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Deepening Debt Contagion

by Stephen Lendman

November 17, 2011

With pressure building on Europe and America, something's got to give. Progressive Radio News Hour regular Bob Chapman says Germany's Angela Merkel and France's Nicolas Sarkozy search for solutions that don't exist.


Nothing's agreed on to be implemented. Austerity weakens failing Eurozone economies. French and other banks are selling bonds. Yields are rising. So is economic, financial and political uncertainty.


Europe's in disarray. Germany printed Deutsch Marks just in case. It "has to come to terms with cutting loose six loser countries. That means leaving the euro and perhaps the EU. We see no other choice in this unnatural" union.


"The future of the euro zone is sealed." By fall 2012, "there will be six less participants." Europe's economy will have negative growth, worsening in 2013. Other Eurozone countries will be forced out. In two years or less, "the euro is history." No one knows how bad things will get. They do know today's crisis won't end soon.


New Greek and Italian governments can't resolve intractable issues. Of concern is how much more austerity can people take before exploding.


At the same time, Eurozone and US leaders are whistling past the graveyard. Perhaps they didn't notice bond market contagion affecting highly-rated countries like Austria, the Netherlands and Finland, indicating worsening crisis conditions.


A recent Bank of England quarterly Inflation Report also was downbeat, saying:


"The prospects for the UK economy have worsened. Global demand slowed. And concerns about the solvency of several euro-area government intensified, increasing strains in banking and some sovereign funding markets. These factors, along with the fiscal consolidation and squeeze on households' real incomes, are likely to weigh heavily on UK growth in the near term."


In 1998, even Alan Greenspan once was right, saying:


"It is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress."


Compared to now, it was mild, yet enough to be worrisome. Today, global alarm bells should be sounding.


Europe's debt crisis needs $6 - 8 trillion to resolve, an impossible amount to raise. Bailing out Italy and Spain alone would bankrupt solvent states.


European banks are threefold over-leveraged. Europe's an accident waiting to happen. In fact, it's unfolding in plain sight. Failed bond auctions show it. European Financial Stability Facility (EFSF) bond sales were postponed for lack of interest.


"Europe is the catalyst, and eventually it probably will take the financial system down." Germany and France are discussing a Eurozone breakup to let six weak countries exit the euro, but stay in the EU. All rescue measures tried so far failed.


Bond yields and spreads off bunds say France no longer is AAA. However, if lost, EFSF firepower will seriously erode. Sentiment across Europe signals downturn.


The San Francisco Fed said "(p)rudence suggests that the fragile state of the US economy would not easily withstand turbulence coming across the Atlantic. A European sovereign debt default may well sink the United States back into recession."


European economies are drowning in debt. Adding more worsens conditions. America's AAA downgrade shows even sacred cows are weak and unsafe. America's lost decade continues.


Total US employment at 131.5 million is lower than in April 2000. Since then, labor force numbers rose 12 million. Population figures increased 28 million. Employment gains have been dead for 12 years.


Real personal income at about $32,000 is at December 2004 levels. Home prices match earlier ones in 2003. Since January 1999, stagnation stalled the country economically. For the first time ever, 5 and 10-year inflation-linked bond yields (TIPS) are negative, signaling protracted trouble, perhaps for another decade.


Combined consumer spending, housing, capital spending, commercial construction, inventories, net exports, and the government sector comprising demand are weak.


Housing has too much supply. European weakness will curb exports. State and local governments keep downsizing. Washington's turn is coming. Household net worth is $6 trillion lower now than at pre-recession highs, an unprecedented occurrence over a four-year period.


Home prices are down 35% from peak highs. Expect the savings rate at 3.6% to more than double. Focusing on debt reduction is key. Deleveraging decreases debt, increases savings, and shifts household budget priorities to necessities. Frills can wait for better times.


The 2002 - 2007 parabolic credit expansion capped three expanding decades. Conditions now reversed and continue down.


On November 23, push meets shove fiscally. Twelve Super Committee congressional members have to decide ways to trim $1.2 trillion through a combination of tax hikes and spending cuts. Both sides are deadlocked.


Politico says "failure (to agree) could shake confidence in world markets and spark automatic cuts across the federal government starting in 2013."


Few observers see resolution. Even if achieved, no one believes Congress will concur. Its choice is vote up or down on the package with no amendments. As a result, expect another US debt downgrade.


Greece experienced something similar. Portugal's turn is coming. So is Italy's and Spain's. France may be next. French bonds plunged. Insurance costs (credit default swaps) on them skyrocketed.


In fact, the cost of insuring French debt against default tripled its 2008 peak level. Insuring $10 million in 5-year government bonds costs $203,001. In contrast, insuring the equivalent amount of Greek debt in November 2008 was $174,761. Markets today say French debt is riskier than Greece at the onset of its crisis. At issue is its insolvent banks.


Yet France is still rated AAA, far higher than Greece's single-A rating then. Who's right? Bet on markets, not Moody's. Eventually, rating agencies catch up.


Days ago, S&P told private subscribers that France's AAA rating would be cut. French government outrage got S&P to back down.


Debt issuers pay rating agencies to grade them. Ratings are bought and paid for by the institutions being rated. Downgrading France means others on French banks. Conflict of interest challenges corrupt both sides.


Moreover, lower rated French debt would halt government ESFS contributions. Doing so could collapse Europe's rescue plan, already breathing hard.


Sick Europe depends on France and Germany. French banks hold the bulk of bad government debt. The country is burdened with bailout pressure and its own debt to refinance.


Greece's crisis shook global financial markets. France's economy is eightfold larger. Imagine calamity conditions if it collapses. It also holds for Italy and Spain. If any of them go down, so does Europe, then America, then global economies.


Europe is the epicenter of economic crisis spreading everywhere. Resolution is nowhere in sight.


Hunker down for protracted hard times. They're exacerbated by further austerity cuts when stimulus is urgently needed.


A Final Comment


A mid-November Organization for Economic Cooperation and Development (OECD) report forecasts further economic slowdown.


Its September composite leading indicators (CLIs) predict trends six months ahead. They show weakening North American, European, Asian, and South American economies.


Seven consecutive CLI declines signal deepening global trouble. A separate Eurostat report said Eurozone industrial production plunged 2% in September, the largest monthly decline since September 2009.


Major central banks recently downgraded their growth forecasts, including the Fed, ECB, Bank of England and Bank of Japan. More austerity cuts assure deepening today's Depression.


Perhaps when it's too severe to ignore, pundits, technocrats, politicians and central bankers will acknowledge what they try hard to conceal.


Stephen Lendman lives in Chicago and can be reached at lendmanstephen@sbcglobal.net.


Also visit his blog site at sjlendman.blogspot.com and listen to cutting-edge discussions with distinguished guests on the Progressive Radio News Hour on the Progressive Radio Network Thursdays at 10AM US Central time and Saturdays and Sundays at noon. All programs are archived for easy listening.



:: Article nr. 83219 sent on 18-nov-2011 22:19 ECT

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