Down Goes Europe!

Europe is and has been in political turmoil for years following their Euro Zone experiment where they combined currency though they still had different ways and means to make money.  Some States rely on tourism, others production; whereas these different systems worked in times of surplus, now that money is stagnant problems have risen.  Led by housing bubbles and unemployment in a socialist system, the Euro Zone appears to be collapsing.

When I think of Europe my first thought is that the US Government is in a similar situation, and the only difference is that Europe is managing multiple societies, whereas America is managing different cultures.  This is a big difference, and it is ill thought that the States of Europe could find harmony in monetary and fiscal policy, but EUrope does have some great advantages to its Western Power counterpart.  First, it is connected by land to the greatest oil producers in the world:  the Mid East and Russia.  This is a great advantage.  Second, it's popluation does not have the reliance on oil that America does due to its infrastructure.  Also it has not the complacency of having the reserve currency; America has been spoiled with such.

Yet their situation is dire:  the banks are undercapitalized, unemployment is high, and they have many promises to pay that are unsustainable; but isn't this just like America?  This conjures up the Sun Tzu quote, "When you are weak appear strong, and when strong appear weak."  Is it that Europe is taking the heat off of America, because when America collapses under its debt burden it will be the end of the Fiat Ponzi, and the Euro Fiasco can prolong the inevitable?  As Europe and America are joined at the hip, I do believe that the reason Europe's problems have been stretched out is to keep the eye off of America.

This is why the problem, reaction, solution has gone into overdrive, with Germany bluffing and bluffing again that they will not pay the next bailout, though they always do.  Same with Greece accepting the bailouts.  There will reach a point of no return; in fact we are past that point, but the result will be just as bad for America as for Europe, and the collapses will be simultanious, as FX swaps will have little meaning when one country collapses.  Will the DXY go up as the Euro goes down?  Will Bernanke cut the value of the dollar by fractionally reserving it to stem the tide, only to increase the price of all assets?  Are there any real solutions?  Considering the debt burden of all Nation-States, and considering they are using fiat to denominate said debt, there is no real solution.  So down goes EUrope, and with it, the Keynesian Experiment.

The ECB Gold

It took gold to become a member of the Euro Zone, and that gold was held at the member bank, the ECB.  A member of the ECB uses the euro.  Once a State defaults on their debt obligations, they will likely not use the euro any longer, and as likely, not get their gold back.  Therefore, the last State in the ECB gets all of the gold.

This may be the reason for the EuroZone.  It may have been invented to sucker in all the States only to have them default due to, basically, sub prime lending.  It is well known that Greece and other member States should not have been approved for admittence.  This would make sense now that we have outlined that Europe's gold will be owned by the strongest member.

Many have long fought for gold.  Was the EZ set up as a way to steal all of the gold in a legally binding way?  I think so.

Kicking the Can

Judging by the laissez-faire nature of the Heads of State at the G-8 meeting yesterday, the only plan they have ever had, kicking the can, is going to continue.  It appears Merkle understands that deflation is not in the cards for any of the Central Banks, and that her political posturing has been mere rhetoric to appear to Germans as at least trying not to spend their future on Greece and other insolvent Euro States.  Hollande, a long time French political insider, will change the European course of austerity.  This is their hope of keeping all States inside the Eurozone not before another State, like America or Japan, go bankrupt, which is a suicide pact of epic proportions.  Since the Keynsian policy model is doomed to fail, because debt does not equal growth, and it sure doesn't equal money, well spent or otherwise, there will be failures, but for now, the long term policy of can kicking continues.

Yet there are no alternative choices when it comes to economics.  It is a study deemed a 'science', and there is no aggressive movement to change it, Ron Paul excluded.  And since the media did everything in its power to defame Paul, the status quo has not changed much.  The hope is that it has changed enough, and that when the can kicking can not go any further, those that hold a different theory than printing trillions upon trillions of fiat currency to throw at the banking system will be asked to step down, and new theories will form to create a discussion outside of this Hegelian dialectic that has formed over the last hundred years.

Now that the Heads of State appear to agree to print ad infinum, the Central Banks have the green light to do so.  This should all but put a lid on the dollar's price appreciation, and a floor under equity.  If this does not happen, then pensions turn negative.  Also, since it is not just a battle of the euro vs the dollar (although it may appear that way for everyone watching), and a battle between all Central Banks, oil and precious metals will find great support at these ranges; so great that we may never see them lower.  In fact, if the photo ops from the G-8 are as they appear - a unity of fiscal and economic policy - then we may see oil and precious metals move higher soon, and quickly.

One thing that was mentioned at the G-8 was releasing oil reserves.  This is a manic decision.  The thought is because the Iran Sanctions are about to be fully levied.  The problem is that these reserves will run out, which means the price in the long term will rise.  Last time it took only a few weeks for the price to rise back up.  Is flushing the holdings of our most important resource worth a few weeks of cheap oil?  Not at all, but these policy heads are just that stupid to try.

Economics Hangs in the Balance

If JPM does indeed get their balance sheet blown out, and the recovery never truely takes hold, it will put pressure on the "science" of economics because it will show that the policy that was used was not sound.  If it was not sound, then economics is not a science.  If economics is not a science, then the whole structure of finance will need to be reorginized.  This will cause great instability, and societies around the world will have to change to fit into the picture of a new economic landscape where true economics reigns supreme.  The difference between current policy and sound policy has many variables, some of which are - How do we determine value?  And what characteristics embody the consumers?

Economic policy dictates that when times are good it is prudent to save, and when times are bad then wealth must be created and spent.  The problem with this is that the consumer is not rational (despite the science's theory) and the consumer often spends most during good times, leaving their wallets empty when a depression arrives.

The next factor is that even if the consumer were rational, the crux of the system is based on an instrument of finance that holds no intrinsic value.  This instrument is the dollar, and it can be printed and loaned out from a promise to pay into an infinite amount.  Since the entire system uses this tool to implement value, value is actually lost before it is ever understood.  This creates a great amount of chaos and if, or rather, when, people come to terms that using fiat currency to trade is different from using it to store value, then real wealth will be demanded with sudden force.  If someone wants to use paper money that is backed with another item that is one thing, but when one hoardes it as if it has value, it is merely done with poor understanding of the thought investment.

And with these fundamental problems also comes the fact that those in charge of making finance work are crooks and inept at making investments proper.  The Central Banks can not really bail them out, because the Central Banks do not create wealth themselves, but just percieved wealth in the form of fiat currency (nevermind the Central Banks are crooks themselves, because they knowingly create and pop bubbles).  There will soon be a moment when actual goods can not trade for fiat currency; this will be when supply is constrained and demand moves higher.  Because the Major Banking Houses continue to falter, we may be fast approaching this moment when the Fiat Ponzi collapses.

The Fall of JPM

Oops.  JPM's prop desk has a realized reported $2B loss.  Oops.  They will now need to shore up their book and remain a buyer of UST debt at the same time, or else they will no longer be able to get the cash swap from the Fed to buy Europan debt.

First they will need to liquidate assets.  How will they do this?  Will they loan dollars?  Sell equity?  Bonds?  Their position is surely leveraged too, and by some estamates the hole will be $20B.

So on the Fiat Ponzi crumbles, and given not only the size of JPM, but the institutional role it plays to mind the gaps, this could trigger the event that will usher out the Fiat Ponzi system.  Anyway it goes; it could be a sharp sell off in equity, and bond bubble collapse due to a lack of demand, or a collapse of fiat due to an increase in leverage to maintain price stability; anything is possible, and because we have never had a stable system, and the backbone is based on a metric (the dollar) which has no real value, I would say that whatever happens is going to be something that most people have never dreamed of.

Today, it has begun.

Mining Stocks

The drop in price of precious metal mining shares has been one of the most interesting happenings in the markets over the last few years.  Not only has precious metal bullion found a comfortable support level, but these miners are providing an important resource for industry, if it is financial by gold or silver by technology.  So how has price dropped so?

I have no answer, but I can stipulate; dropping the price of miners can cause a panic that could lead to a mitigation in the price of bullion due to investor sentiment but also by forcing them to sell more product than wanted to keep their balance sheets even.  Yet it could also create oppurtunity for those miners who manage their positions, because if they can find support, buyers could come in and invest, and they could also hold back product and cause a supply crunch.

Who is shorting?  It is likely that it is institutional investors.  Looking at stocks, the PM miners and financials are down in lockstep.  It is likely that the proxie Banking Houses are doing the bidding and bleeding their books to mitigate the prices of the gold sector, because if miners stay down sentiment may be kept from buying bullion, and vice versa.

It has been a hard year for miners, but those that managed themselves best should see great upside if bullion prices start to rise soon.  The move up in bullion could not only move the mining sector dramatically, but could lead to even more bullion investing.  If one moves, the other should respond.  The two investments, bullion and shares, could build on each other to create the next leg up for the gold sector.