, which is also a significant growing region, to feed the important brewing industry in countries such as the Czech Republic and Poland.
"Central Europe is a problem," Matthias Wree, at Swiss-based RMI Analytics, told Agrimoney.com.
"There are areas where spring crops should have been planted by now, but farmers have hardly got anything down."
The delays reflect the extent of cold weather over the last month, which have ended a period of what had been benign conditions in Central Europe, with farmers in Germany in particular highlighting lower rates of winterkill in autumn-sown crops.
Yet the concerns over spring barley come at a time of ideas of heightened export demand for European malting barley, beyond traditional markets such as Russia.
"We expect Europe to export as much as 500,000 tonnes to Latin America due to the lack of availability of quality barley in Argentina and Canada," Andries de Groen, managing partner at barley trader Evergrain, said.
"Until the southern hemisphere is there to give some relief, we are of the opinion that there is further upside on the European malting barley premium."
‘No real fear’
In wheat markets, the weather concerns have been reflected in a stubbornly-high premium of EU prices over those in the US, as buyers bank on the cold causing at least harvest delays.
At broker FCStone, Jaime Nolan Miralles said: "European cash markets are reflecting this reality with sellers expressing no real fear," despite the US grain stocks report last week which sent Chicago prices tumbling 10% in two sessions.
Yield losses could be a factor too, with France’s National Institute for Agricultural Research estimating losses of 5-6% if cold conditions extend to mid-April.
On Thursday, Paris wheat for May stood 0.9% higher at E242.75 a tonne at 12:00 UK time (13:00 Paris time, 06:00 Chicago time), even as its equivalent in Chicago, the benchmark for world prices, stood 0.4% lower at $6.93 ½ a bushel.
Statistics: Posted by yoda — Thu Apr 04, 2013 4:09 pm
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The Lesson From Cyprus: Europe Is Politically Bankrupt
TUESDAY, MARCH 26, 2013 9:18 PM
Over the past week, Europe, or rather the present EU leadership, has done damage to itself it will never be able to repair.
It seems to escape everbody, but that doesn’t make it any less true: people from Portugal to Spain to Italy to Greece to Cyprus and Ireland are worse off today than they were when they first adopted the euro. Moreover, their economies are all getting worse as we speak and projected to plunge further. The once highly touted blessings of the common currency are by now lost on most of southern Europe; for them, the euro has been a shortcut to disaster.
Until Cyprus, the EU had always maintained two prime objectives (and spent €5 trillion over 5 years to prove it): keeping all members in the eurozone, and guaranteeing all bank deposits under €100,000. These objectives exist from now on only in words. Brussels has threatened to both grab deposits of small savers and throw Cyprus out of the monetary union. Two watershed moments in one.
The membership of the European Union, the subsequent introduction of the euro and the seemingly endless flow of credit that came with these "privileges" provided the region with a temporary illusion of increasing wealth and new-found prosperity. Today it knows that none of it was real, or earned; it was all borrowed. It’s time to pay up but there’s no money left. It needs to be borrowed. From the European core and its banking system.
The EU’s financial scorched earth strategies have left its Mediterranean members with highly elevated unemployment rates, fast rising taxation levels, huge cuts to pensions, benefits and services and above all insanely high debt levels, personal, corporate and sovereign. And now, as ironic as it is cynical, their savings. The only thing that keeps the nations from going bankrupt is more debt, largely in the form of ECB loans.
What sets Cyprus apart from the other victims of Brussels’ expansion hunger is the timing. The country (actually only the Greek-Cypriot 59% of the island of Cyprus) was only allowed entry in the EU in 2004, and it didn’t introduce the euro until 2008. At that point, total bank assets were already well over €80 billion, or a very unhealthy 450% of GDP, and kept on rising with a vengeance. Four years later, in early 2012, the EU/ECB/IMF troika forced €4.5 billion in losses on the Cyprus banking system through the haircut on Greek sovereign debt. Now, one year after that, the same troika forces Cyprus to cough up €5.8 billion. No great math skills required: Cyprus was essentially pushed under the bus in order to – temporarily – save Greece.
The EU, with all its 1000s of highly paid employees and its multiheaded leadership structure, time and again fails to do its overseeing job, and then conceals this by turning around and bullying the victims of its failures. Of course they knew what state Cyprus was in when it switched to the euro, and the country should never have been allowed to enter. And of course the EU and ECB leadership knew all along what happened in Cyprus between 2008 and now, or at least should have. It’s their job to know. Hence, the leaders should be fired either for not knowing or for knowing and not acting. They just cost taxpayers yet another grab bag full of billions, and they should be held accountable for that.
The problem is they’re not accountable to anyone for anything they do, other than in name. Or put it this way: people like Van Rompuy, Barroso and Olli Rehn are not accountable to anyone but themselves, each other and Angela Merkel’s entourage. There’s a great word in the English language to describe their attitude; the ancient Greek "hubris". Add a side dish of arrogance and incompetence and you have a lethal combination.
By the way, here’s how European democracy works: when the whip comes down, everybody will do what Berlin wants. Germany has some 24% of the EU population, and Angela Merkel’s ruling party (through a coalition) has maybe a third of all votes. That means perhaps 20 million Germans, or at best 6% of the 332 million people in the Eurozone, decide what goes and what does not.
Hubris makes stupid (or, granted, it could be the other way around). That’s why we saw the following over the past week:
1) The announcement of the initial Cyprus plan, the one that included a 6.75% tax for all deposits below €100,000. It doesn’t matter that it’s no longer in the final plan, the "deposit grab" genie has left the bottle and will never return. It’s like breaking an egg; restoring confidence is no longer an option. No European small saver will feel safe again for decades, and many will take much of their deposits out of their banks, which will push banks over the edge, requiring more bailouts, rinse and repeat.
The troika, joined by German finance minister Schäuble, went out of their way to put all the blame for this on the Cyprus government (the ball was in their park), but given the obvious potential consequences (the devastating loss of trust), they should never have allowed either the responsibility or the blame to be there; it was theirs to take. That they didn’t, leads to point 2:
2) Brussels and Frankfurt can neither oversee nor control the consequences of their actions. The trust issue is just one of many topics that have made this clear. And as long as the present leadership structure remains in place, what happened in Cyprus will keep on happening, because:
3) They don’t care. They don’t care that the entire southern part of their union is falling over the edge. They don’t care what happens to the people in the streets of Nicosia, or Porto, or Sevilla, their jobs, their savings, their well-being, their children. They’re not accountable to those people. They’re untouchables as far as democracy goes in all but the most cynical definition.
Imagine you’re a cleaning lady or a primary school teacher, or you have a small grocery store or a bakery, in a town somewhere in Spain or Italy or Portugal. At home, you’ve already been hit with huge tax rises and budget cuts. But there’s one thing you can count on to stand between you from things getting real bad: the savings in your bank. And then you see on TV what’s happening in Cyprus. Where people had the same deposit guarantee you had, until from one day to the next they didn’t. What would you do with what’s left in your bank account?
People with bank accounts in Cyprus no longer have access to their money. They’ll be stuck in a repeat of Argentina’s early milennium capital controls for months. People in Spain and Portugal still have a choice. Maybe not for long, because at the first hint of capital flight to the backyard bank, control over your own money will very rapidly become a thing of the past.
The only reason for Europe’s Mediterranean nations to remain in the eurozone and the EU will be bullying from Brussels and Berlin. It’s this bullying from the core, from those who preach union above all else, which will be the undoing of the entire project, but after a lot more pain of the same kind that now hit the Cypriots will have spread north (the rot won’t stop).
Unless first one country and then inevitably others – soon – decide to leave, say thanks for all the fish, and (re-)build their own nation. That would be by far the best choice for all of southern Europe. Staying in the union has nothing positive to offer anyone anymore, except for those presently in power in Brussels and in the capitals of the rich core nations. The dissolution of the union is inevitable. Unfortunately, given the hubris in the core, so is the bloodshed that will pave the way there.
Statistics: Posted by yoda — Tue Mar 26, 2013 10:15 pm
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Cyprus lawmakers may have rejected the bank account tax, but the truth is that the financial crisis in Cyprus is just getting started. Right now, the two largest banks in Cyprus are dangerously close to a meltdown. If they fail, depositors could end up losing virtually all of their money. You see, the banking system of Cyprus absolutely dwarfs the GDP of that small island nation. Cyprus is known all over the world as a major offshore tax haven, and wealthy Russians and wealthy Europeans have been pouring massive amounts of money into the banking system over the last several decades. Yes, those bank deposits are supposed to be insured, but the truth is that there is no way that the government of Cyprus could ever come up with enough money to cover the massive losses that we are potentially looking at. This is a case where the banking system of a nation has gotten so large that the national government is absolutely powerless to stop a collapse from happening. If those banks fail, depositors may end up getting 50 percent of their money or they may end up getting nothing. We just don’t know how bad the damage is yet. And considering the fact that many of the largest corporations and many of the wealthiest individuals in Europe have huge mountains of cash stashed in Cyprus, the fallout from a banking collapse could potentially be absolutely catastrophic.
So Cyprus needs to come up with some money from somewhere in order to keep that from happening.
Basically, there are three options at this point…
1) Even though the bank account confiscation tax was voted down today, there is talk that it could come back in another form. This is really the only place inside of Cyprus where enough money can be raised to bail out the banks.
2) Cyprus could go back and beg the IMF and the EU for money, but the IMF and the EU have already said that they want depositors to share in the pain.
3) Cyprus could get the money that they need from the Russians. This will be discussed in more detail later.
A lot of people will see the headlines proclaiming that Cyprus has voted against the wealth tax and think that everything is going to be okay now, but that is very far from the truth.
The reality is that this is only the first move in a very complicated chess game. The problems for Cyprus are only just the beginning…
“This is not the end of the process, but instead kicks off a further round of negotiation with Moscow and Berlin,” JPMorgan economist Alex White wrote in a research note. “The Cypriot authorities wanted to conduct the vote so that they could reaffirm the extent of their difficulties to the Europeans.”
When the banks of Cyprus reopen in a few days, there is going to be a stampede of people trying to pull their money out of the banks.
In fact, this was starting to happen even before the “bank holiday” was declared. According to The Sun, bank insiders were tipping people off about what was going to happen in the days leading up to the crisis…
But Russian oligarchs and big investors emptied accounts in the days beforehand, prompting claims they were tipped off by bank insiders. A source told The Sun: “It leaked out. Bankers warned their best clients. Government officials warned their friends and relatives.
“Billions disappeared from accounts in days, most from accounts held by Russians.”
And according to David Zervos, we could see billions more euros withdrawn from banks in Cyprus once they reopen. There will be mass panic as depositors scramble to reclaim their money before it can be taxed…
The die is cast. There is no going back for the Cypriots or the Eurozone leaders. As soon as the banks open in Cyprus there will be billions in withdrawals. The question of course is – “where will the money come from?”. Well, if the parliament votes YES, then the Euros will have to come from the Eurosystem. But there is a glitch. The Cypriots have already borrowed 10b euro via the ELA and Target2. How can Mario just wire over 20 billion more (less the 10 to 15 percent haircut) for the Russians, and another 20 to 30 billion for the wealthy Greeks. What collateral will an economy with 20b in GDP post to get this cash? Unless Mario violates every collateral rule at the ECB, the Cypriot financial system will collapse even with a YES vote. Its a wonderful life – Cyprus style.
It may not even matter what Cyprus eventually decides to do about a “wealth tax”. The bank run that is about to happen may be enough to bring down the banks of Cyprus all by itself.
And of course people all over southern Europe are watching developments in Cyprus very closely. As former British Chancellor of the Exchequer Alistair Darling recently noted, if depositors in southern Europe start getting nervous that their bank accounts will be targeted too, they will be likely to start pulling money out of the banks very rapidly…
“They have actually now said to people ‘We will come after your deposits, no matter how small your savings are’ and that seems to me to make it more likely that, if you are a saver in Spain or in Italy, for example, and you have just the sniff of the EU or the IMF coming your way, you will take your money out and you will get a run on the bank”
Cyprus could actually get out of this mess by turning to Russia, but the United States and Europe really do not want to see Russia gain so much control over that very strategic island nation.
So why would Russia get involved? Well, it has been estimated that Russians have approximately $31 billion stashed in banks in Cyprus. It is the favorite offshore banking destination for the Russian oligarchs. Dennis Gartman recently detailed why the tiny island nation is so appealing to the Russians…
Cyprus has been their own private Switzerland for many years. Legal and non-legal Russian cash has swamped the banking system in Cyprus since the early 90’s. The beauty of the island; the ease of admission too and exit from the island via boat or plane; the secrecy of the banking laws; the warm Mediterranean climate and the ease of which Cypriot authorities could be bribed and bought all worked to make Cyprus the center of Russian capital flight.
And right now the Russians are not happy at all that their money is being threatened.
In particular, the Russian mafia launders a lot of money in Cyprus. The Russian mafia is not about to let anyone steal their money, and they have an international reputation for being absolutely brutal. In the end, pressure from the mafia may have been one of the primary reasons why many Cyprus lawmakers voted against the bank account tax. As Dennis Gartman astutely noted, by voting against the wealth tax they may have literally been saving their own lives…
“One could only laugh as such a comment; of course Cyprus was complacent about laundering. To think otherwise was and is nai?ve. Ah, but now you’ve stolen Russia money… or soon shall depending upon the vote in the Cypriot parliament… and that is dangerous… very. One does not steal Russian mafia money and get away with it. There are fewer statements of fact that are more certain, more factual, more unyielding than this statement. Russian Mafia figures do not take well to being stolen from, and they take even less well to be made fools of. We see no reason to mince words at this point: People will be hurt over this decision; some shall be killed.”
And the Russians definitely do not want to see the banking system of Cyprus collapse. In fact, proposals have been made that would provide the money necessary to keep it afloat. But of course that money would not come cheaply.
Some of the proposals that Russia has put forward were summarized by the Daily Mail…
But in a move that has raised eyebrows, the Russian energy giant Gazprom offered Cyprus a plan in which the company will undertake the restructuring of the country’s banks in exchange for exploration rights for natural gas on the island.
Representatives of the Russian company submitted the proposal to the office of Cypriot President Nicos Anastasiades on Sunday evening.
It is also rumoured that the Kremlin is privately offering to help bail out Cyprus in exchange for the right to use a naval base in the Greek part of the island.
In addition, as I wrote about yesterday, some Russian investors have stepped forward and have offered to buy majority stakes in the two largest banks in Cyprus.
So why hasn’t Cyprus accepted help from Russia yet? Well, it is a geopolitical thing. Cyprus is a part of the EU, and European officials do not want Russia to become the dominant influence in Cyprus.
But if the IMF and the EU are not going to step up and help Cyprus, the Russian offers will become more tempting with each passing day.
Meanwhile, the attempted attack on bank accounts in Cyprus is making people nervous all over Europe. For example, the following is what German economist Peter Bofinger had to say about what the situation in Cyprus is doing to confidence in the European financial system…
Making small-scale savers pay is extremely dangerous. It will shake the trust of depositors across the Continent. Europe’s citizens now have to fear for their money.
And if you don’t think that this could ever happen anywhere else, you are just being delusional.
In fact, it is already happening. In fact, the Finance Minister of New Zealand is now proposing that depositors in his nation should be required to “take a haircut” if any banks in his nation fail…
The National Government are pushing a Cyprus-style solution to bank failure in New Zealand which will see small depositors lose some of their savings to fund big bank bailouts, the Green Party said today.
Open Bank Resolution (OBR) is Finance Minister Bill English’s favoured option dealing with a major bank failure. If a bank fails under OBR, all depositors will have their savings reduced overnight to fund the bank’s bail out.
“Bill English is proposing a Cyprus-style solution for managing bank failure here in New Zealand – a solution that will see small depositors lose some of their savings to fund big bank bailouts,” said Green Party Co-leader Dr Russel Norman.
“The Reserve Bank is in the final stages of implementing a system of managing bank failure called Open Bank Resolution. The scheme will put all bank depositors on the hook for bailing out their bank.“Depositors will overnight have their savings shaved by the amount needed to keep the bank afloat.”
But surely there will never be any major banking problems in the United States, right?
Well, large numbers of Chase customers that logged into their accounts on Monday discovered that a “computer glitch” had reset all of their account balances to zero…
Chase bank experienced a problem Monday that had customers scrambling to figure out where their money went.
JP Morgan Chase said it hadn’t been hacked but was having a problem “related to an internal issue” as customers found their accounts showing zero balances.
Some customers shared their frustration on Twitter and showed screen shots of zero balances.
How would you feel if you suddenly discovered that you had no money in the bank?
Most Americans just assume that their money will always be there because their bank accounts are “guaranteed” by deposit insurance and by the full faith and credit of the federal government.
But that is exactly what the people of Cyprus thought too, and look how that turned out.
It would be hard to overstate how dangerous the situation in Cyprus is. Yes, their nation is very small but their banking system is absolutely huge.
If the banking system of Cyprus fails, it could be a “Lehman Brothers moment” for all of Europe. At this point, the entire European banking system is leveraged 26 to 1, and once European banks start to fail they could start falling like dominoes.
There is also a very strong possibility that Cyprus could be forced to leave the euro, and if that happens everyone will be wondering who will be next to leave the common currency.
So don’t think for a second that the crisis in Cyprus is over. The banking meltdown is just getting started, and the consequences could end up being far more dramatic than any of us could possibly imagine.
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When you get into too much debt, eventually really bad things start to happen. This is a very painful lesson that southern Europe is learning right now, and it is a lesson that the United States will soon learn as well. It simply is not possible to live way beyond your means forever. You can do it for a while though, and politicians in the U.S. and in Europe keep trying to kick the can down the road and extend the party, but the truth is that debt is a very cruel master and at some point it inevitably catches up with you. And when it catches up with you, the results can be absolutely devastating. Greece, Italy, Spain and Portugal all tried to just slow down the rate at which their government debts were increasing, and look at what happened to their economies. In each case, GDP is shrinking, unemployment is skyrocketing, credit is freezing up and manufacturing is declining. And you know what? None of those countries has even gotten close to a balanced budget yet. They are all still going into even more debt. Just imagine what would happen if they actually tried to only spend the money that they brought in?
I have always said that the next wave of the economic collapse would start in Europe and that is exactly what is happening. So keep watching Europe. What is happening to them will eventually happen to us.
The following are 17 signs that a full-blown economic depression is raging in southern Europe…
#1 The Italian economy is in the midst of a horrifying “credit crunch” that is causing thousands of companies to go bankrupt…
Confindustria, the business federation, said 29pc of Italian firms cannot meet “operational expenses” and are starved of liquidity. A “third phase of the credit crunch” is underway that matches the shocks in 2008-2009 and again in 2011.
In a research report the group said the economy was caught in a “vicious circle” where banks are too frightened to lend, driving more companies over the edge. A thousand are going bankrupt every day.
#2 During the 4th quarter of 2012, the unemployment rate in Greece was 26.4 percent. That was 2.6 percent higher than the third quarter of 2012, and it was 5.7 percent higher than the fourth quarter of 2011.
#3 During the 4th quarter of 2012, the youth unemployment rate in Greece was 57.8 percent.
#4 The unemployment rate in Spain has reached 26 percent.
#5 In Spain there are 107 unemployed workers for every available job.
#6 The unemployment rate in Italy is now 11.7 percent. That is the highest that it has been since Italy joined the euro.
#7 The youth unemployment rate in Italy has risen to a new all-time record high of 38.7 percent.
#8 Unemployment in the eurozone as a whole has reached a new all-time high of 11.9 percent.
#9 Italy’s economy is starting to shrink at a frightening pace…
Data from Italy’s national statistics institute ISTAT showed that the country’s economy shrank by 0.9pc in the fourth quarter of last year and gross domestic product was down a revised 2.8pc year-on-year.
#10 The Greek economy is contracting even faster than the Italian economy is…
Greece also sank further into recession during the fourth quarter of 2012, with figures on Monday showing the economy contracted by 5.7pc year-on-year.
#11 Overall, the Greek economy has contracted by more than 20 percent since 2008.
#12 Manufacturing activity is declining just about everywhere in Europe except for Germany…
Research group Markit said its index of activity in UK manufacturing – where 50 is the cut off between growth and decline – sank from 50.5 in January to 47.9 in February. It left Britain on the brink of a third recession in five years after the economy shrank by 0.3 per cent in the final quarter of 2012.
Chris Williamson, chief economist at Markit, said: ‘This represents a major setback to hopes that the UK economy can return to growth in the first quarter and avoid a triple-dip recession.’
The eurozone manufacturing index also read 47.9. Germany scored 50.3 but Spain hit 46.8, Italy 45.8 and France 43.9.
#13 The percentage of bad loans in Italian banks has risen to 12.2 percent. Back in 2007, that number was sitting at just 4.5 percent.
#14 Bank deposits experienced significant declines all over Europe during the month of January.
#15 Private bond default rates are soaring all over southern Europe…
S&P said the default rate for Italian non-investment grade bonds jumped to 9.5pc last year from 5.7pc in 2012 as local banks shut off funding. It was even worse in Spain, doubling to 14.3pc.
The default rate in France rocketed from 0.8pc to 8.7pc, the latest in a blizzard of bad news from the country as the delayed effects of tax rises, fiscal tightening, and the strong euro do their worst.
#16 Lars Feld, a key economic adviser to German Chancellor Angela Merkel, recently said the following…
“The sustainability of Italian public finances is in jeopardy. The euro crisis will therefore return shortly with a vengeance.”
#17 Things have gotten so bad in Greece that the Greek government plans to sell off 28 state-owned buildings – including the main police headquarters in Athens.
One of the few politicians in Europe that actually understands what is happening in Europe is Nigel Farage. A video of one of his recent rants is posted below. Farage believes that “the Eurozone has been a complete economic disaster” and that the worst is yet to come…
Most people believe that the eurozone has been “saved”, but that is not even close to the truth.
In fact, it becomes more likely that we will see the eurozone break up with each passing day.
So who would leave first?
Well, recently there have been rumblings among some German politicians that Greece should be the first to leave. The following is from a recent Reuters article…
Greece remains the biggest risk for the euro zone despite a calming of its economic and political crisis and may still have to leave the common currency, a senior conservative ally of German Chancellor Angela Merkel said.
But there is also a chance that Germany could eventually be the first nation that decides to leave the euro. In fact, a new political party is forming in Germany that is committed to getting Germany out of the euro. The following is a brief excerpt from a recent article by Ambrose Evans-Pritchard…
A new party led by economists, jurists, and Christian Democrat rebels will kick off this week, calling for the break-up of monetary union before it can do any more damage.
“An end to this euro,” is the first line on the webpage of Alternative für Deutschland (AfD). “The introduction of the euro has proved to be a fatal mistake, that threatens the welfare of us all. The old parties are used up. They stubbornly refuse to admit their mistakes.”
They propose German withdrawl from EMU and return to the D-Mark, or a breakaway currency with the Dutch, Austrians, Finns, and like-minded nations. The French are not among them. The borders run along the ancient line of cleavage dividing Latins from Germanic tribes.
However this all plays out, the reality is that things are about to get much more interesting in Europe.
No debt bubble lasts forever. The Europeans are finding that out right now, and the U.S. won’t be too far behind.
But for the moment, most Americans assume that everything is going to be okay because the Dow keeps setting new all-time record highs.
Well, enjoy this little bubble of debt-fueled false prosperity while you can, because it won’t last for long.
A massive wake up call is coming, and it will be exceedingly painful for those that are not ready for it.
View full post on The Economic Collapse
Is the financial collapse of Italy going to be the final blow that breaks the back of Europe financially? Most people don’t realize this, but Italy is actually the third largest debtor in the entire world after the United States and Japan. Italy currently has a debt to GDP ratio of more than 120 percent, and Italy has a bigger national debt than anyone else in Europe does. That is why it is such a big deal that Italian voters have just overwhelmingly rejected austerity. The political parties led by anti-austerity candidates Silvio Berlusconi and Beppe Grillo did far better than anticipated. When you combine their totals, they got more than 50 percent of the vote. Italian voters have seen what austerity has done to Greece and Spain and they want no part of it. Unfortunately for Italian voters, it has been the promise of austerity that has kept the Italian financial system stable in recent months. Now that Italian voters have clearly rejected austerity, investors are fearing that austerity programs all over Europe may start falling apart. This is creating quite a bit of panic in European financial markets right now. On Tuesday, Italian stocks had their worst day in 10 months, Italian bond yields rose by the most that we have seen in 19 months, and the stocks of the two largest banks in Italy both fell by more than 8 percent. Italy is already experiencing its fourth recession since 2001, and unemployment has been steadily rising. If Italy is now “ungovernable”, as many are saying, then what does that mean for the future of Italy? Will Italy be the spark that sets off financial armageddon in Europe?
All of Europe was totally shocked by the election results in Italy. As you can see from the following excerpt from a Bloomberg article, the vote was very divided and the anti-austerity parties did much better than had been projected…
The results showed pre-election favorite Pier Luigi Bersani won the lower house with 29.5 percent, less than a half a percentage point ahead of Silvio Berlusconi, the ex-premier fighting a tax-fraud conviction. Beppe Grillo, a former comedian, got 25.6 percent, while Monti scored 10.6 percent. Bersani and his allies got 31.6 percent of votes in the Senate, compared with 30.7 percent for Berlusconi and 23.79 percent for Grillo, according to final figures from the Interior Ministry.
So what do those election results mean for Italy and for the rest of Europe?
Right now, there is a lot of panic about those results. There is fear that what just happened in Italy could result in a rejection of austerity all over Europe…
“I think the election results (or lack thereof) are a negative for the euro, which will likely keep the currency pressured for some time,” Omer Esiner, chief market analyst for Commonwealth Foreign Exchange, told me. But it’s not just the political uncertainty in Italy, he adds. “The shocking gains made by anti-establishment parties in Italy signal a broad-based frustration with austerity among voters and a decisive rejection of the policies pushed by Germany in nations across the euro zone’s periphery. That theme revives unresolved debt crisis issues and could threaten the continuity of reforms across other countries in the euro zone.”
And the financial markets have clearly interpreted the election results in Europe as a very bad sign. Zero Hedge summarized some of the bad news out of Europe that we saw on Tuesday…
Swiss 2Y rates turned negative once again for the first time in a month; EURUSD relatively flatlined around 1.3050 (250 pips lower than pre-Italy); Europe’s VIX exploded to almost 26% (from under 19% yesterday); and 3-month EUR-USD basis swaps plunged to their most liquidity-demanding level since 12/28. Spain and Italy (and Portugal) were the most hurt in bonds today as 2Y Italian spreads broke back above 200bps (surging over 50bps casting doubt on OMT support) and 3Y Spain yields broke above 3% once again. The Italian equity market suffered its equal biggest drop in 6 months falling back to 10 week lows (and down 14% from its end-Jan highs). Italian bond yields (and spreads) smashed higher – the biggest jump in 19 months as BTP futures volume exploded in the last two days.
Not that things in Europe were going well before all this.
In fact, the UK was just stripped of its prized AAA credit rating. That was huge news.
And check out some of the other things that have been going on in the rest of Europe…
In Spain, a major real estate company, Reyal Urbis, collapsed last week, leaving already battered banks on the hook for millions of euros in losses. Meanwhile, the government faces a corruption scandal and a steady stream of anti-austerity demonstrations. Thousands of people took to the streets again on Saturday, protesting deep cuts to health and other services, as well as hefty bank bailouts.
Life is no better in a large swath of the broader EU. In Britain, Moody’s cited the continuing economic weakness and the resulting risks to the government’s tight fiscal policy for its rating cut. In Bulgaria, where the government fell last week and the economy is in a shambles, rightists who joined mass demonstrations across the country burned a European Union flag and waved anti-EU banners. Other austerity-minded governments in the EU face similar murky political futures.
At this point, Europe is a complete and total economic mess and things are rapidly getting worse.
And that is really bad news because Europe is already in the midst of a recession. In fact, according to the BBC, the recession in the eurozone got even deeper during the fourth quarter of 2012…
The eurozone recession deepened in the final three months of 2012, official figures show.
The economy of the 17 nations in the euro shrank by 0.6% in the fourth quarter, which was worse than forecast.
It is the sharpest contraction since the beginning of 2009 and marks the first time the region failed to grow in any quarter during a calendar year.
But this is just the beginning.
The truth is that government debt is not even the greatest danger that Europe is facing. In reality, a collapse of the European banking system is of much greater concern.
Why is that?
Well, how would you feel if you woke up someday and every penny that you had in the bank was gone?
In the U.S. we don’t have to worry about that so much because all deposits are insured by the FDIC, but in many European countries things work much differently.
For example, just check out what Graham Summers recently had to say about the banking system in Spain…
It’s a little known fact about the Spanish crisis is that when the Spanish Government merges troubled banks, it typically swaps out depositors’ savings for shares in the new bank.
So… when the newly formed bank goes bust, “poof” your savings are GONE. Not gone as in some Spanish version of the FDIC will eventually get you your money, but gone as in gone forever (see the above article for proof).
This is why Bankia’s collapse is so significant: in one move, former depositors at seven banks just lost virtually everything.
And this in a nutshell is Europe’s financial system today: a totally insolvent sewer of garbage debt, run by corrupt career politicians who have no clue how to fix it or their economies… and which results in a big fat ZERO for those who are nuts enough to invest in it.
Be warned. There are many many more Bankias coming to light in the coming months. So if you have not already taken steps to prepare for systemic failure, you NEED to do so NOW. We’re literally at most a few months, and very likely just a few weeks from Europe’s banks imploding, potentially taking down the financial system with them. Think I’m joking? The Fed is pumping hundreds of BILLIONS of dollars into EU banks right now trying to stop this from happening.
Like Graham Summers, I am extremely concerned about the European banking system. Europe actually has a much larger banking system than the U.S. does, and if the European banking system implodes that is going to send huge shockwaves to the farthest corners of the globe.
But if you want to believe that the “experts” in Europe and in the United States have “everything under control”, then you might as well stop reading now.
After all, they are very highly educated and they know what they are doing, right?
But if you want to listen to some common sense, you might want to check out this very ominous warning from Karl Denninger…
I hope you’re ready.
Congress has wasted the time it was given by the Europeans getting things “temporarily” under control. But they didn’t actually get anything under control, as the Italian elections just showed.
Now, with the budget over there at risk of being abandoned, and fiscal restraint being abandoned (note: exactly what the US has been doing) the markets are recognizing exactly the risk that never in fact went away over the last couple of years.
It was hidden by lies, just as it has been hidden by lies here.
Bernanke’s machinations and other games “gave” the Congress four years to do the right thing. They didn’t, because that same “gift” also destroyed all market signals of urgency.
As such you have people like Krugman and others claiming that it’s all ok and that we can spend with wild abandon, taking our fiscal medicine never.
They were wrong. Congress was wrong. The Republicans were wrong, the Democrats were wrong, and the Administration was wrong.
Congress is out of time; as I noted the deficit spending must stop now, irrespective of the fact that it will cause significant economic damage.
For the past couple of years, authorities in the U.S. and in Europe have been trying to delay the coming crisis by kicking the can down the road.
By doing so, they have been making the eventual collapse even worse.
And now time is running out.
I hope that you are ready.
View full post on The Economic Collapse
By Midyear, Europe ‘Can No Longer Live With This Euro’
THURSDAY, FEBRUARY 21, 2013 AT 4:46PM
“I’m sitting on cash,” Felix Zulauf said when he was asked in an interview where he was putting his money. With decades of asset management experience under his belt, he’d founded Zulauf Asset Management in Switzerland in 1990. But now he was worried—and has turned negative on just about everything.
In Europe, growth would be weak. In the US, “everyone” was expecting decent growth, but he saw the possibility of a “great disappointment.” Developing nations wouldn’t grow as fast as in recent years. The Chinese were taking their money out of the country. “They have antennas for problems at home,” he said. The markets were expecting the world economy to recover, but he suspected that neither the economy nor corporate earnings would develop as hoped. Once the distance between “wish” and “reality” became apparent, “it could cause a crash.”
Timeframe? This year. Optimism might hang in there for a while; the second quarter would be more problematic. Over time, downdrafts in some markets could reach 20% to 30%. Despite the incessant insistence by Eurozone politicians that the worst was over, he didn’t see “any normalization.” The structural problems were still there, they’ve only been hidden, “drowned temporarily in an ocean of new liquidity.”
“Look at the economic data,” he said. “There is no visible improvement.” As if to document his claim, the Eurozone Purchasing Managers Index was released. It dropped again after three months of upticks that had spawned gobs of hope that “the worst was over.” Business activity has now declined for a year and a half. New orders, a precursor for future activity, fell for the 19th month in a row. While Germany was barely in positive territory, France’s PMI crashed to a low not seen since March 2009 and was on a similar trajectory as in 2008—when it was heading into the trough of the financial crisis!
Sure, the financial markets calmed down, but only because the ECB pulled the “emergency brake” by declaring that it would finance bankrupt states so that the euro would survive. It was a signal for the banks to buy sovereign debt. Borrowing from the ECB at 1%, buying Spanish or Italian debt with yields above 5%, while the ECB took all the risks—”a great business for the banks,” he said. As a consequence, the banks were once again loaded up with sovereign debt. “The problems weren’t solved but kicked down the road,” he said.
Politicians would muddle through. Government debt would continue to rise. But next time something breaks, the pressure would come from citizens, he said. Standards of living have been deteriorating. Many people have lost their jobs. Real wages have declined. “We’ve sent millions into poverty!” People were discontent. And it was conceivable that “someday, they could go on the street and attack these policies.”
But, but, but… hasn’t Chancellor Angela Merkel emphasized that the euro would be important for peace in Europe? “The euro doesn’t create peace,” he said, “but discontent.”
Countries were devaluing their currencies to gain an advantage. This “race to the bottom” could escalate to where governments would impose limits on free trade. The devaluation of the yen would hit other countries. In Germany, it would pressure automakers, machine-tool makers, and others. By midyear, he said, “Europe will reach a point when it can no longer live with this euro.”
It would have to be devalued. France’s President François Hollande was already agitating for it. “And he has to because the French economy is in a catastrophic condition. It’s no longer competitive. France is becoming the second Spain.”
But didn’t the ECB emphasize that the exchange rate was irrelevant for monetary policy? And wasn’t the Bundesbank resisting devaluation?
“The policies of the Bundesbank are unfortunately dead,” he said, and its representatives were only “allowed to bark, not bite.” Monetary policy at the ECB was made by Draghi, “an Italian.” He’d push for the “lira-ization of the euro,” he said, “not because he likes it, but because he has no choice.” It was the only way to keep the euro glued together. “Mrs. Merkel knows that too, but she cannot tell the truth; otherwise citizens would notice what’s going on.”
Given this dreary scenario, what could investors do? Long-term, equities were a good choice, he said, but this wasn’t the moment to buy.
Gold? That it was down from its peak a year and half ago was “normal,” he said. Currently, gold funds were forced to liquidate, which could cause sudden drops, but it also signified “the end of a movement.” He expected the correction to end by this spring. “Long-term, the uptrend is intact,” he said.
Bonds? They had a great run for 30 years but were now “totally overvalued”—in part due to central banks that had bought $10 trillion in debt “with freshly printed money” over the past five years. Debt markets were completely distorted, but central banks would be able to hold the bubble together for “a while longer.” So he admitted, “Last summer, I sold all long-term debt.”
But where was he putting his money now? “I’m sitting on cash,” he said.
The Fed is growing deposits far faster than banks can deploy them, or than the economy can use them. It is growing them far faster than anybody wants or needs. And now there are “hundreds of billions of dollars of potential fuel unused,” as Bloomberg pointed out. A potential for big problems.
Statistics: Posted by yoda — Fri Feb 22, 2013 9:42 am
View full post on opinions.caduceusx.com
Just a few weeks ago many leaders were tentatively looking at what they thought might be more than just a respite in the ongoing European (world) economic calamity. But this storm is far from over. It’s shifting into a new phase as Spain continues to spin out, Italy’s industrial output is the lowest it’s been since its been recording the stat, and even tiny Cyprus is causing real problems.
Japan is printing with abandon. So are we. But hey the stock market is poking around 14000 so everything must be cool.
View full post on AgainstCronyCapitalism.org