Tears of the Moon

Sunday, January 30, 2011

Bank Bailouts Explained

Egypt Closes Banks, Stock Market; Protests Spread to Saudi Arabia, Jordan; Saudi King Backs Mubarak; Reflections on Misguided US Policy

From Mish:

One sure way to get people fired up is to shut down the stock market and all the banks, thereby denying citizens access to their money. Yet, that is exactly the desperate course of action chosen by Egyptian President Hosni Mubarak.

Protests have now spread to Saudi Arabia, and Jordan. So far however, the protests in Saudi Arabia are of a peaceful nature, mostly related to government response to flooding. Recent history suggests that may change at any moment into something far more significant.

In a move that can easily backfire, the Saudi king defended Mubarak and offered support.

Meanwhile, in Jordan, the pace of protests have now picked up as opposition supporters have held rallies in Amman and called for the resignation of Jordan's prime minister......read on

What the price of gold reveals about UK house prices

By Dominic Frisby
from Moneyweek.com:

What's the most controversial topic we've ever tackled? You'd think it might be something about exploiting rising food prices. Or bankers' bonuses. Or even vice stocks.

I doubt any of you would have guessed: "the ratio of gold and silver to house prices". Yet that is the subject that holds the record for reader comments – by a long chalk.

And today I'd like to update you on that topic.
The best way to measure house prices

Let's kick off with a stat that I find amazing. Did you know that if you had sold your average British house in late 2004 and bought silver – just regular bars of silver – you could now sell that silver and buy 5.5 average British houses?

As we all know, money seems to buy you less and less each year – the above statistic really brings this home. This is because we operate under a system of 'fiat' (from the Latin, 'let it be done') money and credit. Churchill described it as money 'by government edict'. In other words, it is the law that what we use as money be money. Without that legal backing, modern money would be just a meaningless computer digit or piece of paper..........read on

On The Edge: James Howard Kunstler discusses Peak Oil

S&P Downgrades Japan's Sovereign Debt

By Dan Norcini

The news that the rating agency S&P had downgraded Japan's sovereign debt from 'AA' to 'AA-'. This is no small development. The reality is that Japan's finances are in even worse shape than those of the US when its overall indebtedness is compared as a percentage of GDP. Japan is approaching a debt to GDP ratio of nearly 200%! Yes, you read that correctly. The only nation in the entire world that is higher is Zimbabwe. In effect, it would take the sum total of all economic activity generated in Japan over a two year period to eliminate the nation's debt. Think about that!

What this means is that the rating agencies, who are watching these sovereign debt woes which have struck various countries in the EU, are concerned about the same problem beginning to surface in other quarters around the globe. Quite simply they are looking at the huge deficits being run by many nations in the West (and Japan). In other words - TOO MUCH DEBT!

That led to selling in the long end of the US yield curve this morning as bond traders are starting to be more than a bit fearful that the same thing is going to happen to the US's 'AAA' rating at some point in the future if the US does not get its financial house in order. They are watching massive amounts of QE2 and another ballooning of the federal budget deficit and are selling even as the Fed attempts to jam the market higher with its purchases. AT this point, the only thing holding the long end of the curve is the Fed. How long can that last especially without affecting the Dollar?

More and more we see the integrity of sovereign debt being brought into doubt which leads to the question among many investors; "what is a safe haven that is actually safe?" Who wants to take the chance of holding a nation's bonds if overnight they face the real risk of being downgraded?

The real world impact of this is that nations whose debt gets downgraded will have to offer potential investors a higher rate of return to compensate them for the increased risk of holding their debt. For nations already hopelessly in debt, that means borrowing costs begin to rise forcing them to borrow even more money just to keep their heads above water. The whole thing becomes a vicious cycle with rising interest rates compounding the problem.

The US has been able to sneak by and thus far avoid a rating agency's downgrade partly because its borrowing costs are so low. Should these agencies begin to train their sights on the US and give closer scrutiny to its miserable financial condition, there is a chance that a downgrade could follow. Such a development, were it to indeed occur, would force the US to offer higher rates of return on its debt. That of course would raise its borrowing costs at a time when it can least afford it not to mention short circuiting the QE policy which is deliberately designed to lower borrowing costs.

This is why the take down in gold, after yesterday's nice performance, is so remarkable for its perverseness and why long term oriented holders of the metal should not be the least bit concerned as to the antics taking place in the paper market. Sovereign debt woes are not behind us - the problem lies squarely ahead of us and no amount of wishful thinking is going to change that hard reality.

This being said, one of the things we now want to monitor will be the performance of gold when priced in terms of the Yen.

jsmineset.com