"Bazooka Theory" And Why The Authorities Won't Pull The Trigger

by Tyler Durden

The most common pushback from any China bull, industrial commodity bull, US equity market bull, or in fact any risk market in general "bull" is "won't the authorities just pull the trigger? Won't they just stimulate?" As UBS Commodities group notes, The debate is most advanced for China and for industrial commodities, where the weakness in the economy, and the sharp commodity price falls of recent weeks, has consensus looking for a stimulus driven bounce. UBS does not think so - the authorities in China and the US have become increasingly focused on structural issues - which, simply put, means they are less willing to act than before. Via UBS Commodities & Mining, Many investors are relying on what UBS calls "Bazooka theory" to protect them from any potential downside... Over the past decade, China investors have used a couple of rules of thumb to trade domestic and commodity markets. When total social financing slips to 15% y/y, and when the Shanghai A Share Index falls towards 2000, expect a stimulus. We appear to be in that zone. And as UBS notes, investors are right to be expectant as the macro data is not strong... we don’t rely on the GDP data, where a client pointed out to us that, in 2013, no region in China reported lower GDP growth than the national average. Instead, we rely on the three indicators highlighted by Li Keqiang a decade ago, when he was party secretary for Liaoning; electricity production, volume of rail freight and loan disbursements. We use our macro team’s total social financing series (Fig 3.) as a proxy for loan disbursements. Clearly rail freight is weak. Electricity production is more robust, although it has lost a little momentum. And we watch steel consumption and pricing. Carsten Riek, European steel analyst, pointed out in 'China's steel mills to limit global steel recovery', 25 March 2014, that China steel consumption is down 1.3% y/y. Carsten uses the worldsteel production data that UBS has used consistently in its global steel modelling (worldsteel rationalises sometimes conflicting data from CISA and the China steel council). We believe the fall reflects two key developments; • An end of restocking • Weak underlying demand. So will the China authorities stimulate? It is a key question. Stimulus may allow a solid, consensus like demand performance for the commodities across 2014. But without aggressive stimulus, commodity demand will likely fall well short of consensus – leading to larger surpluses and lower prices than consensus anticipates. We always saw stimulus in the past when the Shanghai A Share Index fell towards 2000 and when renminbi loan growth decelerated below 15%. The standard view on China is that the Party’s main aim is the continuation of power, and so it won’t tolerate a slowdown in growth below 7% (otherwise popular support for the party will fail). We agree that the main ambition of the party is to extend its rule. But we disagree that this means that GDP growth won’t be allowed to fall below 7%. We understand that Xi Jinping and Li Keqiang see structural reform as a more important target than short-term growth. Commentary following the China development forum earlier in March also indicated a consensus that there was considerable flexibility around growth targets. We understand that this stems from the politbureau’s deep study of previous regimes; whether Russia from the 50’s to the 80s, or Japan and the Asian Tigers in the 80s and 90s. In each case, the lack of decisive reform after a period of deteriorating returns on capital led to malaise and, in Russia’s case, collapse. We suspect that the reinjection of liquidity into the system from July 2013, was in part to buy time to allow Li Keqiang and Xi Jinping push forward the deep and wide-ranging reform agenda that they delivered during the third plenum in November 2013. Prior to the third plenum, Li Keqiang stated; ‘Pursuing reform in the face of vested interests is akin to stirring the soul’. Now something of the meaning may have been lost as it went through ‘Google Translate’, but in commodity strategy we see this as a clear shot across the boughs of the vested interests in state-owned enterprises (SoEs). China’s political process is highly factional. The anti-reform factions have in the past pointed to slowing growth as a signal that reforms had gone too far, and used it to undermine the reformists’ political standing. But we believe that Li Keqiang and Xi Jinping have orchestrated the reform process to quietly but fundamentally weaken the powerbase of these vested interests. The crackdown on corruption is the most clearcut reform. Some China watchers see it as a political masterstroke from Xi Jinping. The corruption probes have clipped the wings of key anti-reform politicians. And they act as a latent threat against anyone who might seek to stand in the way of reform in the future. Beyond that, the tightening of net interest margins at the banks, electricity and coal price reform, and the controls on corporate and private property speculation all put pressure on vested interests. All enhance Xi Jinping’s and Li Keqiang’s power base. Further evidence from the reform process to date indicates a persistent intention to push forward. Xi Jinping’s decision to chair the shadow banking reform committee, normally chaired by the premier or a more junior official, seems a clear signal that Beijing intends to get shadow bank lending under control. The decision to allow the rmb to weaken from the start of the year, and to widen the rmb trading band is also suggests that the authorities intend to disincentivise China dollar borrowing, and hot money speculative inflows. The fact that the move came when underlying growth was lacklustre is testament to the current political will. Li Keqiang’s speech in March, which indicated a willingness to allow corporate defaults (albeit not to allow the spread of contagion), is also a strong message on reform. But of all the measures to date, Beijing’s decision to allow bond yields to rise over the past six months without significant policy interference is the policy action that shows greatest intent. As UBS goes to note, China’s policy of financial repression has created substantial distortions. As the chart below shows the process has been virtuous for years but has major risks of reversing in a vicious manner... China has paid negative real rates on savings for much of the last decade. In China, this induced consumers to raise savings (left hand arrows in Figure 8). That’s because consumers had to build a nest-egg for their retirement, in the absence of sufficient grandchildren to look after them in old age (because of the one child policy) or a decent social safety net. But lower real rates reduce the size of that nest egg, compared to their target. That induced consumers to save more, and as a result, consumer spending fell from an emerging market average rate of 45% of GDP in 1995, to an all-time/all country low of 40% in 2002. It currently stands at 35%. We suspect that corruption and easy money may have induced asset reflation, in as much as it has skewed China’s income inequality to one of the highest in the world, and also had a significant effect of raising savings rates (all things equal, societies with more skewed income distributions save more – see ‘23 things they don't tell you about capitalism’ by Cambridge professor Ha-Joon Chang). At the same time the second and third set of arrows in Figure 8 showed the distortions this creates; inducing excessive property speculation and excessive fixed capital formation. This in turn causes diminishing returns on capital, and the potential for bad loans to develop. For much of the last thirty years, the massive productivity boost from migration (500m people saw their productivity up 13x as they moved from working the land to working in factories), as well as the demographic benefit of a growing workforce, more than outweighed the negatives from the misallocation of capital. But all this changed with the extraordinary lending and capex boom from 2009-11. It was a period that saw lending and fixed capital formation double – an event unprecedented in emerging market history. Raising bond yields threatens to reverse this process. It helps the consumer, who can save less. But it hurts property speculation and it hurts fixed capital formation. The fact the authorities have allowed this to take place without intervention is a profoundly important move; as the higher real rates will dampen property activity and fixed capital formation. That in turn depresses activity, and undermines pricing power in China’s heavy industry. We have seen this in the weak China data highlighted earlier, and the combination of rising wages and falling prices suffered by the coal, steel, cement and other heavy industries. The danger here is that the process pressures profits, and reveals bad loans. The authorities’ willingness to engineer and then tolerate these developments appears to be a strong signal that Li Keqiang and Xi Jinping are serious about reform. This discussion leads UBS to believe there two conclusions that last night's mini-railway-focused stimulus seems to confirm... The China authorities intend to hold to the reform agenda. Any stimulus will be moderate and directed. Tao Wang, UBS China economist believes that it is too early to roll out stimulus, but that the authorities may push a directed ‘mini-stimulus’ if conditions remain weak into 2Q14 (see China Focus: '2014 GDP Growth Forecast Cut to 7.5% on a Weaker Start', 13 March 2014). Any stimulus would be small and directed into key areas; • Building the social safety net. • Environmental projects. • Social housing, hospitals, schools, water treatment, urban public transport. The monetary authorities will intervene to prevent a banking crisis through providing liquidity to large and small banks to smooth over solvency concerns. Tao highlights possible reserve requirement or loan/deposit ratio cuts in the face of a default-driven credit squeeze. But neither she nor we anticipate an aggressive credit expansion aimed at boosting private property speculation, heavy industry expansion or non-directed local government infrastructure spending. Finance minister Zhou Guangyou’s comments on 23rd March that there will not be any ‘Big Stimulus’ from Beijing in 2014, and that the focus on quality of growth means no ‘shotgun stimulus program’ appear to be consistent with this view. This in turn means that the base case is that growth will likely moderate over the next three years, and that commodity intensity will fall. It is entirely likely that we will see years where China commodity demand growth is zero or negative. There are lessons here from Japan... That suggests barely any growth in offtake for iron ore and copper in 2014. This is a much more conservative outcome than the 6-7% copper growth and 4% iron ore demand growth that consensus or our bottom-up team are looking for. We would also highlight that the Chinese authorities’ decision to reform does not rule out the potential for a harder landing. In commodity strategy we maintain the view that the probability of this type is even greater than consensus believes. Credit growth is now much less effective in driving GDP growth than in the 2000s. This was the same red flag that warned of an impending deterioration in Japan in the ‘90s. This analysis makes us more cautious than our economists and our bottom-up commodity analysts. UBS China economist Tao Wang is looking for a moderate acceleration in activity in 2Q14. Our bottom-up commodity team also anticipates a seasonal bounce, before conditions deteriorate later this year

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After hard winter, U.S. housing industry sees signs of pickup

By Lewis Krauskopf and Michelle Conlin

NEW YORK (Reuters) - In Indianapolis, an open house event tends to draw 10 people on a good day. But after the snowiest winter on record for the U.S. Midwestern city, prospective home buyers were champing at the bit: 45 people came to an open house late last month, according to mortgage executive Greg Block. "The realtor was dumbfounded," said Block, vice president of lending at Austin, Texas-based Open Mortgages, which has branches near Indianapolis. "The winters were so brutal across the country that people just hunkered down and didn't do anything." As much of the United States thaws out from a particularly frigid winter, signs are also pointing to a warmer national housing market. Anecdotal evidence from homebuilders, mortgage lenders and brokers suggest demand in the residential housing market is picking up, potentially paving the way for a broader acceleration in an economy that has been in a slow-growth mode since pulling out of the financial crisis. Housing is an important part of the economic fabric, contributing about 18 percent to Gross Domestic Product including private residential investment as well as consumption spending on housing services, according to the National Association of Home Builders. The positive reports from across the country are supported by data from the Mortgage Bankers Association showing that the volume of home-purchase mortgage applications has climbed more than 13 percent in the past five weeks, near its highest point in two months. Other positive economic indicators this week - including better-than-expected auto sales and solid private sector hiring in March - also could underpin strengthening consumer sentiment that is critical to gains in the housing market. U.S. consumer confidence, as tracked by the Conference Board, last month hit its highest levels in more than six years. "We also believe that most everything is pointing in the right direction," said Rex Gordon, vice president of corporate land at The Drees Company, a privately held homebuilder based in Fort Mitchell, Kentucky that sold 1,648 homes last year. At Drees, which sells mostly single-family detached homes in metropolitan areas across the country, foot traffic to its model locations was up about 8 percent in the past four weeks compared with a year ago, Gordon said. "Yes, construction was hit real hard because of the weather, but from a sales standpoint we've been encouraged," Gordon said. "The vibe is good; our sales people are happy. They're all working with prospects all the time." FEARS OF RISING RATES To be sure, some figures show that the housing market has been tepid. Housing starts fell for the third straight month in February, while homebuilder sentiment ticked up but remained mostly poor in March. Sales of existing homes have fallen 14.5 percent in the past seven months, while sales of new homes have flattened after rising in the back half of 2013. Also, mortgage applications may be up - but they are rising from the lowest levels in 18 years. And what rebound that may be underway is not benefiting every builder, yet. Beazer Homes USA Inc reported on Thursday that net new orders fell 9 percent in the quarter ending March 31. Still, some of the conditions that may have undercut demand are disappearing. Aside from the poor weather dampening construction and keeping home buyers indoors, the 16-day U.S. government shutdown last fall also may have weighed on would-be buyers, because it contributed to general uncertainty about the economy, according to homebuilders. "The fourth quarter with the government shutdown put a lot of people on the fence, so I think there was a lot of pent-up demand," said Jared Weggeland, director of sales and marketing at Southern Homes in Florida. At Southern, which builds homes averaging about $185,000 in Central Florida, January and February sales were the highest for those months since 2005, and "March was even better," Weggeland said. "Demand is extremely high right now," he said. Another factor that could energize the housing market is home buyers seeking to capitalize on low interest rates before those rates potentially spike higher. Take Renee Barrett, a nurse's assistant in Las Vegas, who got a pre-approval for a $249,000 mortgage a week ago. After shedding debt from a divorce, Barrett, who has a 13-year-old son, is hoping to buy a home as fast as she can, believing interest rates could easily pop back up to 7 percent or more. A 30-year mortgage rate is currently around 4.56 percent. Las Vegas' home prices fell by more than half during the housing bust. But the market has been recovering for a couple of years now and that recovery may be picking up pace. Rick Piette, a mortgage lender in the city, said his typical bill for credit checks for pre-qualification letters doubled from January to February. "I have seen an uptick in demand for the pre-approvals," Piette said. "I think the demand for the mortgages will follow, too." At Guaranteed Rate, a top 20 U.S. mortgage lender, March was the best month for new loans in half a year, said Chief Executive Victor Ciardelli. The company locked in $1.2 billion in loans for new purchases and refinancings last month, or around 26 percent more than it did in February. The cold winter "had a significant effect on business," but between pent-up demand among home buyers and tight inventories in the marketplace, the company is now seeing more multiple bids on homes, Ciardelli said. Like many large publicly traded homebuilders contacted by Reuters, Toll Brothers Inc declined to comment on demand trends. But Martin Connor, Toll's chief financial officer, said that given the company's luxury home focus "when we see consumer confidence statistics rising, that generally bodes well for us." Investors have begun to take note. The Dow Jones U.S. Home Construction index has risen 5 percent in the past 7 days. Rob Henger, director of mortgage banking with Lexington, Tennessee-based FirstBank, said he believes that confidence is back. The company's retail mortgage division saw a 16 percent increase in credit applications in March from February, after they rose 19 percent in February from January. "The damage to our industry and the public perception of housing and mortgage banking I think is 24 months behind us," said Henger. "Today, there's a renewed confidence."

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BOJ Battle: The Empire Strikes Back

By Jacob M. Schlesinger

Reuters For a year, the Bank of Japan’s new leadership has drawn surprisingly little flack while executing a self-proclaimed aggressive “regime change,” breaking from a decade of more cautious policymaking. Now the repudiated old guard is striking back, publicly ringing alarm bells about the lurking dangers of a massive money-printing program, even while many economists say recent signs of slowdown call for a bigger dose of short-term stimulus. Kunio Okina, a long-time BOJ official widely considered Japan’s most influential monetary economist in the 1990s and 2000s, delivered a speech Friday dissecting what he called “the Achilles’ heel of Abenomics,”  a reference to the economic revival plan of Prime Minister Shinzo Abe. Abenomics relies heavily on turbocharging the restrained monetary policy long advocated by Mr. Okina and his disciples. In the speech, Mr. Okina warned about longer-term risks from the policies launched in April 2013 by Mr. Abe’s handpicked Bank of Japan governor, Haruhiko Kuroda, shortly after he replaced Mr. Okina’s long-time associate, Masaaki Shirakawa, as Japan’s top central banker. At one point in the speech, Mr. Okina compared current Japanese economic policy to the recent disastrous experience of Zimbabwe, which was plagued by rampant inflation and colossal government debt. The lecture, delivered in the southern region of Kyushu on the first anniversary of Mr. Kuroda launching his monetary “bazooka,” followed a series of critical comments that Mr. Okina, now an economics professor at Kyoto University, has made in the Japanese press in recent months. In a December interview with the Asahi Shimbun, Mr. Okina criticized Mr. Kuroda for “manipulating information” and for “promoting phony medicine as real.” He talked of the dangers of “a surge in long-term interest rates,” and said: “I wonder how a soft landing will be possible.” Mr. Okina’s campaign won’t affect Japanese monetary policy in the short term. Mr. Kuroda has solid control over the BOJ policy board, and strong backing from Mr. Abe and his allies. The Kuroda bazooka is generally seen as the most effective part of Abenomics to date. Fiscal policy has been mixed, with a sales tax hike dampening the impact of a big new public works spending push. Promised longer-term structural reforms — from deregulation to free trade — have progressed slowly. But Mr. Okina’s increasingly prominent critique does open a new phase of public debate over Abenomics, which has largely gone unchallenged amid broad signs of quick success, from an apparent end to a decade of deflation, to a sharp rise in stock prices and drop in unemployment. The emerging debate in Japan mirrors one long-raging in the U.S. over the Federal Reserve’s similar “quantitative easing” program. Stanford’s John B. Taylor, one of the most influential American monetary economists of the past two decades, has argued that the policy “has diminished the Fed’s independence and credibility,” complicating efforts to meet its inflation target. For close followers of Japan’s economic policy arguments, there’s a symbolic significance to Mr. Okina’s return to prominence. In the early 1990s, Mr. Okina famously debated economist Kikuo Iwata over monetary policy. In the exchange, published in Toyo Keizai magazine and frequently cited over the years by BOJ backers and bashers alike, Mr. Okina laid out the case for the limits to BOJ power, saying Japanese growth hinged on other factors. Mr. Iwata argued that the central bank had greater clout. Mr. Okina’s views did more to shape the immediate path taken by the BOJ, where he ran the Institute of Monetary and Economic Studies. Mr. Iwata became the BOJ’s leading outspoken outside critic. Then, as part of the last year’s BOJ “regime change,” Mr. Abe tapped Mr. Iwata to serve as BOJ deputy governor under Mr. Kuroda. Now on the outside, Mr. Okina argues any short-term gain from Abenomics risks being offset by long-term pain. Either Abenomics sputters out and fails to end Japan’s long slump. Or it succeeds to the point where the BOJ has to formulate an “exit policy” from its current aggressive easing, along the lines of the U.S. Federal Reserve’s current “tapering.” And that’s when Mr. Okina foresees a dangerous day of reckoning. Here’s why. The main ammunition for the Kuroda bazooka is the large-scale purchase of Japanese Government Bonds. The BOJ injects money into the economy by buying JGBs from the banks that hold them. That pushes up the price — and drives down the interest rate — on the bonds. That makes it dirt cheap for the Japanese government to keep borrowing, which is convenient for Mr. Abe, since Japan’s government is the most indebted on earth, except, perhaps, for Zimbabwe. What happens if and when Mr. Kuroda succeeds in hitting his target of 2% inflation? At that point, he has a choice, Mr. Okina said in his speech. The BOJ could curb bond buying to steer interest rates higher. But that would raise the cost to the government of its outsized borrowing, “severely aggravating government debt problems.” It would also, he said, wreak havoc on the BOJ’s own balance sheet, since the price of the JGBs in its portfolio would fall. Or Mr. Kuroda can choose to keep interest rates low by continuing his big bond buys, and then “it will be impossible to halt inflation overshooting,” Mr. Okina said. In other words, Japan would have simply replaced a deflation problem with inflation. One way out of the bind is for Mr. Abe to pare debt, with more tax increases or spending cuts, but Mr. Okina calls that a “fairly dangerous” path requiring “major pain and great economic and political risk.” Kuroda allies — many trained by Mr. Okina — privately acknowledge the legitimacy of these concerns. But they respond that it’s way too soon to worry about the exit policy, with the economic recovery showing signs of fragility, and more forecasters betting that Mr. Kuroda will fall well short of his 2%-inflation-in-two-years pledge than overshoot it.

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Only A Few Days Until Another USDA Report

By: Paul Georgy

Good Morning! Paul Georgy with early morning comments for April 4, 2014 at 4:40 am.  Grain futures are mixed with soybeans higher, corn and wheat lower. Tight US soybean supplies are supporting old crop while planting concerns weigh on new crop. We could repeat comments from yesterday morning, where will the money flow today? Fund buying or money flow is impacting price movement and giving producers an opportunity to make marketing decisions with profitable production returns in the price. Funds bought an estimated net 3,000 wheat contracts, 6,000 corn contracts, 5,000 soybean contracts, 1,000 soymeal contracts and 4,000 soyoil contracts on Thursday. Traders and clients bring up the argument that it is getting late and the crop will not get in the ground on time. Have we forgotten last year where farmers planted nearly 60% of the corn crop in IL, IA, and MN in one week? They planted 62% of soybeans in one week as well. The USDA monthly supply and demand report will be released next Wednesday, April 9. Allendale does not expect many surprises other than USDA making adjustments from the March 31 stocks. Gulf basis is steady on corn but waning demand for soybeans and wheat was the reason for weaker bids. Argentine harvest has been supported by recent dry weather. Yields there are coming in as expected, giving the reason for the Buenos Aries Exchange to keep soybean production at 54.5 mmt. China canceled purchases of 221,400 tonnes of U.S. corn last week for unapproved GMO contamination, according to the U.S. Department of Agriculture. They now have canceled more than 1 million tonnes of U.S. corn this season. The cash hog index is 130.34 while the April futures are nearly a 6.00 discount. Packers have their needs for this week and meat is starting to find resistance at the retail counter. Pork cutout value was down 3.83 on Thursday. Spreads have been a feature this week in the pork complex. Cash trade is quiet as packers are pulling contracted cattle. We are hearing bids at 147 and offers at 153. Tight supplies of feeder cattle have futures traders buying as potential moisture moves into the southern plains. Beef cutout values are weak with choice down .69 and select down 1.19. The CME Feeder Index is 177.83.

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How precious markets are swayed by High Frequency Trading

By Dr Jeffrey Lewis

Furthermore, for all the pomp and circumstance surrounding this bombshell, one also wonders why a tightly controlled media would set this red herring free into a public holding a dwindling institutional confidence. recent 60 Minutes television show interview revealed the long established electronic trading mechanism used to front run and carry out price management and profit schemes across trading seconds. In the wake of the interview, one cannot help wonder how many degrees of separation exist between public awareness of this and its connection to futures and precious metals price manipulation. Furthermore, for all the pomp and circumstance surrounding this bombshell, one also wonders why a tightly controlled media would set this red herring free into a public holding a dwindling institutional confidence. High frequency trading has been around for at least a decade, beginning in earnest in the aftermath of key regulatory changes. Such changes have mainly been in equities, and have recently spread to futures and forex. Insiders have been chronicling the farce for years. As part of Michael Lewis' tour promoting his book, "Flash Boys", he was given access to a much wider audience in his interview with 60 Minutes. While most of the damage has already been done, one might rationalize that we have potentially skipped a few chapters on the way toward collapse of confidence. But I would not hold my breath. The HFT story, combined with algorithm trading strategy, is known to most precious metals investors. It has been a key racket for at least a decade following regulation changes. HFT, which accounts for more than 70% of equity market volume, is legal and nearly as damaging. But it is certainly in line with changes such as Glass Steagall, which gave the green light for commercial banks to become full-fledged investment banks, while exchanges became for-profit entities. For all the news hitting the mainstream, the exchanges themselves are the real beneficiaries for precious metals. The self regulated CME is the main focus for price discovery and the COMEX. The metals HFT trading is used by the large commercial banks to push the market in whatever price direction they deem "necessary" to affect a profit. They routinely spoof or create un-fillable orders to induce hedge fund or speculative algorithms to sell automatically. This enables the commercial banks to buy back positions, profiting and painting the tape so that the whole world of technical analysts and professional traders think the market is fundamentally this way or that. But in reality they are a complete farce. This, of course, trickles down to the mainstream investor and public sentiment where complacency rules for those with a voice. Regulators talk and we will soon see a giant storm of action and debate regarding the fairness and/or evil of HFT. But this issue has occurred despite regulation - if anything, regulation serves to add more complexity as it is often written by future traders. Additionally, it will soon revolve into the very system that exploits the flaws. It's perfectly legal in the same way intervention by the ESF has been a legal cover for gold (and silver) manipulation. Heaven forbid the day an official uses this to "calm" the markets. In the end it is a road that ultimately leads to a failure or confidence among the confluence of various other tremors. This is true especially in the context of financial and currency wars waged behind the scenes as the developing world slowly chips away at Western monetary dominance. HFT leads to further disconnect in fundamentals which leads to absence of the market maker or human broker, leading to greater trading volume followed by growth and consolidation of the players that profit most from that volume (CME). This leads to increased fragility when machines buy and sell suddenly and all at once, followed by crash, collapse and more stimulus and bailouts, along with more credit creation and more pressure on interest rates. Then follows foreign tensions as dollar holders accelerate dis-hoarding of dollar denominated assets, then volatility and shattered underlying economy, leading to widespread mistrust, fear and civil unrest. Next is scarcity of metal, then policy implementation accelerates demand, shortages create a two-tiered market, then paper physical split which leads to large institutional investors taking massive position in retaliation for political sanction and, ultimately, hyperinflation. In the end, HFT is yet another consequence of a much larger and more fundamental issue. It's well known throughout human history that once the control of money is usurped from the market by those in power, it is merely a matter of time before the final unwind begins in earnest. HFT is one more loophole, allowing a small subset of elites to gain the upper hand. Private banks are allowed to create the public "money" supply out of nothing, as debt is the government enforced FRAUD which is the foundation of the entire market. The fear is that the coverage of this story will be viewed as merely a recasting and not necessarily stir up issues. In much the same way, the most recent silver investigation (led by the CFTC) simply recasts the denial - and this time with silence.

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Eurocrats Pile-On More Bailout Debt: Greek Economy Keeps Sinking

By Richard W. Rahn

How far can a modern economy sink? The Greek economy is entering its fifth year of decline. Nominal gross domestic product is about 28 percent lower than it was four years ago. The official unemployment rate is 27.5 percent (as though the decimal point matters, given the poor quality of the data). The unemployment rate for young people is about 60 percent. Nonperforming loans continue to rise. The privatization program continues to fail, in part because of an absence of bidders. In a paper posted earlier this month, leading Greek economist Yanis Varoufakis of the University of Athens and the University of Texas at Austin argues Greece is “a failed social economy.” The following are several of his examples: There are 10 million Greeks living in Greece (and falling fast owing to migration), “organized” in around 2.8 million households that have a “relationship” with the Tax Office. Of those 2.8 million households, 2.3 million have a debt to the Tax Office they cannot service. One-million households cannot pay their electricity bill in full, forcing the electricity company to “extend and pretend,” thus ensuring that 1 million homes live in fear of darkness at night while the electricity company is insolvent. Of the 3 million people constituting Greece’s labor force, 1.3 million are jobless. Contractors who work for the public sector are paid up to 24 months after they provided the service and prepaid sales tax to the Tax Office. Half of the businesses still in operation throughout the country are seriously in arrears vis-a-vis their compulsory contributions to their employees’ pension and social security fund. Eventually, the decline will stop. Some argue that Greece is near bottom, while others say no, but no one knows for sure. Even with gross mismanagement and policy incompetence, no country’s GDP goes to zero, because some food and other essentials are produced no matter what. During the Great Depression, GDP dropped by about a third between 1929 and 1933, which was the worst decline in U.S. history. The other EU members, and particularly the Germans, are providing a partial bailout to the Greeks, to both limit and stretch out their debt payments and provide a very limited social safety net. Yet knowledgeable observers also realize that despite the previous debt restructuring, the failure to meet targets means another bailout is almost certain for this year. Too many Greeks, including many politicians, blame the EU for their problems, rather than confront the reality that it has been their own government that has been overspending for decades — and no other country or the EU forced it to do this. Eventually, the fall in real wages adjusted for the level of productivity will make Greece competitive again, and foreign investment will renew along with job growth. Greece will continue to have a comparative advantage in tourism;  after all, the country is spectacularly beautiful, with an ideal climate. Not even corrupt and incompetent politicians have been able to destroy what God gave the Greeks. Still, tourism and certain other comparative advantages will not produce a vibrant economy, but they will establish a floor. The greatest danger to an eventual economic turnaround in democracies is political. Unemployed and underemployed people are frustrated and unhappy, and they take it out on the politicians who they blame for getting them into the mess. Most politicians have short time horizons; namely, no further than the next election. Thus, the political incentive is to provide more government handouts in one form or Both of these activities stifle — rather than enhance — growth. Whether they are financed by taxation, debt or just printing money, they suck resources out of the remaining productive people and businesses. Despite thousands of years of failure of welfare and socialist states, the siren call of immediate gratification often trumps rationality. The current unpleasantness with Russia and Ukraine could further harm Greece, which depends on Russia for more than 75 percent of its natural gas, and most of it passes through Ukraine. Greece also needs a vibrant EU economy to help pull it out of the current mess. If European growth is hurt by the effect of its own sanctions on Russia, Russia’s sanctions on Europe, or a disruption in Russian oil or gas flow, the effect could be catastrophic for Greece, given the fragility of its situation. The Greek economy is too small to significantly damage the European or world economy, but the opposite is not true.

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