This time it’s different

The ideological assault of the market worshipers on government is starting to have its inevitable result — extreme market uncertainty. In a system of rules, which is what a financial system is, endless denigration of the rule setters (governors and regulators) because of alleged incompetence or wicked constraint on basic liberties will always result in the weakening of the very rules on which the libertarians rely. For their liberty. That is the lesson of the current extreme volatility. In practical terms, as a Credit Suisse report details, it is making it very hard for investors to work out where to turn.

Equities and bonds are simultaneously cheap. Investors do not want to buy equities because of prevailing growth risks. But they are also reluctant to buy bonds, because of sovereign debt concerns. In this context, the recent S&P downgrade of the US government seems to have had a significant psychological impact on investors. Seemingly, investors are massively overweight cash. But it is now costly for investors to hold cash. Recently, the custodian Bank of New York Mellon started charging a 13bps fee for large deposits. This effectively creates a negative interest rate. It is symptomatic of a liquidity trap – an environment where there is an abundance of money supply – but no-one willing to put cash to good use.

Yep, the usual rules don’t apply. Which is what you would expect when privateers and banksters have for decades attacked those who set the rules. You can always go to gold, but that is not even valued on supply and demand, just the ancient belief that it is worth something:

Understandably, investors have been desperately seeking out alternatives to cash and bonds. They have been buying gold and CHF. But these alternative safehaven trades are now very crowded. Gold prices are exceptionally high in real terms, whereas the CHF is massively overvalued relative to longer-term fundamentals.

Therefore, investors have been forced to move even further out the risk (or yield) spectrum in search of safety. Currencies like the AUD have been viewed more favourably. After all, the AUD is backed by hard commodities, and is therefore a beneficiary of money printing globally. Also, the Australian government has very low debt levels compared with its foreign counterparts. To be sure, the AUD is not a safehaven currency in the strictest sense, because Australia is a net borrower of funds from abroad, and is therefore vulnerable to capital outflows during episodes of global risk aversion. Also, if world growth is weak or negative, commodity prices tend to fall, causing a deterioration in the trade balance. But notwithstanding these considerations, investors have been willing to buy the AUD as a quasi-reserve currency, because there has been precious little else to buy. Clearly, investors still have a preference for safety.

There is the usual advice about how Europe should manage its problems.

(Investors) are demanding a quick resolution of European and US debt issues. But a quick resolution is not possible or palatable. Germany may need to transfer saving to peripheral Europe. Peripheral European debt must be restructured. China may need to allow its export sector to be downsized to create room for the US to kick-start its manufacturing. These ideas are not very popular – and even if policy makers could agree to implement them, the adjustment process would take many years. In the short-term, the best thing that policy makers can do is to buy time for longer term adjustment processes to take effect. But so far, policy makers and investors alike seem very uncomfortable with this state of affairs. Nobody likes the idea of “kicking the can down the road”.

What is notable in the recent ructions is the lack of sense of responsibility in the market worshipers and their smug preaching at governments as if they had nothing to do with what went wrong. Somehow government is always other, and a pernicious other at that. It is not important that the self interest of this view is odious. What matters is that it is flat wrong. We are all in it together, and the refusal to acknowledge that is at the heart of the current near panic: The Credit Suisse report gives a glimpse of recognition, though:

Ironically, their discomfort could be self-fulfilling and making matters worse. They are depriving (desperate) borrowers of cash. They are creating a fundamental dislocation of fund flows. We can see this, because there are pockets of credit market stress in the world despite an abundance of cash in the global financial system. It is like having starvation in one part of the world, and obesity in the other – possible, but not sensible.

This looks a lot like a co-ordination failure. It is possible that investors could help themselves by helping policy makers. They could continue to fight the Fed, ECB, and fiscal policy makers – but perhaps they should simply choose not to. After all, valuations on safehaven assets are now so stretched that even risk assets are starting to look attractive. And if nominal interest rates really are turning negative, investors could be forced back into the market for risk assets again. At this juncture, it could be mutually beneficial to endorse the credibility of policy makers and indeed, the path of least resistance.

Support government in the collective interest? What about enlightened self interest, and the limitless benefits of self interest, fear and greed? Adam Smith’s invisible hand would be turning in its grave, to use an entirely unconvincing metaphor.

Comments

  1. Weimar Republic

    I’d like to hear from gold bugs whether they are buying physical gold bullion, e.g. turning up at the Perth mint and loading up, or buying a piece of paper that says they own gold.

    • That is what I have thought for some time now… What happens when everyone wants delivery of physical gold.

    • weimar. i have been buying lihir and newcrest for years and more so after 2007. the lihir play turned out well when NCM acquired them. however i have found NCM has grossly underperformed the bullion price in last couple of years. hoping traders spot this large spread and start buying up NCM shortly!! i prefer the top tier low cost miners to ETFs or physical etc.

    • I hold about 15% of my portfolio in gold (probably higher now given the recent upturn so may be time to sell some off) and you can bet that it’s physical.

      I wouldn’t consider myself a bug though.

    • I’m up to 10% of net worth in gold. Perth mint unallocated pool gets you the physical stuff without having to move and store it.

      • yep my margin portfolio has ballooned from around 4% of portfolio to around 19.5% now with little additional purchase since 2007/08. overweight gold but like you AB i am definately not a gold bug. i am value investor through and through and in general agree with buffett that gold is terrible investment. in current environment though i disagree with the jedi master. hold gold!!

    • Perth Mint Gold is state govt. guaranteed. It’s the best place in the universe to BUY gold on an allocated or uinallocated basis. You can call in your unallocated gold to allocated within 10 days.

  2. There is no more market. All the uncertainty comes from the state.

    People are navel gazing and jumping whenever the Bernank sees his shadow and hints at QE3.

    Investors respond to political debates about debt ceilings, to the head of the ECB overstepping his powers to bailing out the European welfare states, to the central planners in China trying to control inflation without creating civil unrest whilst engaging in massive unsustainable construction projects.

    Even the much maligned ratings agencies, upon which the investment world rely, are the beneficiaries of the SEC credit rating cartel.

    Today we have Fannie Mae revealing another $73billion of so-called ‘hard to value’ loans that were loaded onto the back of taxpayers.

    Nobody said markets are supposed to provide certainty.

    But when the governments and central bankers try to prop them up, stimulate them, zombify the banking system, prevent deleveraging and bail out the welfare states, they are only kicking the can down the road.

    Markets can be fooled for a while… they can get it wrong… but what markets will eventually do is speak up and sniff out the lies. Shares were priced for perfection. Many governments were not worthy of their AAA credit rating.

    The correction will be as large as all the government manipulation of the past 4 years.

    • +1. at some point the inevitable question arises….does china/arabs/japan etc (other large debt holders) bail everyone out and then force us to work in iCLONE factories for 20hrs/day?

    • Govt. turned a blind eye to some crucial legislation some time ago when they allowed investment banks to become ADI’s in adddition to their usual activities.

      Banks make money by creating debt, throw in some moral hazard, short term incentive reward structures, inept ratings agenices (giving piles of crap investment grade ratings) and who on Wall Street in their right mind wouldn’t come up with all sorts of creative debt instruments to make money??

      Add in the absolute ease of cross border capital flows in today’s globalised world and you have a financial nuclear reactor waiting to melt down (GFC 1)

    • You’re forgetting that it is actually the markets(you know, those stridently capitalist chaps who run companies or trade and speculate on the profits of said companies) that – ahem – politely request that Govt and Central Bankers prop them up when things turn bad. The State is just responding to its constituency.

      • Its not responding to the people (the majority)- its repsonding to the powerful banksters that want to keep their profits and put the losses onto ther taxpayer.

        This is the exact opposite of the free market…the way lefties cant understand this is simple point is remarkable. No bailouts, no assistance…you go bust, you go bust and the Governments role is to help pick up the pieces for the most vulnerable in society (public housing and food shelters etc…)..

        Not propping up massive companies for the cost of hundreds of billions

        • This is utopian thinking. Given the inconistencies inherent in human behaviour, the kind of free market you are describing can’t exist for a sustained period.

          • “Given the inconistencies inherent in human behaviour”

            DO you mean people’s irrational behaivour and likelihood to fail? Well thats fine…I dont understand what is so wrong about allowing failure and recessions. As long as the Government maintain civil harmony (fail), allow businesses to operate and compete (fail) and maintain good fiscal and monetary policy FAIL! then the Government would at least not be destructive

            And over time the productivity and innovation from the private sector would allow higher levels of production and better standard of living.

            The market and society are very similar in that human beings interact for each others benefit. When someone engages in conduct that is damaging and against the popular will of the market or society (looting, corruption, financial cleptocracy) there can be regulation to prevent and punish…

            I saw a shopping centre in Birmingham was protected from gangs of looters only because he hired 4 big dogs and a few security guards. He plans on sueing the Government for police negligence

        • I disagree firstly that “human beings interact for each others benefit”. For every well behaved Western European socialist paradise there is a post-Communist eastern European or Asian mafia state/autocracy acting in the interests of the few. Which is the norm ? When does the State ever respond(for sustained periods of time) to the will of the majority ? When have markets ever been free of humans’ fundamental impulse to perpetuate their power ? Remove the ability of Governments to “distort” markets, that power just moves to other agents.

        • The point he was trying to make was that the banks and not the people are the constituency.

          It’s all fine to talk about free markets but once a group, no matter how small, becomes too powerful/rich they are not willing to go back down and will use their money and power to hold on to their position. How do you stop that from happening?

  3. To sum up the current situation, I have slightly modified a quote from James Galbraith’s recent speech:

    “Absolute distrust, leading to absolute liquidity preference is the incurable consequence, it seems to me, of financial fraud the current financialized market.”

  4. The first lines you quote from the CS report:

    “Equities and bonds are simultaneously cheap. Investors do not want to buy equities because of prevailing growth risks. But they are also reluctant to buy bonds, because of sovereign debt concerns…..Seemingly, investors are massively overweight cash. But it is now costly for investors to hold cash. Recently, the custodian Bank of New York Mellon started charging a 13bps fee for large deposits. This effectively creates a negative interest rate. It is symptomatic of a liquidity trap – an environment where there is an abundance of money supply – but no-one willing to put cash to good use.”

    — THAT to me seems to be an absolute load of rubbish!!! Yes there is a lot of cash – but there is WAY MORE DEBT. It just isnt alligned…one person’s cash is not another persons debt (Fannie May Vs Apple)

    So although the non-market (State!) worshippers think that we can just look at aggregate cash across the economy and spread it around to solve the mess…it cant happen. Europeans (Germans) will not stand for it…as it is a massive wealth transfer that is unfair and inefficient

    SON then goes to point out the role of the central bank – having to keep rates at 0 and give savers a negative interest rate (as if this is good monetary policy!) without realising the punishing effect thisd has on savers who are relying on their cash to buy food and shelter with.

    The free market cash rate would not have allowed such large bubbles to form…its central bank failures and poor regulatory frameworks that have caused the crisis.

    • “The free market cash rate would not have allowed such large bubbles to form…”
      .
      Can you describe what the hell is “free market cash rate” and how is it different from the current cash rate set by the central bank?
      .
      So, if the central banks do not get to set the cash rate in your free market la la land, then you can basically abolish the central bank and central bankers with million $ salaries, yes?
      .
      That would save a pile of money ..err..something.

      • A free market cash rate is having financial institutions set their own level of interest based on the supply and demand of money. When people borrow too much, savings go down, forcing up the interest rate, discouraging borrowing. When people save too much, the price goes down, encouraging borrowing.

        “So, if the central banks do not get to set the cash rate in your free market la la land”

        Why his objection to price fixing la-la land? Who is centrally setting the price of vegetables in Australia? We don’t need anyone to set prices for anything.

        “then you can basically abolish the central bank and central bankers with million $ salaries, yes?”

        Yep, now you are getting it. Central bankers contributed to the current crises by keeping rates low when there was too much borrowing an not enough saving. They then failed to see the largest credit crunch in history as it engulfed them. Then they said they would solve the problem with some QE and ZIRP. 4 years later, things are still dreadful.

        And we pay them for their services….

        • How is that different from the cash rate target set by the RBA?
          .
          Also, we should abolish the APRA too, yes?
          .
          PS: Keep pulling on that thread and you will unravel the blanket pulled over the innate barbaric instincts of mankind.

          • Weimar Republic

            How is that different from the cash rate target set by the RBA?

            because the RBA sets a target rate and “defends” it (for want of a better term).

            by analogy the RBA could go down to the Viccy market and set a target price on turnips. …or maybe they should have acted and done this for bananas to keep inflation low 🙂

            I agree with the guys above, I don’t see why this has to be centrally planned.

          • I do agree in principle with the market set interest rates. Interest rates could be an automatic stabiliser if you will.

            Cartel behaviour among banks was always the goal however before the creation of the central bank there were too many things stopping this from happening. The biggest problem was the problem of the commons where if one bank decided to be competitive/charge a different interest rates to gain maximum profit the cartel was broken. In effect without a central bank to backstop you there is every incentive for one individual bank to gain market share. Any bank who lent too much and created too much credit would also be taking huge risk that could result in bankruptcy and other banks taking their share giving more incentive for a bank to lend prudently.

            If you want government money get rid of private banking. it isn’t a real business anyway – it is part of the systems design. if you want private banking don’t make taxpayers on the hook. I.e a hybrid model doesn’t really work in the long run.

            No system is perfect they all have faults.

          • “I agree with the guys above, I don’t see why this has to be centrally planned.”
            .
            You mean, you don’t see why supply of base money (or the metaphorical and real printing of currency) has to be done by a central bank???
            .
            Okk.. I am off to Officeworks to barter for a cheap HP printer/scanner and print my own money.

          • Mav its pretty straightforward and not that hard. You would still have the legal system to enforce contracts. Pretty much if you were to issue currency you would need something of value to back it unlike our current fiat system. Notes are simply claims to an asset whether it be a physical one or a financial one and a contract to pay the backing if the note is redeemed. This is probably why in the long one all fiat systems fail – if a currency isn’t backed by anything it is too easily manipulated and the rules that govern its value too easily changed.

          • And furthermore money is a trust based system really that the note provided is worth something. I wouldn’t use your notes simply because I don’t trust you or that you can back them with anything tangible.

          • “You would still have the legal system to enforce contracts.”
            .
            You can not be serious !! Google “Robo signing” – where legal documents are fraudulently produced on an industrial scale.

    • Finally someone who understands exactly what caused this mess. This is been in the making for a very long time.

      There are rules for everything not just the economic system. Should the government or the community set these rules? Historically the role of government was much more limited than it is now and communities set the rules.

      A system should be designed with its end users in mind, so that without intervention each component or actor in the system passively has an incentive to keep it running properly. These incentives should promote behaviours that promote system stability and fairness. This includes factoring into account that we are human and we have greed, fear and other aspects. An economic system should be designed to achieve the maximum benefit for its users taking these into account not criticising that they are there. That is my problem with picking on the greed is good mantra, it isn’t bad or good – its just there and needs to be catered for. This is why I don’t agree with too much regulation or rather what us engineers call “administrative risk mitigation strategies”. These are usually quite in effective generally for most problems. Regulation isn’t dynamic enough to handle every stress in the system, is normally reactive by nature, is trying to curb the system outside its natural behaviour (so normally system participants try to find a way around it and have every incentive to do so without fear of failure/justice) and usually deals with symptoms rather than the cause of the issue. And it normally has a cost.

      This doesn’t just apply to economics either – a lot of other systems share the same weakness that is the over reliance of regulation.

      • The problem is not regulation. The problem is that after the repeal of Glass-Steagall Act, the banksters have over-engineered the financial system for their own benefit – they have created the financial equivalent of the dream machine you see in the movie “Inception”.
        .
        But banksters should do well to understand that no accounting tricks can save them from a rampaging mob in downtown London.

    • agree total rubbish.

      i found Ken Roger view is very enlightening.

      We are in prolonged huge debt overhang slow growth path, which is bad for investor.

      http://www.businessspectator.com.au/bs.nsf/Article/global-debt-crisis-markets-recession-stocks-US-cre-pd20110809-KK4HG?OpenDocument&src=sph

      but, his policy prescription is even scary:
      1, write off debt
      2, inflate out of debt

      Who will pay for it: creditor and saver

      It is a bad time for investor – slow growth, policy driven inflation/write off to steal from crediter & saver

      • Writing off debt should produce some interesting social effects. Let’s suppose (for fun) the Feds announced that all current housing mortgages were to be “written off”. All of a sudden everyone will have been given the asset. Effect? Instant increase in wealth (aka borrowing power) for those people – complete inequity for those renting or just behind in the generation cycle. I’m sure the renters (generally the rioting classes) would just love it…

        • Since most of the debt is mortgages, you’ll have to pay royalty to the BullHawk first. He has the patent on EFM (a financial product that nobody seems to have found any use for, so far 🙂 )

      • Weimar Republic

        I’ve read people referring to the Swedish solution in which apparently they made banks take a haircut. Someone with some knowledge of this might want to comment.

    • A cart does not move by pushing the horse.

      There is some confusion in regard to what the Fed fund rate is, or how Central Banks set interest rates for the economy. The US Fed does not tell the banks what interest rates to pay for savings, or what to charge for loans. Each banks can makes their own decision. However they prefer to operate as a cartel, and they adopted the Fed Fund rate as their pricing signal to avoid competition amongst themselves. The situation is similar in most of the Western world.

      So in a sense, the market decided, and they decided to follow the Central Bank.

      • No. What he has implied is that each private bank have their own base money and circulate it among its private customers, i.e. borrowers and depositors. No solution professed as to how and where the inter-bank or inter-customer exchange of this private “money” will take place.
        .
        Personally, will I accept money printed by $16 million-a-year Sir Ralph? Snowball’s chance in hell.

        • “What he has implied is that each private bank have their own base money and circulate it among its private customers, i.e. borrowers and depositors.”

          – Isnt that exactly how credit unions operate?

  5. The terrain we trek has been trudged before. The solution, ultimately, is political – a re-write of the tax statutes.

    Liberty and freedom are fungiable concepts:

    “The shepherd drives the wolf from the sheep for which the sheep thanks the shepherd as his liberator, while the wolf denounces him for the same act as the destroyer of liberty. Plainly, the sheep and the wolf are not agreed upon a definition of liberty.” Abraham Lincoln

  6. Bonds are cheap? whoever wrote that hasnt looked at the US treasury yields in that case (falling over 2011)…far from cheap! Yields on US bonds have fallen since the S&P downgrade, significant psychological impact indeed.

    ” investors have been willing to buy the AUD as a quasi-reserve currency, because there has been precious little else to buy.”

    yeah, right, they sure wanted to hold the “quasi-reserve” AUD when risk was back on. We are still the same growth/carry trade currency we have always been, as soon as that growth/yield look threatened due to global instability investors backed the hell away.

    SON did you just quote that article because it supported your viewpoint? You certainly dont seem to have done any fact checking.

    Wont bother commenting on your anti-liberty pro-govt rant, Jono has said everything that needs to be said.

  7. tell everyone there will be no QE3… and set interest rates negatively… watch everyone with money off the table put it back on the table. It’s funny how, when you know you’ve got a govt. intent on fixing the market, that market will play that govt position (and contribute to the market not being fixed) – putting money on the table when they think QE is about to happen and then taking it off when it looks to dry up… the market falls, the govt thinks of printing more money, and the cycle continues. The market isn’t stupid, but that market is in no way moral. Governments are trying to fix something broken, and the very thing that is broken (the market) is trying to make money from govt’s intentions.

  8. some good quotes:

    Ludwig von Mises The social system of private property and limited government is the only system that tends to debarbarize all those who have the innate capacity to acquire personal culture.

    Ludwig von Mises The ultimate cause, therefore, of the phenomenon of wave after wave of economic ups and downs is ideological in character. The cycles will not disappear so long as people believe that the rate of interest may be reduced, not through the accumulation of capital, but by banking policy

    Ludwig von Mises True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression.

    Ludwig von Mises If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders.

    Ludwig von Mises If one regards inflation as an evil, then one has to stop inflating. One has to balance the budget of the government.

    Ludwig von Mises Inflationism, however, is not an isolated phenomenon. It is only one piece in the total framework of politico-economic and socio-philosophical ideas of our time. Just as the sound money policy of gold standard advocates went hand in hand with liberalism, free trade, capitalism and peace, so is inflationism part and parcel of imperialism, militarism, protectionism, statism and socialism.

    • “The social system of private property and limited government is the only system that tends to debarbarize all those who have the innate capacity to acquire personal culture.”
      .
      What do you do with those without the innate capacity to acquire personal culture? (which is like 75% of mankind and 100% of banksters)

  9. When saving is punished, as in the USA, SYSTEM IS BROKEN. I don’t have an argument with debt as long as the borrower’s track record demonstrates they do pay back and have the future capacity to pay it back. Too much sovereign debt or future commitment looks like it is in the can’t pay back box. PROBLEMS WILL KEEP COMING.

  10. Firstly, I just wish Swan, and Gillard were aware of the quote below rather than doing a disservice to the public by failing to admit the global risks to Australia – I agree we’re better off, but for how much longer looking at the combined Federal, State, Business, and personal debt.

    “To be sure, the AUD is not a safehaven currency in the strictest sense, because Australia is a net borrower of funds from abroad, and is therefore vulnerable to capital outflows during episodes of global risk aversion. Also, if world growth is weak or negative, commodity prices tend to fall, causing a deterioration in the trade balance. But notwithstanding these considerations, investors have been willing to buy the AUD as a quasi-reserve currency, because there has been precious little else to buy. Clearly, investors still have a preference for safety.”

    Secondly, no fundamental changes have been made to the global economy so we’ll get turbulence until that happens if it does … I have no faith that we’ll get the needed change quickly however.

    Finally, I think the title is spot on as it is different this time, and politicians and bankers need to read Reinhart and Rogoff book for a reality check. The violence in the UK is not without some economic cause, and like Greece, large parts of the Arab world we have a generation of jobless. I hope this will be sorted out eventually, but it may take a few generations?

  11. Albert Bartlett

    ‘What is notable in the recent ructions is the lack of sense of responsibility in the market worshipers and their smug preaching at governments as if they had nothing to do with what went wrong’

    That statement with actors reversed is at least as true,probably more so.

    One problem is language in a debate. If one controls that, half the debate is won. Public versus private debates ignore institutions that are at different times either of sometimes both. Also it ignores people who move between private and public but act in the interests of the other actor (while dodging tax).

  12. How to handle bankruptcy properly.
    Iceland’s On-going Revolution
    by Deena Stryker
    http://www.dailykos.com/story/2011/08/01/1001662/-Icelands-On-going-Revolution

    An Italian radio program’s story about Iceland’s on-going revolution is a stunning example of how little our media tells us about the rest of the world. Americans may remember that at the start of the 2008 financial crisis, Iceland literally went bankrupt. The reasons were mentioned only in passing, and since then, this little-known member of the European Union fell back into oblivion.

    As one European country after another fails or risks failing, imperiling the Euro, with repercussions for the entire world, the last thing the powers that be want is for Iceland to become an example. Here’s why:

    Five years of a pure neo-liberal regime had made Iceland, (population 320 thousand, no army), one of the richest countries in the world. In 2003 all the country’s banks were privatized, and in an effort to attract foreign investors, they offered on-line banking whose minimal costs allowed them to offer relatively high rates of return.
    The accounts, called IceSave, attracted many English and Dutch small investors. But as investments grew, so did the banks’ foreign debt. In 2003 Iceland’s debt was equal to 200 times its GNP, but in 2007, it was 900 percent. The 2008 world financial crisis was the coup de grace. The three main Icelandic banks, Landbanki, Kapthing and Glitnir, went belly up and were nationalized, while the Kroner lost 85% of its value with respect to the Euro. At the end of the year Iceland declared bankruptcy.

    Contrary to what could be expected, the crisis resulted in Icelanders recovering their sovereign rights, through a process of direct participatory democracy that eventually led to a new Constitution. But only after much pain.

    Geir Haarde, the Prime Minister of a Social Democratic coalition government, negotiated a two million one hundred thousand dollar loan, to which the Nordic countries added another two and a half million. But the foreign financial community pressured Iceland to impose drastic measures.

    The FMI and the European Union wanted to take over its debt, claiming this was the only way for the country to pay back Holland and Great Britain, who had promised to reimburse their citizens.

    Protests and riots continued, eventually forcing the government to resign. Elections were brought forward to April 2009, resulting in a left-wing coalition which condemned the neoliberal economic system, but immediately gave in to its demands that Iceland pay off a total of three and a half million Euros. This required each Icelandic citizen to pay 100 Euros a month (or about $130) for fifteen years, at 5.5% interest, to pay
    off a debt incurred by private parties vis a vis other private parties.
    It was the straw that broke the reindeer’s back.

    What happened next was extraordinary. The belief that citizens had to pay for the mistakes of a financial monopoly, that an entire nation must be taxed to pay off private debts was shattered, transforming the relationship between citizens and their political institutions and eventually driving Iceland’s leaders to the side of their constituents.

    The Head of State, Olafur Ragnar Grimsson, refused to ratify the law that
    would have made Iceland’s citizens responsible for its bankers’ debts, and accepted calls for a referendum.

    Of course the international community only increased the pressure on Iceland. Great Britain and Holland threatened dire reprisals that would isolate the country. As Icelanders went to vote, foreign bankers threatened to block any aid from the IMF. The British government
    threatened to freeze Icelander savings and checking accounts. As Grimsson
    said: “We were told that if we refused the international community’s conditions, we would become the Cuba of the North. But if we had accepted, we would have become the Haiti of the North.” (How many times have I written that when Cubans see the dire state of their neighbor, Haiti, they count themselves lucky.)

    In the March 2010 referendum, 93% voted against repayment of the debt.
    The IMF immediately froze its loan. But the revolution (though not televised in the United States), would not be intimidated. With the support of a furious citizenry, the government launched civil and penal investigations into those responsible for the financial crisis. Interpol put out an international arrest warrant for the ex-president of Kaupthing, Sigurdur Einarsson, as the other bankers implicated in the crash fled the country.

    But Icelanders didn’t stop there: they decided to draft a new constitution that would free the country from the exaggerated power of international finance and virtual money. (The one in use had been written when Iceland gained its independence from Denmark, in 1918, the only difference with the Danish constitution being that the word ‘president’ replaced the word ‘king’.)

    To write the new constitution, the people of Iceland elected twenty-five
    citizens from among 522 adults not belonging to any political party but recommended by at least thirty citizens. This document was not the work of a handful of politicians, but was written on the internet. The constituent’s meetings are streamed on-line, and citizens can send their comments and suggestions, witnessing the document as it takes shape. The constitution that eventually emerges from this participatory democratic process will be submitted to parliament for approval after the next elections.

    Some readers will remember that Iceland’s ninth century agrarian collapse
    was featured in Jared Diamond’s book by the same name. Today, that country is recovering from its financial collapse in ways just the opposite of those generally considered unavoidable, as confirmed yesterday by the new head of the IMF, Christine Lagarde to Fareed
    Zakaria. The people of Greece have been told that the privatization of their public sector is the only solution. And those of Italy, Spain and Portugal are facing the same threat.

    They should look to Iceland. Refusing to bow to foreign interests, that small country stated loud and clear that the people are sovereign.

    That’s why it is not in the news anymore.

  13. How to handle bankruptcy properly.
    Iceland’s On-going Revolution
    by Deena Stryker
    http://www.dailykos.com/story/2011/08/01/1001662/-Icelands-On-going-Revolution

    An Italian radio program’s story about Iceland’s on-going revolution is a stunning example of how little our media tells us about the rest of the world. Americans may remember that at the start of the 2008 financial crisis, Iceland literally went bankrupt. The reasons were mentioned only in passing, and since then, this little-known member of the European Union fell back into oblivion.

    As one European country after another fails or risks failing, imperiling the Euro, with repercussions for the entire world, the last thing the powers that be want is for Iceland to become an example. Here’s why:

    Five years of a pure neo-liberal regime had made Iceland, (population 320 thousand, no army), one of the richest countries in the world. In 2003 all the country’s banks were privatized, and in an effort to attract foreign investors, they offered on-line banking whose minimal costs allowed them to offer relatively high rates of return.
    The accounts, called IceSave, attracted many English and Dutch small investors. But as investments grew, so did the banks’ foreign debt. In 2003 Iceland’s debt was equal to 200 times its GNP, but in 2007, it was 900 percent. The 2008 world financial crisis was the coup de grace. The three main Icelandic banks, Landbanki, Kapthing and Glitnir, went belly up and were nationalized, while the Kroner lost 85% of its value with respect to the Euro. At the end of the year Iceland declared bankruptcy.

    Contrary to what could be expected, the crisis resulted in Icelanders recovering their sovereign rights, through a process of direct participatory democracy that eventually led to a new Constitution. But only after much pain.

    Geir Haarde, the Prime Minister of a Social Democratic coalition government, negotiated a two million one hundred thousand dollar loan, to which the Nordic countries added another two and a half million. But the foreign financial community pressured Iceland to impose drastic measures.

    The FMI and the European Union wanted to take over its debt, claiming this was the only way for the country to pay back Holland and Great Britain, who had promised to reimburse their citizens.

    Protests and riots continued, eventually forcing the government to resign. Elections were brought forward to April 2009, resulting in a left-wing coalition which condemned the neoliberal economic system, but immediately gave in to its demands that Iceland pay off a total of three and a half million Euros. This required each Icelandic citizen to pay 100 Euros a month (or about $130) for fifteen years, at 5.5% interest, to pay
    off a debt incurred by private parties vis a vis other private parties.
    It was the straw that broke the reindeer’s back.

    What happened next was extraordinary. The belief that citizens had to pay for the mistakes of a financial monopoly, that an entire nation must be taxed to pay off private debts was shattered, transforming the relationship between citizens and their political institutions and eventually driving Iceland’s leaders to the side of their constituents.

    The Head of State, Olafur Ragnar Grimsson, refused to ratify the law that
    would have made Iceland’s citizens responsible for its bankers’ debts, and accepted calls for a referendum.

    Of course the international community only increased the pressure on Iceland. Great Britain and Holland threatened dire reprisals that would isolate the country. As Icelanders went to vote, foreign bankers threatened to block any aid from the IMF. The British government
    threatened to freeze Icelander savings and checking accounts. As Grimsson
    said: “We were told that if we refused the international community’s conditions, we would become the Cuba of the North. But if we had accepted, we would have become the Haiti of the North.” (How many times have I written that when Cubans see the dire state of their neighbor, Haiti, they count themselves lucky.)

    In the March 2010 referendum, 93% voted against repayment of the debt.
    The IMF immediately froze its loan. But the revolution (though not televised in the United States), would not be intimidated. With the support of a furious citizenry, the government launched civil and penal investigations into those responsible for the financial crisis. Interpol put out an international arrest warrant for the ex-president of Kaupthing, Sigurdur Einarsson, as the other bankers implicated in the crash fled the country.

    But Icelanders didn’t stop there: they decided to draft a new constitution that would free the country from the exaggerated power of international finance and virtual money. (The one in use had been written when Iceland gained its independence from Denmark, in 1918, the only difference with the Danish constitution being that the word ‘president’ replaced the word ‘king’.)

    To write the new constitution, the people of Iceland elected twenty-five
    citizens from among 522 adults not belonging to any political party but recommended by at least thirty citizens. This document was not the work of a handful of politicians, but was written on the internet. The constituent’s meetings are streamed on-line, and citizens can send their comments and suggestions, witnessing the document as it takes shape. The constitution that eventually emerges from this participatory democratic process will be submitted to parliament for approval after the next elections.

    Some readers will remember that Iceland’s ninth century agrarian collapse
    was featured in Jared Diamond’s book by the same name. Today, that country is recovering from its financial collapse in ways just the opposite of those generally considered unavoidable, as confirmed yesterday by the new head of the IMF, Christine Lagarde to Fareed
    Zakaria. The people of Greece have been told that the privatization of their public sector is the only solution. And those of Italy, Spain and Portugal are facing the same threat.

    They should look to Iceland. Refusing to bow to foreign interests, that small country stated loud and clear that the people are sovereign.

    That’s why it is not in the news anymore.

    • +1.
      .
      BTW, a media commentator on today’s ABC Breakfast news recoiled in horror when the presenter suggested that the UK government austerity program may have something to do with the rioting in London.

    • I suspect a replication of the Icelandic response writ large would be a little more unwieldy for 320 million plus disparate citizens with a vast military complex to tend. No guarantees either of a warm and fuzzy left-wing government to hold hands with and sing Kumbaya.

  14. yeh well with austerity your suppose to get lower prices, not crazy inflation.
    austerity and high inflation = WTF?

    • It is possible for some things to experience deflation whilst others experience inflation at the same time.

      Some things react quickly to changes in the economy whilst others can take decades. Think about a company with a 5 year rental contract. If market rents are increasing the company can enjoy a competitive advantage and not pass on price increases to it’s customers. Conversely if market rents are falling and they are locked into paying the higher rate then they can’t pass on the savings to their customers.

      Sorry that I’m not more eloquent in my explanation

  15. Thanks for the Iceland link…very interesting.

    Of course trhe austerity is causing the UK Riots…watching middle class toffs sipping latte complaining about these ‘feral animals’ is interesting…as they should have know the massive wealth inequality and corporatism leads to civil unrest amongst the economically marginalised.

    This is an example of the division that the State creates in society…As Rothbard explained:
    “It is true that on the free market there are no clashes of class or group interest; all participants benefit from the market and therefore all their interests are in harmony.

    But the matter changes drastically, Mises points out, when we move to the intervention of government. For that very intervention necessarily creates conflict between those classes of people who are benefited or privileged by the State and those who are burdened by it.”

    http://www.lewrockwell.com/rothbard/rothbard255.html

    I think the UK “hoodlums and thugs” robbig at will have lost any faith in the market working for their own interests. They see rich bankers and politicians making savage budget cuts, which at the same time propping up protected industries such as finance and the public service.

    If the Government continues to intervene but only to protect the powerful…then expect the weak to rise up. This is just the begginings of an ongoing battle between the poor and rich, the young and old and the weak and powerful.

    Viva revolution for economic opportunity for all and end the bailouts and corporatism that is ruining society

    • While I agree with your conclusion, I don’t agree with the circuitous, tea partyesque “government is the problem” route you took to reach that conclusion.
      .
      But never mind.. the end justified the means.

      • + 1

        Stav proves he can actually say something sensible sometimes.

        Though I’d like to know which part of the public service the UK government are propping up since they’re making savage cuts in that department as well.

  16. “Equities and bonds are simultaneously cheap.”

    Some bonds are cheap. Some are not
    Some equities are cheap. Some are not. But it is not easy to tell which is which.

  17. The hilarious thing about people like Sell on News, is they actually think the current financial markets and monetary system have anything to do with Libertarians, Liberty or Adam Smith.

    The current banking system is one of State enforced regulations and monopoly cartels that impose high barriers to entry for new competitors, and protect established big business.

    The current monetrary system is one where the coercive apparatus of the State is used to imprison and kill those who do not submit to using the local fiat currency, which is continually devalued.

    In this Alice in Wonderland world, all this is supposedly the result of libertarians and free market proponents.

  18. what a thought provoking concept.

    well I’m off to print my own money now too.
    it will be backed by physical carbon dioxide molecules in the air, and the confidence that if you use my currency you’re healing the planet. Somehow.

    i think i’ll call them carbon credits. The Exchange rate will be $23 of fiat will equal cc1

    get them while theyre hot!