Mish's Global Economic Trend Analysis

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Comments from Italy on "Financial Terrorism", Taxes, General Economic Condition, and Mario Monti Posted: 21 May 2012 11:02 AM PDT Financial Terrorism Reader Andrea from Italy (who now lives in France) has some interesting comments regarding my post on Saturday Italy Deploys 20,000 Law Enforcement Officers to Protect Individuals and Sensitive Sites; Anecdotes From Italy via Canada: Taxed Out of House and Home. Andrea writes ... Hi Mish, I would like to give your readers a better understanding of terrorism in Italy. Italy went through the seventies with a very hard season of terrorist acts. In the worst period you could count one terrorist act per day: killing or bombing of politicians, managers, journalists and trade unions representatives. The main terrorist organization during those years were the "Brigate Rosse" (Red Brigades). The climax happened when they managed to kidnap, jail and eventually kill the Italian PM Aldo Moro. Their "five point star" logo is still today symbol of fear and terror in the country. Along with the "Brigate Rosse", other minor far-left armed organizations have been spreading terror in the country and also many far-right organizations. An involvement of Italian and US intelligence has sometimes been guessed for some these acts. Those years passed to history as the "years of lead", by the metal bullets are made of. The period of terrorism roughly ended in 1982 with the liberation of US Army Gen. Dozier, kidnapped by Red Brigades. Most of their masterminds and killers have been caught and put in jail or spontaneously surrendered by that time. Since then, from time to time, some acts are still claimed by Red Brigades. So the matter of terrorist acts is very, very sensitive in Italy. Unfortunately, the difficult economic environment creates the conditions for a comeback of terrorism. Best regards, Andrea General Economic Conditions, Taxes, and Mario Monti In a followup on general economic conditions Andrea writes ... Hi Mish, I was in Italy a couple of weeks ago and so I have some fresh updates. The article you mention is mostly correct, but it is worth to add some things and some facts to describe the full picture. For starters, Italy has a very long and strong "habit" of tax evasion and tax fraud compounded by an extremely high level of criminal activities and presence of criminal organizations in the economy. This "habit" goes far beyond the economically difficult circumstances, and includes professionals (dentists, doctors, lawyers), retailers and small business. The phenomenon is so widespread and dramatic that a few figures should help explaining it. Statistics show that owners of luxury cars, yachts or private planes declare in average very few tens of thousands Euros income per year, much less of the value of the objects they own. Clearly, this is simply mathematically impossible! So far, no government has been able to tackle this issue, for a lack of will and a lack of capacity at the same time. But increasing debt, pressure from financial markets and increasing spending has increased so much the fiscal pressure on those that cannot evade that the problem now could no longer be avoided. The recent governments have put in place a more and more efficient organization to fight this phenomenon and Prime Minister Mario Monti has now empowered this organization with powers that are really at the limit of democracy, a kind of Orwellian powers including some of the things you see described in the article but also much more. For example, the state now has the power to look into your bank account at any moment without any intervention from your bank. In principle I do not like these enforcements, as it sounds quite tyrannical but at the same time nothing else seemed to work so far. Coming back to the point: restoring fiscal loyalty is absolutely necessary for Italy and those measures seem to have effect to this respect. The problem is that this "fiscal machine" is not making any difference between a fiscal fraud or robbery and simple problems of people that cannot pay because they have no money and they have troubles with their firms. The latter group should be helped to keep their companies alive during these troubled times. Instead, stories of people that commit suicide after getting a tough payment request from "Agenzia delle Entrate" can be heard almost every day in Italy along with weapon aggression to "Agenzia delle Entrate" employees. While a fair tax system is needed, this way is going to kill Italian companies. As I said, nearly every day you can hear and read about entrepreneur suicide stories in the mainstream media. Even Monti had to comment in a press conference. A mix of things is responsible for this desperation. Public Administration delayed payments. PA in Italy is currently years behind in payment. Private customers payment delays or non-payments Bank unwilling or unable to make loans Taxes and tough demands from the new "fiscal machine" Lack of demand in the wake of austerity measures, tax hikes, and general European slowdown Note the injustice: Central and local governments are agonizingly slow (as in years late) in paying bills but now demand citizens to pay immediately. Monti approval is now rapidly declining because of tax increases and because of waste of public money. Best regards, Andrea Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Full-Fledged European Bank Run; ECB Deposit Insurance is Not the Answer; How FDIC Played a Part in the US Real Estate Bust; Monetarist Fools are Everywhere; Believe in Gold Posted: 20 May 2012 11:58 PM PDT One chart is all it takes to prove a full-fledged European bank run on the banks is well underway in the Club-Med countries and Ireland. click on chart for sharper image The above chart is from the Financial Times article The anatomy of the eurozone bank run by Gavyn Davies. A bank run is now happening within the eurozone. So far it has been relatively slow and prolonged, but it is a run nonetheless. And last week, it showed signs of accelerating sharply, in a way which demands an urgent response from policy-makers. The fear of bank runs is deeply ingrained in all economists who know anything about the genesis of the Great Depression in the United States in the early 1930s. Then, the failure of the Bank of United States in December 1930 led to multiple bank runs across the country. Bank failures in the following two years wiped out personal savings and greatly exacerbated the collapse of demand in the economy. The classic account of the crisis, by Milton Friedman and Anna Schwartz, concluded that the collapse was largely the fault of the Federal Reserve, which failed to provide enough liquidity to keep the banks functioning and thus end the panic. Classical Nonsense We need to stop right there for a bit because the "classic account" Davies believes in is complete nonsense. The crisis then and now is a crisis of solvency. The culprit is fractional reserve lending coupled with fraudulent lending practices that allow banks to secure deposits for 2 years or less but lend money out for 30 years. The way to stop runs on the bank is easy enough: stop fractional reserve lending and other fraudulent lending practices. Davies continues with still more nonsense. After the crash, the establishment of the Federal Deposit Insurance Corporation was intended to ensure that deposit holders never again had to live in fear that their savings would be in jeopardy. What are the lessons for the eurozone? How FDIC Played a Part in the US Real Estate Bust Clearly there was fear depositors would lose money and the run on Lehman and Bear Stearns is proof enough. The irony is  there was no fear for the longest time because of FDIC when fear should be a rational worry. That lack of fear led to depositors chasing the highest yields simply because they were government guaranteed. For example, Corus bank (among numerous others) offered attractive rates and invested deposits in condo construction schemes in Florida, California, and Las Vegas. Were it not for FDIC, no one in their right mind would have put deposits at Corus and other such banks that went bust in the real estate crash. The fools who did place deposits at such banks seeking higher yields deserved to lose those deposits. End Fractional Reserve Lending Under a full-reserve 100% gold-backed banking system, inflation would be nonexistent and bank failures would be few and scattered. Instead, we have seen boom-bust cycles of increasing magnitude with faith placed on FDIC, and that faith contributed to the magnitude of the bust and an enormous failure of hundreds of banks in a short period of time. In short FDIC should be phased out along with the end of fractional reserve lending. The rest of Davies' article is a hodge-podge of still more fallacies concluding with ... Mario Monti apparently took a plan to the G8 summit to offer jointly-funded guarantees on bank deposits to apply across the entire eurozone. This would certainly help, but whether it would be sufficient to eliminate fears of exchange rate losses if the euro were to disintegrate is another matter. To fix that problem, belief in the integrity of the euro as a single currency needs to be restored. The bank run could bring matters to a head. Belief in the Euro? Why?  Pray tell why should there be a belief in the Euro, especially when the "solution" proposed by Keynsian and Monetarist clowns is simply to print more money to cover fraudulent lending practices by banks, every time banks get into trouble? Belief in Gold Note that the US dollar index is right where it was over seven years ago. The US$ index is at a spot first touched in late 2004. Gold was well under $500 an ounce at that time, so please do not tell me gold is a function of the US dollar. One of the reasons gold is at $1600 with the US dollar index above 81 is precisely because central banks in general (notably the Fed, the ECB, the Bank of England, and China) have printed nonstop and the Fed and the ECB have initiated all sorts of liquidity and QE measures. In addition, the ECB's balance sheet is more bloated than the balance sheet of the Fed thanks to the LTRO program.  Integrity of Gold The proper conclusion is that gold is a function of mistrust in fiat currencies in general, not just the US dollar. However, nothing moves in a straight line including faith (or lack thereof) in central banks' ability to handle this crisis. By now it should be perfectly obvious the LTRO is a complete failure. Banks in Spain took the money and bought more of their own bonds and are now underwater on them. Only monetarist fools want the ECB to do more of the same. Sadly, monetarist fools are nearly everywhere, and the chart of the price of gold says just that. In conclusion, if the ECB was to take the action suggested by Davies (and they might), it certainly will do nothing for the "integrity of the euro", but it is highly likely to further the integrity of gold. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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