Mish's Global Economic Trend Analysis

Chris Martenson Discusses Shadow Bank Runs With Lauren Lyster on Capital Account; Note on Adobe Flash "Try Later" Message in Firefox
Spain Has Budget Deficit of 3.41% of GDP Through May (Not Counting Regional Governments); Target for Entire Year was 3.5%
Monti Threatens to Resign if No Eurobonds; Specter of Early Elections
EC President Van Rompuy Releases 7 Page PDF "Towards a Genuine Economic and Monetary Union"; Merkel Says "No Shared Total Liability as Long as I Live"
Zero Hedge Provides Empirical Proof of Deflation (However, He Does Not Even Realize It)

Chris Martenson Discusses Shadow Bank Runs With Lauren Lyster on Capital Account; Note on Adobe Flash "Try Later" Message in Firefox

Posted: 26 Jun 2012 10:26 PM PDT

Chris Martensen had a nice interview on Capital Account with Lauren Lyster today on shadow banking.

Here is the link if embedded video does not play: Chris Martenson on Shadow Bank Runs and how Central Banks are Missing the Boat!

I discussed the same topic earlier today as did Zero Hedge. Please see Zero Hedge Provides Empirical Proof of Deflation (However, He Does Not Even Realize It) for a discussion.

Adobe Flash Errors

By the way, YouTube videos completely stopped playing on Firefox for me after I went to the latest release of Adobe Flash. I had to uninstall flash, then return to version 10.3.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Spain Has Budget Deficit of 3.41% of GDP Through May (Not Counting Regional Governments); Target for Entire Year was 3.5%

Posted: 26 Jun 2012 02:31 PM PDT

Spain has reached it budget deficit target of 3.5% of GDP. The problem is, Spain did it in 5 months, not 12. Via Google translate, Spain has Budget Deficit 36.364 Billion Through May.

The State had until May a deficit of 36.364 billion euros in national accounting terms, equivalent to 3.41% of GDP, representing an increase of 30.6% compared to 2.59% in the same period 2011. The figure almost touches the 3.5% target it has set the state for the entire year.

Secretary of State for Budget, Marta Fernandez Currás, said that Spain suffers from a weakness of the collection because it crosses the "worst" macro.

Executive forecasts are ending the year with a deficit target of 3.5% for the state and 5.3% of GDP for the whole of the government.

Regional Debt Not Included in Above Totals

My friend Bran who lives in Spain adds this explanation ...

Clearly, Spain's deficit is well off track . The primary difference between the "state" and the "whole of the government" is regional government debt.

There are two main components: State (3.5% objective) and Regional (1.5% objective). The Total Public Administration deficit, which is supposed to come in at 5.3% for the year, is a combination of the two (+ 0.3% from somewhere else). The current Regional figure is not given in the article, but it is likely to be not too far off 1.5% this year.

The government says that this situation is due to a drop in revenue.

Taxes Going Up, 456 Prescription Drugs Dropped

The debate now is over how much taxes will go up and what government services are dropped. Bran supplied a link to 456 prescribed drugs dropped from funding to save €440 million.

The Ministry of Health, Social Affairs and Equal propose a list of 456 drugs that may be excluded from public funding and, as calculated by the department led by Ana Mato, would be a net savings to the NHS of 440 million euros.

If approved this measure, the state will cease to provide 60% of these medications as usual and the citizen has to bear the full amount. These drugs also were free prescription for retirees, which from now on you should pay them.

How long before Brussels sends in a team of experts telling Spain what it needs to do? Three hours or three days?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Monti Threatens to Resign if No Eurobonds; Specter of Early Elections

Posted: 26 Jun 2012 11:04 AM PDT

Courtesy of Google Translate, via a link posted on the Guardian Live Blog, please consider this choppy clip from Monti: EU summit difficult But Knight gives the alarm

Perhaps the Prime Minister Mario Monti has finally accepted the ultimatum of Cav and decided to download Frau Merkel. Perhaps the government, dealing with the preparation of the European Council of 28 and 29 June, will have a movement of pride and will be presented in Brussels slamming his fists on the table. Perhaps, indeed. For now, sources close to Palazzo Chigi, Monti wants to ensure that clamped down on the German Chancellor. A professor there to shake the thought that Silvio Berlusconi has decided to launch an ultimatum to the government "should immediately change direction." At the end of the summit with Prime Minister, Cavalieri, the actual government falters in an absolute uncertainty and that, to get himself out of this impasse is to take a firmer line in Europe: "We are left with a feeling of uncertainty about the proposals Italy will do.

In the last hours, however, the prime minister would even toyed with the idea of a stroke effect to force Merkel to put aside his nein the eurobond and a loosening of the line of rigor in favor of investment and spending policies, capable of giving the necessary shot back to growth in the eurozone. "If the Chancellor does not give up I will tell you that I resign because if things do not change are not able to bring Italy out of the abyss", he suggested doing Monti lever on the bogeyman of the political crisis that would bring Italy under the attack of speculators. On the other hand, Merkel knows all too well that the fall of Rome would mean the final collapse of the 'euro with perspectives that would put the shivers even in Berlin.

Specter of Early Elections

Early elections in Italy are certainly not on the wish list of nannycrats. Yet early elections appear increasingly likely.

Monti would not survive such an election. The economic situation in Italy worsens every week. People are becoming increasingly frustrated, not only with government in general but with the euro itself.

For details please see Italy "Gasping Like Beached Whale"; Berlusconi Reiterates Euro Exit "Not Blasphemy"; Beppe Grillo Discusses "Taboo of the Euro"

Five Star Movement

Beppe Grillo and his Five Star Movement gains momentum every day. Grillo supports an exit from the eruorzone and the Five Star Party is now the second largest party in Italy.

Former Italian Prime Minister Silvio Berlusconi is leader of the PDL, Italy's third largest party. Berlusconi is now anti-euro, as is the Northern League. These are very significant events.

For more details, please see Six Reasons Why Italy May Exit the Euro Before Spain; Ultimate Occupy Movement.

Also note Monti Begs Germany to Stabilize Interest Rates; Merkel Pours Cold Water On "Theoretical Discussions"; Italy Official Denial #1; Why Monti's Days Are Numbered.

The nannycrats do not want Monti to resign nor do they want early elections.

However, delays in calling for elections actually plays into opposition hands. Each passing day weakens Mario Monti, and each passing day strengthens the anti-euro movement in Italy.

"See you in the next Parliament" Beppe Grillo said after the local elections in May.

Let's hope so.

Addendum:

I did not understand the phrase "ultimatum of Cav" so I pinged a friend "Andrea" who is from Italy but now lives in France.

Andrea explains ...

"Cav is short for Cavaliere, a nickname for Berlusconi. The site Il Giornale (where you found the article) is owned by Berlusconi and is therefore very Berlusconi friendly. The newspaper nickname him the Cav."

She also added the article states ...

"In a meeting he had with Monti, Berlusconi complained that there is absolute uncertainty about what the EU will adopt at the upcoming summit. Berlusconi sought a much tougher position on Merkel noting the discomfort many of his party representatives and senators face in supporting Monti's government."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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EC President Van Rompuy Releases 7 Page PDF "Towards a Genuine Economic and Monetary Union"; Merkel Says "No Shared Total Liability as Long as I Live"

Posted: 26 Jun 2012 09:44 AM PDT

Inquiring minds are reading "Towards a Genuine Economic and Monetary Union" by the gang of four nannycrats: European commission president Herman Van Rompuy, ECB president Mario Draghi, José Manuel Barroso of the European commission, and Jean-Claude Juncker, the leader of the 17-country eurogroup.

Don't expect any details. There aren't any. Instead the document consists of a wish list wrapped in a wordy package that says virtually nothing.

Wish List

An integrated financial framework to ensure financial stability in particular in the euro area and minimise the cost of bank failures to European citizens. Such a framework elevates responsibility for supervision to the European level, and provides for common mechanisms to resolve banks and guarantee customer deposits.
An integrated budgetary framework to ensure sound fiscal policy making at the national and European levels, encompassing coordination, joint decision-making, greater enforcement and commensurate steps towards common debt issuance. This framework could include also different forms of fiscal solidarity.
An integrated economic policy framework which has sufficient mechanisms to ensure that national and European policies are in place that promote sustainable growth, employment and competitiveness, and are compatible with the smooth functioning of EMU.
Ensuring the necessary democratic legitimacy and accountability of decision-making within the EMU, based on the joint exercise of sovereignty for common policies and solidarity.

Details are allegedly coming December 12 2012, with an interim report due in October.

Van Rompuy "expects to reach a common understanding on the way forward for the EMU at our meeting at the end of the week."

I expect more bickering, if not a major battle because Germany was not included in the preparation of the white paper.

By the way, this pathetic detail-lacking document is all there is to see from the purposely leaked story on June 3, regarding a "Secret Plan for a New Europe"

Germany "Pooh Poohing" Paper Already

The Guardian offers these thoughts on the "plan to save the eurozone"

[The plan] calls for a quick start on establishing a new European banking union, says that the ECB could be given supervisory authority over EU banks quickly, and proposes common resolution funds (for winding up bad banks, funded by a banking levy to spare EU taxpayers) as well as a common deposit guarantee scheme for Europe's savers.

Berlin is already pooh-poohing the notion, unwilling to "mutualise" liability for other country's savers or banks any time soon. The paper also says that the eurozone's new permanent bailout fund, the European Stability Mechanism (ESM), could be used as the "fiscal backstop" for a banking union, opening the way to direct recapitalisation of troubled banks, also opposed by the key power, Germany.

Britain is adamantly opposed to joining a banking union and placing much of Europe's biggest financial centre, the City, under the authority of the ECB. Arguing that the union should be purely eurozone as a response to the euro crisis, Cameron will demand "safeguards" quarantining the British financial sector while ensuring that any new financial regime does not impair Britian's interests in the EU's single market.

The Germans appear reluctant to offer any concessions, though, and the draft says the banking union should extend beyond the eurozone.

Merkel Torpedoes Idea

Please consider these comments from the Guardian Live Blog.

4.13pm: Markets are getting spooked again, and here's one reason. According to Reuters, German chancellor Angela Merkely has said at a coalition party meeting that Europe will not have shared total liability for debt as long as she lives.

So is this a torpedo aimed at the earlier EU draft talking about turning the eurozone into a fully fledged political union within a decade?

Whether or not this is the case, the Spanish and Italian stock markets don't like it - they are both down more than 1% now.

4.23pm: But now comes the backtracking.
Seems partial denial over the Merkel comments... allegedly was off the cuff at 'private meeting'

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Zero Hedge Provides Empirical Proof of Deflation (However, He Does Not Even Realize It)

Posted: 26 Jun 2012 12:28 AM PDT

Zero Hedge, citing a Federal Reserve Bank of New York report on Shadow Banking, makes (without even realizing it) a sure-fire case for deflation.

I encourage you to visit the link shown above, but also take a look at On The Verge Of A Historic Inversion In Shadow Banking by Zero Hedge.

Here is the introduction by ZH.

While everyone's attention was focused on details surrounding the household sector in the recently released Q1 Flow of Funds report (ours included), something much more important happened in the US economy from a flow perspective, something which, in fact, has not happened since December of 1995, when liabilities in the deposit-free US Shadow Banking system for the first time ever became larger than liabilities held by traditional financial institutions, or those whose funding comes primarily from deposits.

As a reminder, Zero Hedge has been covering the topic of Shadow Banking for over two years, as it is our contention that this massive, and virtually undiscussed component of the US real economy (that which is never covered by hobby economists' three letter economic theories used to validate socialism, or even any version of (neo-)Keynesianism as shadow banking in its proper, virulent form did not exist until the late 1990s and yet is the same size as total US GDP!), is, on the margin, the most important one: in fact one that defines, or at least should, monetary policy more than most imagine, and also explains why despite trillions in new money having been created out of thin air, the flow through into the general economy has been negligible.

Empirical Proof of Deflation

Here are the pertinent charts and commentary.

That chart is from the NY Fed.

On a similar chart ZH commented ... "As another reminder, US Shadow Banking liabilities - a combination of Money Market funds, GSE and Agency paper, Asset-Backed paper, Funding Corporations, Open market paper and of course, Repos - hit a gargantuan $21 trillion in March 2008. They have tumbled ever since, printing at just under $15 trillion at the end of March 2012, the lowest number since March 2005 when shadow banking liabilities were soaring. This is an epic $6 trillion in flow being taken out of credit-money circulation, with a $143 billion drop in Q1 alone!"

Sequential Change in Shadow Bank Liabilities

click on chart for sharper image

The chart immediately above is from ZH, not the NY Fed article.

ZH comments ... "It is precisely this ongoing contraction that the Fed does all it can, via traditional financial means, to plug as continued declines in Shadow Banking notionals lead to precisely where we are now - a sideways "Austrian" market, in which no new credit-money money comes in or leaves."

Emphasis in bold by ZH.

Deflation It Is

There is nothing "sideways" about it. The charts clearly show credit money is indeed leaving (contracting) to the tune of a whopping $6 trillion since March 2008.

Interestingly, Zero Hedge did not mention "deflation" once in his post.

Yet, those charts, without a doubt, depict deflation if one accurately describes inflation and deflation as measures of credit, not prices.

Based on real-world experience of what is most important, here is my definition: Inflation is a net increase of money supply and credit with credit marked to market.

Deflation is the opposite, a net decrease of money supply and credit with credit marked to market.

If one woodenly sticks to the view that inflation and deflation are about prices (while ignoring a devastating collapse in housing), then yes, the US is still in a period of inflation.

Likewise, if one foolishly sticks to measures of money supply like M1, M2, or TMS (true money supply) by Michael Pollaro, then the US is also in a period of inflation.

Real World Viewpoint

Neither money supply nor the CPI can adequately explain interest rates, housing prices, lack of jobs, and numerous other real-world phenomena.

In the real-world, in a credit-based economy, it is credit that matters.

The above charts show the real story. That story explains 10-year treasury yields at 1.61% and 2-year yields at .29% even though the CPI is 1.7% year-over-year.

Those charts also show why hyperinflationists are in an alternate universe and why proponents of "huge inflation but not hyperinflation" are on Mars.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Tuesday, June 26, 2012

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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