Huge Gold deliveries/Low Silver OI/Job report/More Fallout MFGlobal

Good morning Ladies and Gentlemen:

Before beginning, I would like to inform you that no USA bank entered the morgue last night.
The FDIC decided to give the boys two extra weeks off due to their hard work for the past several months.

The bankers were surely ready with their fat fingers on the sell buttons in gold and silver as soon as the non farm payrolls were announced and they were weaker than expected.  Gold had already reached $1764.00 during the night but when comex opened, the barrage begin.  However gold would have none of this nonsense and it closed at $1747.00 up $11.70 on the day.  Silver still remains a punching bag for the bankers as it lost 15 cents to $32.55. Let us now head over to the comex and assess trading, deliveries and inventory movements.

The total gold comex OI fell by a rather large 3591 contracts, from 430,118 to 426,527 despite gold's advance on Thursday.  We lost some gold bankers along the way.  The front delivery month in gold is exciting to watch.
Here the December month saw its OI fall from 6815 contracts to 3834 contracts for a loss of 2981.  We had 4638 delivery notices on Thursday so we gained a huge additional 1691 gold contracts standing and lost nothing to cash settlements.  It seems that we have some very anxious buyers of gold lining up at the comex to get whatever metal is available.  The next big delivery month is February and here the OI fell from 264,239 to 262,255 for a loss of 1984 contracts.  This is where some of the bankers threw in the towel.  The estimated volume at the gold comex on Friday was a very tiny  122,281.  The confirmed volume on Thursday was also anemic at 123,485.  It seems that the MFGlobal scandal has had an effect on players wishing to invest.
They are fleeing the comex as fast as their little feet will carry them.

The total silver comex OI saw its OI fall 1401 contracts, from 98,068 to 96,667 a new multiyear low.
The lowest OI on record is around 90,000 contracts when silver was $4.00.  However 10 years ago we also had high numbers of spreaders (calender spreads).  If you take out these non economic spreads, we are at record low OI's with a much higher price of silver.  The bankers are loathe to supply the paper as they know the game is up in silver.  The next big delivery month is March and here the OI fell from 57,327 to 56,136.
The estimated volume at the silver comex was extremely anemic at 34,497.  The confirmed volume on Thursday was also very low at 34,487 a difference of 10 contracts..

Inventory Movements and Delivery Notices for Gold: Dec.  3 2011:
 

Gold	Ounces
Withdrawals from Dealers Inventory in oz	nil
Withdrawals from Customer Inventory in oz	nil
Deposits to the Dealer Inventory in oz	nil
Deposits to the Customer Inventory, in oz	nil
No of oz served (contracts) today	487  (48700)
No of oz to be served (notices)	3347  (334,700 oz)
Total monthly oz gold served (contracts) so far this month	16,554 (1,655,400)
Total accumulative withdrawal of gold from the Dealers inventory this month	nil
Total accumulative withdrawal of gold from the Customer inventory this month	868

you will note that there was no activity whatsoever at the gold vaults.
We had no deposits, no withdrawals and no adjustments.
Thus the registered or dealer inventory remains at 3.34 million oz. Strange for a big delivery month!!

The CME notified us that we had 487 delivery notices on Friday for 48700 oz.
To obtain what is left to be served upon, I take the OI standing (3834) and subtract out Friday
deliveries (484) which leaves us with 3347 notice or 334,700 oz left to be served upon.

The increase in the number of oz standing in gold is due to the world clamoring to find the last morsels of physical metal.  The dealer bankers are raiding the cookie jar trying to put of fires elsewhere.

The total number of gold oz standing in this delivery month of December is absolutely outstanding:

1,655,400 oz (served) +  334700 oz (to be served)  =  1,990,100 oz or 61.9 tonnes.
If you combine the 1.77 tonnes of November we have 63.67 tonnes of gold standing or 62% of the registered gold inventory. It is absolutely strange that no gold is leaving the dealer to settle upon this huge number of gold oz standing.

And now for silver 

First the chart: December 3rd

Silver	Ounces
Withdrawals from Dealers Inventory	nil
Withdrawals fromCustomer Inventory	nil
Deposits to theDealer Inventory	nil
Deposits to the Customer Inventory	nil
No of oz served (contracts)	22 (110,000)
No of oz to be served (notices)	597  (2,985,000)
Total monthly oz silver served (contracts)	625 (3,125,000)
Total accumulative withdrawal of silver from the Dealersinventory this month	nil
Total accumulative withdrawal of silver from the Customer inventory this month	619049

The silver vaults were comatose on Friday.  We had no deposits of any kind,
no withdrawals of any kind and no adjustments, identical to the gold comex.

Thus the silver registered inventory remains at 34.00 million oz and the total of all silver remains at 108.17 million oz.

The CME notified us that we had 22 notices filed for 110,000 oz.  The total number of silver notices filed so far this month total 687 for 3,435,000 oz.  To obtain what is left to be served upon, I take the OI standing for December (619) and subtract out Friday deliveries (22) which leaves us with 597 notices or 2,985,000 oz left to be served upon.

Thus the total number of silver oz standing in this delivery month of December is as follows:

3,435,000 (oz served) +  2,985,000 (oz to be served)  =  6,420,000 oz

we  lost 284 contracts or  1.42 million oz to cash settlements as Blythe has been a very busy girl providing massive fiat bonuses to long. In gold she is having no luck.

The longs want their metal and are shying away from any cash offer.

end

Let us now proceed to our ETF's SLV and GLD and then our physical gold and silver funds:

Sprott and Central Fund of Canada.

The two ETF's that I follow are the GLD and SLV. You must be very careful in trading these vehicles as these funds do not have any beneficial gold or silver behind them. They probably have only paper claims and when the dust settles, on a collapse, there will be countless class action lawsuits trying to recover your lost investment.

There is now evidence that the GLD and SLV are paper settling on the comex.

Thus a default at either of the LBMA, or Comex will trigger a catastrophic event.

Dec 3.2011:

Total Gold in Trust

Tonnes:1,297.93

Ounces:41,729,700.42

Value US$:72,875,635,723.21

DEC 1.2011:

TOTAL GOLD IN TRUST

Tonnes:1,297.93

Ounces:41,729,700.42

Value US$:73,085,080,689.02

we neither gained nor lost any gold inventory at the GLD

And now for silver Dec 3.2011:

Ounces of Silver in Trust	311,944,660.200
Tonnes of Silver in Trust	9,702.56

dec 1.2011:

Ounces of Silver in Trust	312,072,481.500
Tonnes of Silver in Trust	9,706.54

we lost 128,000 oz of silver from the SLV vaults.

And now for our premiums to NAV for the funds I follow:

1. Central Fund of Canada: traded to a positive 1.5 percent to NAV in usa funds and a positive 1.8% to NAV for Cdn funds. ( Dec 3.2011).

2. Sprott silver fund (PSLV): Premium to NAV rose dramatically back to a positive 16.39% to NAV  Dec 3/2011
3. Sprott gold fund (PHYS): premium to NAV rose to a 4.53% positive to NAV Dec 3.2011).

I guess the army is now behind Eric Sprott as he prowls the universe for 1.5 billion dollars worth of silver. He has regained his high premiums to NAV despite the dilution  in metal.

Please note the rise in premiums for the Sprott gold fund having surpassed the 4% plateau reaching 4.53% Friday.  

end

Friday afternoon we received the COT report for gold and silver and it was a dilly!!.

Without further ado, here is the COT report:

Gold COT Report - Futures
Large Speculators			Commercial		Total
Long	Short	Spreading	Long	Short	Long	Short
186,031	31,238	22,953	151,929	345,474	360,913	399,665
Change from Prior Reporting Period
-8,035	-1,858	-2,269	-18,169	-17,037	-28,473	-21,164
Traders
166	63	67	53	48	252	150
	Small Speculators
	Long	Short	Open Interest
	62,263	23,511	423,176
	-5,421	-12,730	-33,894
	non reportable positions		Change from the previous reporting period
COT Gold Report - Positions as of				Tuesday, November 29, 2011

Please note that this report is from Nov 22.2011 to Nov 29.2011.  It thus missed the last 3 days of this week. Also pay attention that all categories decreased in OI.  No doubt that the MFGlobal scandal has a lot to do with the declining OI numbers.

Those large speculators that have been long in gold pitched a huge  8035 contracts from their long side.

Those large speculators that have been short in gold, covered 1835 contracts of their short positions.

And now for our commercials:

Those commercials that have been long in gold and are close to the physical scene, pitched

a monstrous 18,169 contracts.  (this smells like the confiscation of longs with MFGlobal)

Those commercials that have been short in gold covered a massive 17,037 contracts from their short side given the opportunity presented to it from MFGlobal.

Our small specs:

Those small specs that have been long in gold got murdered and they were forced to surrender a monstrous 5,421 contracts for this small category.

Those small specs that have been short in gold, saw a massive 12,730 contracts covered out of 23,511 or 54% of outstanding longs.  The taking of segregated customer accounts in gold by the bankers is nothing but criminal and they should all be put in jail.

Conclusion:  Extremely bullish for gold as the bankers are covering like crazy.

Now for our silver COT:

Silver COT Report - Futures
Large Speculators			Commercial		Total
Long	Short	Spreading	Long	Short	Long	Short
23,816	11,722	16,103	38,884	59,572	78,803	87,397
239	769	-6,195	-1,357	-2,400	-7,313	-7,826
Traders
57	31	36	35	40	111	93
	Small Speculators
	Long	Short	Open Interest
	20,156	11,562	98,959
	-2,276	-1,763	-9,589
	non reportable positions		Change from the previous reporting period
COT Silver Report - Positions as of				Tuesday, November 29, 2011

A little different than gold 

Our large specs that have been long in silver added a tiny 239 contracts to their long side.

Our large specs that have been short in silver added a small 769 contracts to their short side.

Our commercials;

Those commercials that have been long in silver pitched 1357 contracts from their long side.

And those commercials (JPM and cohorts) that have been short in silver from the beginning of time, covered a smallish 2400 contracts from their short side.

Our small specs:

Those small specs that have been long in silver pitched 2,276 contracts from their long side.

Those small specs that have been short in silver covered a rather large 1763 contracts from their short side.

Conclusion: bankers are covering so very bullish.

end.

Before moving into the big economic stories from yesterday, I was pretty excited to see the huge increase in official gold bought by the South Koreans.  This sovereign nation has been

for the past several years towing the line by accumulating vast stores of USA dollars and not diversifying.  They have now decided to diversify into gold:

(courtesy Bloomberg)

Bank of Korea Says It Boosted Gold Holdings in Foreign-Exchange Reserveshttp://www.bloomberg.com/news/2011-12-01/bank-of-korea-says-it-boosted-
gold-holdings-in-foreign-exchange-reserves.htmlBy Sungwoo Park and Eunkyung Seo - Dec 1, 2011 11:17 PM ET
The Bank of Korea, which controls the world’s eighth-biggest foreign-exchange reserves, boosted gold holdings for the second time this year as investors sought safer assets amid Europe’s debt crisis.
The central bank bought 15 metric tons last month, boosting holdings to 54.4 tons, which is equivalent to 0.7 percent of its total reserves, Lee Jung, head of the investment strategy team at the bank’s Reserve Management Group, told reporters in Seoul.Central banks are expanding reserves for the first time in a generation as the precious metal is in the 11th year of a bull market. Purchases of as much as 450 tons in 2011 may be repeated next year as Asian nations and emerging economies diversify their reserves, UBS AG said Nov. 30.
"They want to diversify," Gavin Wendt, the founder and senior resource analyst at Sydney-based Mine Life Pty., said by phone today. Investors and "central banks are pretty nervous about all currencies, not just the U.S. dollar."
Gold has risen about 23 percent this year, reaching an all- time high of $1,921.15 an ounce on Sept. 6 and beating equities, treasuries and other commodities. The U.S. dollar, which typically moves inversely to bullion, is down about 1 percent this year against a basket of six major currencies.

‘Portfolio’

"We’re buying gold to improve profitability against risks," the Korean bank’s Lee said. "This is part of our mid- and long-term strategy to diversify our portfolio and enhance efficiency of asset management."The Bank of Korea purchased 25 tons over a one-month period from June to July, the first purchases in more than a decade, joining other emerging-market countries in expanding gold holdings to guard against volatile currency movements and to diversify portfolios.
The World Gold Council said central bank purchases in the third quarter jumped more than sixfold to 148.4 tons and forecast buying for the year would reach as much as 450 tons. Russia, Kazakhstan, Colombia, Belarus and Mexico added a combined 25.7 tons of gold to reserves in October, according to data on the International Monetary Fund’s website.
Holdings in exchange-traded products reached a record 2,356 tons on Nov. 30 and were at 2,355.5 tons yesterday, according to Bloomberg data compiled from 10 providers.
South Korea’s foreign-exchange reserves fell by $2.35 billion from October to $308.6 billion at the end of November as the euro weakened against the dollar, the central bank said in a statement today.

Friday morning saw the release of the non farm payrolls and true to form the Bureau of Labor Statistics fed the world total garbage.  The headline is great:  addition of 120,000 of jobs and a drop in the unemployment rate.  However when you get into the meat of the report you see clearly the phoniness. First the official report:

(courtesy Reuters):

DJ-US Nov Payrolls +120K; Jobless Rate Drops To 8.6%

Fri Dec 02 08:30:15 2011 EST

WASHINGTON (Dow Jones)--The U.S. labor market strengthened in November, as private employers continued to add jobs at a healthy pace and the unemployment rate fell to its lowest level since March 2009.

Nonfarm payrolls rose by 120,000 last month, the U.S. Labor Department reported Friday in its monthly survey of employers. Private companies grew by a combined 140,000 jobs, while the public sector--federal, state and local governments--shrank by 20,000 jobs.

The unemployment rate, obtained by a separate survey of U.S. households, fell to 8.6% in November from 9.0% the previous month. The rate hadn't been below 9% since March, when it was 8.8%. The rate is now lower than at any point since March 2009, when it was 8.6% as well.

In another positive development, October's figure for nonfarm payroll jobs was revised upward to show a gain of 100,000 from a previously reported 80,000 and September was revised up to a 210,000 gain from 158,000.

The results, while confirming the labor market remains sluggish, were broadly positive and may boost stock markets Friday. Economists surveyed by Dow Jones Newswires had forecast payrolls would rise by 125,000 last month and that the jobless rate would remain 9%.

The Labor Department data showed that some industries fared better than others. Retail trade rose by 50,000 jobs, with much of the increase occurring in clothing and electronics and appliance stores, the Labor Department said.

Leisure and hospitality jobs rose by 22,000, and professional and business services saw a gain of 33,000. Healthcare jobs rose 17,000. Manufacturing changed little.

The number of unemployed, according to the household survey, fell by 594,000 to 13.3 million. A broader measure that accounts for both job seekers and part-time workers who would prefer to be working full time--the so-called underemployed--fell to 15.6% from 16.2% in October.

The latest figures-the broadest snapshot of the labor market-come less than two weeks before the Federal Reserve's next policy-making meeting. After taking steps in August and September to spur growth, the Fed is expected to pause until next year as it assesses the U.S. economic landscape and follows developments in Europe's financial crisis.

The jobs data are the latest sign that the economy is on firmer footing than it was just two months ago, when a rocky start to the year spurred fears of a double-dip recession.

However, the jobless rate is still very high, and threats to the U.S. economic recovery remain, including further turmoil in the euro zone and higher taxes at home as lawmakers turn toward reducing budget deficits.

Friday's report shows that Americans' hourly earnings declined by 2 cents to $23.18. Wages are up by 1.8% over the past 12 months, not keeping pace with overall inflation at 3.6%.

-END-

Here is the latest from John Williams’ www.ShadowStats.com.

(courtesy John Williams..shadowstats.com/Jim Sinclair commentary)

The Economy Is Not Suddenly Recovering / November M3 up About 2.7%

NOTICE:  Commentary No. 403 to be published December 3rd.

An hour-plus after the Bureau of Labor Statistics (BLS) released its happy headline numbers showing November 2011 U.3 unemployment at 8.6% and nonfarm payrolls gaining 120,000 jobs (+/- 129,000 jobs, 95% confidence interval), full data still were not posted on the BLS Web site, although much appears to be coming up now, as I write this.  Where I try to get my analysis of the labor numbers out before the close of the business day, the delays here now have pushed that beyond feasibility for today.

Accordingly, Commentary No. 403 on the November labor numbers, current economic conditions, November M3 and the evolving global systemic solvency crisis will be published tomorrow (December 3rd), instead of today.  The SGS-Alternate Unemployment Estimate for November 2011 will be posted on our site, as available, later today, on the Alternate Data tab.

The economy is not suddenly recovering, and the employment circumstance generally is getting worse, not better.  Details will be covered tomorrow.

The comments that would have been in today’s Commentary on M3, follow.  The detail will be updated tomorrow for the hard estimate tomorrow.

Money Supply M3 (November 2011).  Bank lending remains impaired and broad money growth is not picking up as it would with a healthy banking system.  Based on roughly three weeks of data, the preliminary estimate of the SGS Ongoing-M3 Estimate for November 2011 will be published in the Alternate Data section December 3rd.  November M3 is on track to show year-to-year growth of about 2.7%, up slightly from the 2.6% estimated for October and still below the official rate of CPI inflation. As with October, the seasonally-adjusted, month-to-month change estimate for November M3 likely will be unchanged.  The estimated month-to-month M3 changes, however, remain less reliable than the estimates of annual growth.

A flattening or softening in the relative monthly estimates of annual growth, and slowing-to-flat month-to month gains, also likely continued for the narrower M1 and M2 measures (M2 includes M1, M3 includes M2).  M2 for November is on track to show year-to-year growth of about 9.7%, versus 9.9% in October, with month-to-month growth estimated at roughly 0.3% in November, the same as in October.  The early estimate on M1 for November shows year-to-year growth of roughly17.9%, down from 20.8% in October, with month-to-month change showing a 0.4% contraction in Novembers, versus a 0.8% gain in October.  The relatively stronger annual growth rates in M1 and M2 still reflect the recent shifting of funds out of M3 accounts into M1 and M2 accounts.

Best wishes to all – John Williams, December 2, 2011
www.ShadowStats.com

end.

The best analysis out there is from the GoldenTruth..Dave from Denver.

In his article, he describes the numbers as ludicrous as  315,000 souls were dropped from the labour force.

The labour force is described as " those employed plus those actively seeking employment".  So to make the numbers better, they reduce the labour force.  On page 5 of the report once sees the drop in the labour force of those 315,000 souls as these people just gave up looking for a job.


Another metric discussed is the "labor participation rate".  This is defined simply as the percentage of people actively working out of the entire nation.  Here the USA participation rate fell from 64.2% to 64% despite a gain in actual population. Thus we have a record number of people in the USA not working or not actively looking for a job.


The BLS also has a metric called "Not in the Labor Force".  Here the number increased by a huge 487,000
souls. One would expect in the good market that this number would decline as owners of businesses would seek out employees help them in a rising economy.  We did not see that.


What is really startling is the average length of unemployment rising from 39.4 weeks to 40.9 weeks.
Finally, most of the gain announced was due to the plug B/D .  B stands for Birth and D death.  The bureau guesses that individuals who lose their jobs  (Death) goes into business themselves  (birth) and takes on other "death" employees.  The Government has no way of reporting this phenomena so they just use a fictitious plug number. 


Here is this important commentary from the Golden Truth:

FRIDAY, DECEMBER 2, 2011

You CAN'T Be Serious

Before I get to the ridiculous non-farm payroll report the BLS released this morning (believe me, it's a serious pile of dog shit with chocolate cupcake frosting spread all over it to mask the stench), I wanted to point out that the media is finally starting to scrutinize CFTC Chairman Gary Gensler with regard to his oversight - or lack thereof - and role in the MF Global fraud.  I want it noted that this blog outlined Gensler's unscrupulous ties to Corzine a month ago:  Gensler and Corzine - Two butt-buddies, with reach-arounds

I'm starting to think that "BLS" - instead of Bureau of Labor Statistics - stands for Bureau of Ludicrous Shit.  The monthly non-farm payroll report was released to today and the numbers they are reporting are so absurd that they go well beyond any possible tiny shred of credibility.  The headlines scream:  "Jobless rate falls to 8.6%, 120,000 jobs added."  Sounds wonderful, right?  Go out and spend! However, let's look at the truth behind the headlines.

Here's the numbers you won't see being reported by most news media sources.  The unemployment rate dropped from 9% to 8.6%.  This is a very highly manipulated number and it is determined by taking the size of the labor force - as reported and defined by the BLS - and dividing that number into the number of unemployed.  But first understand that the labor force is defined as "those employed plus those who are actively looking for a job."  There is a large amount of leeway for manipulation in this metric.  At any rate, in order to make the unemployment rate better, all the BLS is does is somewhat arbitrarily reduce the size of the defined "Civilian labor force."  If you go to page 5 of the link I provide below, you will see that from Oct 2011 to November 2011 the "civilian labor force" indeed declined from 154.198 million to 153,.883 - or by 315,000.  This means that according to the Government, 315,000 people stopped looking for work (or possibly got fired from their Walmart greeter job and slithered away into a cave).  Also on page 5 is the "labor force participation rate."  This shows the percentage of people in the economy who are considered to be part of the labor force.  This number dropped to 64%, the lowest rate since 1983.  Given that the population is substantially larger now than in 1983, this means that there are a record number of people out "there" who are not working and not looking for a job. That is, they are largely living off of the Government entitlement programs.  Another startling metric is the average duration of unemployment, which rose to a new record of 40.9 weeks, up from 39.4 weeks. 

More significantly, the BLS has a metric titled "Not in labor force."  This number increased from 86.07 million to 86.558 million, or a whopping 487,000.  So the Government is reporting to us that 487,000 people have decided that things are so good with their finances that they have decided to just stop working altogether.  I find this exceedingly hard to believe, especially since the supporting data that would support this metric show the complete opposite.  For instance, real wages have been plunging.  The point is, you would expect that more people would be looking for work, because the population is growing and people are earning less, on average, which would indicate to me that size of the real labor force should actually be growing, not shrinking.  Also on page 5 you will find "Duration of unemployment."   If you scroll down to page 6 in the link below you will see that average weekly earnings declined, as did average weekly hours worked.    These numbers are unequivocally not consistent with the positive jobs report that is being promoted in the headlines.  BLS - LINK

To sum it up, here's the truth that you will not see reported in your daily newspapers tomorrow or hear on your nightly local news, CNN, CNBC, Bloomberg or MSNBC:  There are less people working as a percentage of the total population, the total number of employed people as a percent of the population continues to decline, it's harder to find a job for those still looking, and those who do find a job are earning less - especially after factoring in inflation.  Sounds a bit different that the rosie headlines reported by the media and promoted on CNBC. 

Have a great weekend.  I am playing in my last tennis tournament this weekend as a USTA/NTRP 3.5-rated player, as I was bumped up to 4.0 by the NTRP.  I haven't decided if I will appeal this LOL.

end.

The surprise announcement of the huge swap arranged with the USA and 5 central banks indicated to many of us that one or two big foreign banks was in deep trouble with all of their gorged PIIGS debt.  Tyler Durden easily picked off the bank in trouble:  Credit Agricole, the 3rd largest bank in France as he discovers the high Libor rate it selected as it deals with other banks.  It stuck out like a sore thumb:

(courtesy zero hedge)

Dollar Libor Market Hints 66x Leveraged Credit Agricole Was Bank X

Submitted by Tyler Durden on 12/01/2011 09:22 -0500

• Deutsche Bank
 
• headlines
 
• LIBOR

Following yesterday's shove-liquidity-down-your-throat-of-last-resort action by the Fed et al. 3M USD Libor fell, admittedly marginally, for the first time since July 25th. The 0.1bps compression was practically insignificant as only 4 of the 18 member banks actually reduced their bids - Citi, Rabobank, RBC, and UBS but we are sure headlines will crow of the impact the coordinated central bank action has had already. What is most concerning when we look at the individual Libors of each member is one bank stands out over the last few weeks. Given that we know the dollar funding market is highly stressed (USD-cross currency basis swaps), this appears to be the only efficient way to understand which bank might be under the most stress. Given Credit Agricole's notably weak Tangible Common Equity Ratio and the fact that its Libor was such an outlier recently, it is hard not to suspect the global stick-save was instigated because this $1.59tn asset-heavy bank was on the verge of failure.

Credit Agricole's borrowing rate has been an outlier for the last few weeks suggesting, given the dollar funding stresses we know exist, a far greater desire to borrow USD than the rest of the motley Libor crew.

And given Credit Agricole's 2nd worst position on Bloomberg's Tangible Common Equity Ratio screen (behind Landesbank Berlin no less), it is hardly surprising that the giant French bank is suffering. At 66x leverage, it is perhaps no wonder the massive French bank was willing to pay up to 13bps more for 3M USD than the average Libor in early November, and still 7bps more (around a 15% premium).  As an aside, the whining out of Deutsche Bank this morning (to be discussed shortly) that "using the swap lines is not stigmata" is perhaps understandable considering their position in the "weakest TCE Ratio" screen is third worst, just behind CA.

end

Despite the huge swaps, Thursday night saw a big jump in overnight lending by the European banks to the tune of 8 billion euros, borrowing from the ECB window.  The stress in the system has not abated:

(courtesy Financial times)

Jump in overnight lending: The FT noted that Eurozone banks borrowed more than €8B from the ECB overnight on Thursday, the highest amount since March. The article pointed out that traders said that the jump in overnight lending by the ECB highlighted the inability of virtually all Eurozone banks, with the exception of the very strongest, to secure funding in the markets. The paper said that the jump in borrowing highlights another headwind on the banks, which have to pay 2% to fund from the ECB, compared with only 0.74% in the market.

end

I want you all to study the latest release from Jim Sinclair on the complete failure of the

clearing house mechanism.  He is of course referring to the MFGlobal scandal:

(courtesy Jim Sinclair)

Clearing Houses Are The Mechanism Of All Markets

December 2, 2011, at 4:13 pm
by Jim Sinclair in the category General Editorial |  Print This Post |  Email This Post

My Dear Extended Family,

We all know bank’s balance sheets are cartoons due to FASB’s capitulation on the fair market value issue, that the euro financial leaders do not deserve the title leader, and that the Fed is the source of liquidity for Euroland in unlimited cheap dollar swaps, but there is more.

That more is the first failure of a major clearing house.

Clearing is the mechanism of all markets.
It is the guts of the system.
It is the engine under the hood of finance.
It is the pulleys that turn inside the watch.
It is basic to finance for without clearing trades cannot close.

Without faith in the clearing house system where is faith that what your account statement says means anything whatsoever?

Unless MF clients are made whole in every way, the system is broken. It is as if the heads blew off the engine of finance. Where can you keep your money and investments if a clearinghouse is allowed for whatever reason to go broke, therein leaving the clients to suffer?

Are you safe even in a custodial account if the clearing mechanism can erase assets across the board as a product of insolvency for any reason?

The system is in a critical seizure.

It may take some time, but even the financial sheeple are going to worry about their own funds. God help you if you hit gold right on a paper exchange with the wrong clearing facility.

You are wholly dependent on the ability of the clearing house to pay into your account the winnings by deducting those funds from the loser. You are wholly dependent on the ability of the clearing house to guarantee the safety and security (are T Bills securities?) beyond SIPC levels. SIPC is underfunded but would be made whole by funny paper.

God help all the exchange traded funds that are nothing more than houses of derivative paper requiring a sound clearing system to have even an excuse for existing.

If the clearing system fails then you have nothing whatsoever. God help you if you are a farmer hedging your crop or livestock if you the farmer have nothing whatsoever due to a broken clearing house. You are insolvent regardless of the fact that your hedge may have been perfect for the needs of your operation.

Unless MF clients are made whole in every way the system is broken.

People did not realize then and some even now that the failure of Lehman broke the technical procedures (mechanism) for the functioning of the OTC derivative and for that reason broke the Western world’s financial system for which we are paying dearly today.

MF is a Lehman Brothers, but worse. OTC derivatives have always been a fraud but could have, before Lehman failed, been globally netted to practically zero.

The lack of faith in the clearing house system breaks the mechanism of the marketplace, even for legitimate transactions. This leaves gold in your possession as the asset of last resort. This is quietly driving the gold price towards Alf’s objective of $4500.

For your sake immediately take delivery of your gold and silver.
For your sake immediately take paper delivery of your gold and silver shares from those very few companies still willing to facilitate that kind of transaction.
For your sake immediately make your general securities positions "direct registration" as a second best method of protection the asset against failure of your clearing facility.

You all have clearing facility dependence even if you do not know it. Unless MF clients are made whole in every way, the system is broken.

This is no time to take any unnecessary risk.
This is no time to be lazy.

If you do not know how to do direct registration, get paper securities or take delivery of paper gold and silver, ask me.

Respectfully,
Jim

end

And this story on a MFGlobal account. The trustee now states that more than 1.2 billion dollars in segregated customer accounts are missing. No wonder everyone is fleeing the comex and other brokerage firms:

(courtesy Bloomberg)

MF Customer: $50M Commodity Account Gone

By Linda Sandler and Thom Weidlich - Dec 2, 2011 4:40 PM ET

Highridge Futures Fund LP, a customer of the MF Global Inc.brokerage, said its $50 million account with the defunct company is “missing.”

James Giddens, the trustee liquidating the brokerage, has “failed and refused” to provide any information about the whereabouts of the account, Highridge said in a filing today in U.S. Bankruptcy Court inManhattan. Highridge asked the judge handling the case to order Giddens to locate and transfer the account, containing mostly cash and also unsettled commodity positions.

Highridge described itself in the filing as a registered commodity pool incorporated in Delaware, with a general partner that is an Illinois company.

Giddens has transferred about 38,000 commodity accounts to other firms, and said he plans to sell 330 securities accounts. Three transfers of collateral made and pending will give commodity customers about $4 billion of their assets, according to court filings.

“Highridge’s account was not among the accounts transferred,” the fund said. “This account is nowhere to be found.”

Kent Jarrell, a Giddens spokesman, said, “The trustee’s office has been in contact with Highridge and will continue to try to resolve the issue without the need for a judicial decision.”

Transfer Lists

Highridge said its account showed up twice on lists of accounts to be transferred to other future firms, first to Vision Financial Markets LLC, then to R.J. O’Brien.

CME Clearing, part of CME Group Inc., told Highridge on Nov. 29 that there was no information on the account because its unsettled positions were on the London Metal Exchange, which also had no information to give at the time.

“Twice Highridge was told the account was being transferred and twice the account was not transferred,” it said.

Separately, Queen’s Quay Avante Ltd., which opened a Canadian dollar account of $7 million at MF Global on Sept. 21, said it hadn’t received any money from the all-cash account, possibly because of the Canadian currency, or a failed wire transfer from Harris Trust & Savings Bank inChicago, which was maintaining the account, to “a different bank.”

Account Shortfall

The shortfall in the MF Global brokerage’s U.S. segregated customer accounts may exceed $1.2 billion, more than double what was previously expected, Giddens has said. That would mean customer accounts are missing about 22 percent of their total of $5.4 billion.

The parent company’s Oct. 31 bankruptcy filing, the eighth- largest in U.S. history, listed assets of $41 billion. The firm said it has about $26 million in cash. Jon Corzine, the former co-chief executive officer of Goldman Sachs Group Inc. (GS), quit as MF Global’s CEO on Nov. 4.

The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-02790, U.S. District Court, Southern District of New York (Manhattan). The parent’s bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.net; Thom Weidlich in New York at tweidlich@bloomberg.ne

end

Finally, Jon Corzine has been subpoenaed to testify on Dec 8.2011:

get your popcorn ready

(courtesy Dan Norcini)

Fox Business is reporting that the former head of MF Global has been subpoenaed to testify in front of a Congressional House Panel

Here is their lead in to the article:

Jon Corzine, the former head of bankrupt commodities brokerage firm MF Global, has been subpoenaed to testify about his role in the collapse before a congressional committee.
Corzine hasn’t been heard from publicly since MF Global imploded in October, the result of bad bets on European sovereign debt, a risky gamble reportedly pushed by Corzine himself.

Read more: http://www.foxbusiness.com/politics/2011/12/02/corzine-subpoenaed-to-appear-before-house-panel/#ixzz1fOoGfStV

end

Ambrose Evans Pritchard discusses the European problem and how Germany will be the ultimate victim

of a big debt collapse.  He states correctly that fingers should not be pointing to Germany for the mess that they 

are in.

(courtesy Ambrose Evans Pritchard/UK Telegraph)

Germany Is The Ultimate Victim Of EMU

The German people have been ensnared

By Ambrose Evans-Pritchard

Economics

Last updated: December 2nd, 2011 17:16

 

Enough is enough. Please stop defaming Germany out there in the blogosphere.

 

The Germans are not engaged in a mercantilist conspiracy to subjugate and milk southern Europe. They are not conducting “warfare by other means”, or heaven forbid, trying to establish a Fourth Reich.

 

The German people entered monetary union for honourable motives, believing they were acting as good Europeans. It is excruciating for them to see those Athens banners in Syntagma Square showing Chancellor Angela Merkel wearing the Swastika, or read that sign “Arbeit Macht Frei”.

 

They gave up the D-Mark reluctantly under French and Italian pressure, as the price for acquiescence in Reunification.

 

They entered EMU at an overvalued rate after the Reunification bubble, leaving them in semi-slump for half a decade. They slowly clawed back competitiveness the hard way, by squeezing wages and driving up productivity.

 

It is entirely understandable that they now think Club Med can and should do the same. (They are profoundly wrong, of course, because Germany was able to lower relative wages during a) a global boom, b) against other EMU states that were inflating c) and with benchmark borrowing cost that stayed low even during the dog days. None of these factors apply to Italy or Spain now. But this is hard to explain this to the man or woman on the Berlin tram.)

 

If EMU now puts Germany in mercantilist ascendancy – an untenable position politically – it is by accident. They make good products (and for that reason they should have a strong currency that rises to reflect the fact). The euro is the cause of all the trouble, not German ambitions or motives. Germany is now hated in Europe more than at any time since World War Two because it allowed itself to roped into this ruinous currency experiment, and for no other reason whatsoever.

 

Chancellor Merkel gave an emotional defence of German conduct today in the Bundestag. Her country is not trying to dominate anybody, she said. “Politics has destroyed all trust,” she said.

 

“German and European unity have been and are two sides of the same coin. We will never forget that.”

 

She is entirely right in one sense to continue ruling out Eurobonds as “unthinkable” under current structures, and a violation of German constitution, but that is not really an answer to the historical challenge that she faces in late 2011.

 

Germany cannot unwind the clock. It did take the fateful step of joining monetary union, and from that awful error follows a string of strategic imperatives.

 

As the wise professors warned at the time, EMU would lead ineluctably to full fiscal union because an orphan currency would not endure without an EU Treasury and government to back it up, but it would a fiscal union accountable to nobody, because no European democracy exists, or can exist.

 

It would lead to debt pooling and shared budgets.

 

It would lead – fatally – to loss of the Bundestag’s sovereign powers to tax and spend. The core functions of parliament would slip away to EU mandarins.

 

It would lead to the emasculation of Germany’s exemplary post-War democracy.

 

It would lead in essence to the abolition of Germany as a nation state, even if the window flowers remained in place.

 

All else was illusion and wishful thinking.

 

That is what monetary union always meant and means now, though the trick being played on Europe’s citizens was fudged by dishonest treaties, themselves dishonestly ratified.

 

It is why so many of us on this side of the Ärmelkanal have fought tooth and nail for twenty years to stop Britain being subsumed into this plaything of unaccountable elites, this Project so profoundly threatening to our self-government and constitutional order.

 

But this is where Germany now is. It must either immolate itself and dismantle the Bismarckian state for the cause of EMU, or prepare to finance an orderly withdrawal from monetary union (with the Finns, Dutch, and Austrians) so that the South can breathe again and hope to recover.

 

That is the choice. All else is can-kicking, denial, obfuscation, muddle, and self-delusion. As is now becoming obvious, the failure to resolve the matter one way or the other is becoming a danger to the global financial system. It threatens to uncork a global depression. Germany must at last decide.

 

It is a horrible choice. My sympathies go to the German people who were never given a vote on this ensnarement and infeudation of their peaceful country, and who were egregiously deceived by their own leaders, and who cannot now begin to understand why they suddenly are target of such furious and venomous global criticism.

 

The Germans too are victims of this ruinous project, the greatest victims of all. Their elites have led them into a diplomatic and economic Stalingrad.

 end

The generally upbeat George Soros is very worried about a global collapse:

(courtesy Wall Street Journal/author Brenda Cronin)

Dec 1, 2011
4:20 PM

Soros: World Financial System on Brink of Collapse

By Brenda CroninThe world financial system not only isn’t functioning, it’s on the brink of collapse, according to investor George Soros.

The Hungarian-born philanthropist, who recently spent time in countries where his charities are active, such as Africa, said he sees a growing bifurcation between emerging and developed countries – and he’s more confident about prospects for the emerging ones.Despite their assorted problems, including corruption, weak infrastructure and shaky government, developing countries are relatively unscathed by the "deflationary debt trap that the developed world is falling into," Mr. Soros said at a New York gathering to mark the 10th anniversary of theInternational Senior Lawyers Project, a group that provides pro bono legal services around the world. Mr. Soros was among those honored by ISLP, for his work as founder and chairman of the Open Society Foundations, which supports democracy and human rights.
The current global financial system is in a "self-reinforcing process of disintegration," Mr. Soros warned, and "the consequences could be quite disastrous. You have to do what you can to stop it developing in that direction."

end

Now Philly Fed President Prosser is now worried about rising inflation in the USA. In plain English his worry is hyperinflation:

(courtesy Dow Jones newswires)

DJ Fed's Plosser: Worried About Rising Pressure On Central Banks To Monetize Debt




Fri Dec 02 10:00:04 2011 EST
NEW YORK (Dow Jones)--A key Federal Reserve official warned Friday of wavering commitments to keep inflation contained among government officials in the U.S. and elsewhere, in what he views as a worrisome development."Despite the well-known benefits of maintaining price stability, there are increasing calls to abandon this commitment in both Europe and the U.S.," Federal Reserve Bank of Philadelphia President Charles Plosser said. "This is a disturbing trend that risks undermining the independence of the central bank to control monetary policy and its ability to preserve a credible commitment to price stability," he said.
The pressure on central banks to do something in a time of large scale budget deficits in many major nations is not a new impulse. "History suggests that governments often resort to the printing press to try to escape their budget problems," Plosser said, explaining "we all understand that this option is a recipe for creating substantial inflation."
Plosser is a voting member of the monetary policy setting Federal Open Market Committee. His comments came from the text of a speech prepared for delivery before a conference at his bank in Philadelphia. The official did not comment on the economic outlook or what's next for monetary policy in his prepared remarks.
Plosser spoke in the wake of the release of the November jobs report, which showed an unexpectedly large drop in the unemployment. That suggested to some the rising chance the Fed would soon embark on providing more stimulus for the economy is now falling. Plosser has been a steadfast opponent of additional action, and he said in a CNBC interview earlier Friday that the U.S. economy is in better shape than many believe.
In the U.S., the policy actions pursued by the Fed over the course of the financial crisis have complicated how many observers understand the central bank. "The Fed and other central banks have already embarked on a path that has blurred the distinction between monetary policy and fiscal policy" and made many think these institutions can do something to fix government borrowing problems.
Even if central banks do not respond to pressure and keep their focus on their respective monetary policy mandates, price pressures could still rise, the official said.
"The continuing fiscal disarray may also lead the public to believe that the government's only near-term strategy is to monetize the debt," Plosser said. "Even if the central bank resists, expectations of future inflation could become unanchored and inflation could rise through no fault or consequence of central bank action or intent."
Killing off rising inflation pressures is frequently costly, Plosser said. "History has shown that once inflation is unleashed, it is not always easy to bring it back down, especially if the central bank loses the public's confidence and damages the credibility of its commitment to return to price stability," he explained.

end.

Yesterday I pointed out to you the huge lawsuit filed by Mass. Attorney General in the Robo-signing scandal.

Here is a fallout  where one bank named in the suit  (Ally--the former GMAC) threatened to boycott the state:

(courtesy zero hedge)

GMAC Boycotts Massachusetts, Will Halt State Mortgages In Retaliation For Lawsuit

Submitted by Tyler Durden on 12/02/2011 17:56 -0500

• Citigroup
 
• GMAC
 
• Wells Fargo

Following yesterday's announcement that the state of Massachusetts would sue 5 mortgage lendersamong which the bailed out subprime failure formerly known as GMAC and now known by the much more idiot-friendly name "Ally", the latter has decided to take matters into its own crazy hands and escalate matters by confronting the entire state of Massachusetts in a move that will generate even greater anger among the broader population, aimed squarely and rightfully at the banks all over again. In an email sent out today, GMAC Bank said it would "no longer accept new locks for properties located in the Commonwealth of Massachusetts." The reason given: "This change is necessary due to the complexity of transacting business in an increasingly difficult legal environment in Massachusetts." By complexity GMAC of course means being confronted with Attorneys General who refuse to be pushed over or jump when the banking cartel says so. In essence, GMAC (with other lenders likely to follow suit) has decided to boycott states that dare to break away from the settlement talks and to pursue unilateral action. Alas, since pretty soon every state will be suing the banks now that the Nash Equilibrium of the settlement negotiations has collapsed and it is every state for itself, GMAC better figure out a way to make money doing something besides lending as very soon the "legal environment" in every state is about to get "increasingly difficult."

Naturally, MA AG Martha Oakley had some choice words for GMAC in the aftermath of this idiotic announcement. From the WSJ:

Ms. Coakley, responding in a statement to GMAC's move, said in order to do business in the state GMAC has to follow the law before foreclosing on homeowners. She said she was looking to hold the lenders accountable for actions and enforce the strict foreclosure laws in the state. "With today's action, it appears GMAC has acknowledged it has a problem following those laws and being held accountable for doing so," Ms. Coakley said. A spokeswoman for Ally wasn't immediately available to respond to Ms. Coakley's comment.

As a reminder...

The Massachusetts civil suit, filed in Superior Court in the state's Suffolk County, alleges that the banks' foreclosure practices were unlawful and deceptive. The suit, which doesn't specify damages, contends the banks—Bank of America Corp., J.P. Morgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally—charted a "destructive path by cutting corners and rushing to foreclose on homeowners without following the rule of law."

The banks have in the past acknowledged problems with their foreclosure processes, but said they haven't found anyone who was wrongly foreclosed upon.The robo-signing practice involves people who allegedly signed many foreclosure documents without properly reviewing them.

Yet mortgage lending is merely a small portion of GMAC's book, which prides itself in lending out subprime loans to GM car buyers.

The mortgage business, a much smaller portion of Ally's total revenues than auto lending, forced a $471 million write-down in the third quarter because of historically low interest rates

We can't wait to discover how long it takes before comparable robosigning practices are discovered when it comes to car loans for GM's NINJA customers, and the 74%-government owned lender is forced to stop transacting in any lending venue.Which of course would mean that every car sale by GM would end up on some dealer's showroom as channel stuffing moves to represent 100% of GM's monthly "sales."

As for GMAC's decision, it is more than clear that the second any lender is challenged on their MO, they will high tail it instead of risk suffering further liabilities.

"It also sends a signal to Massachusetts and other states that if you make it difficult for lenders to act they will take their business elsewhere," Mr. Cecala said of GMAC's decision. 

And that in a nutshell is how US banks operate: break the law until for some crazy reason you can no longer break the law.

Then just high tail it out of Dodge post haste.

end.

The ultimate collapse of the global economy will occur when the 3 big French banks bite the dust.

These guys have gorged themselves on PIIGS debt greater than the sovereign GDP of France 

itself.  I will leave you today with this great piece from Austrian school of Economics, Gary North:

French Fried Banks By: Gary North

-- Posted Friday, 2 December 2011 | Share this article | Source: GoldSeek.com Ben Bernanke is in panic mode. The November 30 coordinated announcements of six central banks regarding their intervention into the currency markets was exactly that – coordinated. If you think it was coordinated by anyone other than Bernanke, you are out of touch with reality. (Test: name the heads of at least two of the other five central banks.) As I shall argue, this was an action preliminary to (1) Angela Merkel's December 2 speech to the German parliament, which is preliminary to (2) the next Eurozone summit, scheduled for the weekend of December 9, which is preliminary to (3) a coordinated violation of the two treaties that created the European Union, which is hoped will (4) pressure the European Central Bank to buy newly created Eurobonds issued illegally by the EU, in order to (5) raise enough euros fast enough to buy Italian government bonds before (6) the Italian government misses interest payments, which may (7) bankrupt the largest French banks, which could (8) trigger a worldwide financial panic. In short, Bernanke and his peers are in a pre-panic panic. DECIPHERING THE ANNOUNCEMENT This was an announcement of a very specific kind. Ninety minutes before the American stock markets opened, the six central banks said that they would increase the availability of money. The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity. In short, The FED assured us, they were acting on behalf of the best interests of common people around the world. They were doing this in the name of the People. "What's good for the People is good for central bankers." The problem is, they were silent on why, exactly, the strains of the supply of credit was threatening the People. On November 29, the interest rate for 90-day U.S. Treasury bills was 0.01%, or one one-hundredth of a percent, which is the lowest it has been in history, basically. To be honest, I do not regard this as evidence of a strain in the financial markets. This raises these questions: "Which financial markets? Paying what rates? Why?" In the good old days, meaning earlier than November 30, "strain in the credit markets" meant a frantic rush by investors and speculators to purchase a financial asset. The asset's price rises rapidly, which is what happens when there is greater demand than supply for any asset. The U.S. dollar has been bumping around in relation to the euro all year. There has been no indication of a frantic rush to sell euros. On January 1, 2011, a euro bought $1.34. On November 29, a euro had fallen in price to $1.33. That was not what I would call a strain on the euro market. We are not talking even nickels and dimes here. We are talking pennies . . . in single digits. So, the question arises: Why was it necessary for a coordinated intervention?The FED explained: These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice. This is central bank gibberish. It refers to the practice of lending U.S. dollars for a period of time. These are central bank loans to other central banks. They are called central bank liquidity swaps. For a description, see Wikipedia. Say that one central bank needs dollars. It can swap its assets for dollar-denominated assets for a fixed period of time. In this case, the deadline is February 1, 2013. The five other central banks promised to supply liquidity, meaning their own currencies. As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorized through February 1, 2013. It can therefore supply dollars to those who demand them. So, the problem is the dollar. Better put, it may soon be the dollar. But, just in case, the central banks are willing to inflate. At this point, I can imagine an exchange between a confused caller and some call-in satellite radio investment show. But won't the free market do this? "Yes, but at a higher price." So, the coordinated action was a move to keep down the price of the dollar. "You've got it, Sherlock." So, the other five banks are working with the Federal Reserve to keep the dollar low, which will reduce their nations' exports to America. "That's one effect." But that means the central banks are acting to hurt their own export markets. "That is one effect." But central bankers never do this. "This time, they are." Why? "Because they are scared out of their wits." To get some indication of what the coordinated action is intended to accomplish, pay attention to this. In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly. So, the FED thinks there is a chance that there will be an increase in demand for dollars in other currencies: "to provide liquidity in any of their currencies if necessary." So, more than one of them are afraid of a panic-driven sell-off of their currencies. Are they all equally at risk? No. There has to be one targeted bank: the central bank of the currency that is being dumped by investors in order to buy any of the others. Which might that be? It is obvious: the European Central Bank. But the euro has been stable in relation to the dollar all year. It is obvious that Bernanke and five other central bankers think that this rosy scenario is about to end. U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses. The FED said that U.S. financial institutions are not having problems getting access to dollars. Furthermore, the FED "has a range of tools available to provide an effective liquidity backstop for such institutions." Then why the swaps? Why would five other central banks join in? Why should they need to worry about "such institutions"? Simple: the central bankers are not worried about U.S. financial institutions. They are worried about their own financial institutions. They have good cause to be worried. FRANCE'S BIG BANKS With a useful interactive graph in the New York Times, we can see which nations owe how much money to which other nations' commercial banks. The chart reveals something ominous. French banks are sitting on top of a mountain of Italian bonds. What if Italy decides to create what I have elsewhere called an "Iceland event"? It could be a disaster! Europe will then have French fried banks. Then the question arises: What will Sarkozy do? How will the French government get the money it needs to bail out its now-insolvent big banks? Who will lend it this money? The money needed will be euros. But, under the present laws governing the European Union, the ECB is not allowed to buy bonds of nations that are considered poor credit risks. France will be a bad credit risk if Italy skips interest payments, let alone defaults. Then what is the FED's problem? This: if Merkel does not get her government to accept instant inflation by the ECB, but without a revision of the Maastricht and Lisbon treaties, then she will go into the December 9 summit as a barrier to a quick decision by the ECB. The summit will be stuck. The threat of Italy's default is imminent. If the ECB does not act, and act fast, then the Eurozone will be seen as approaching a break-up. This means the euro may not survive. That fear may trigger a run on the euro: a mad dash to sell it and buy U.S. dollars. If dollars are not available at a price people are willing to pay, then there will be a rush to buy other currencies. This is the much-feared, long-denied domino effect. The orders to sell euros are placed by people with big money: hedge funds. They want instant conversion. They will also start looking for safe-haven banks located outside the Eurozone. They will fear a Lehman event. This is what an Iceland event can become if Italy defaults. It owes too much money. At that point, the ECB will be pressured to intervene to prop up the euro. Question: Intervene with what? With U.S. dollars. Where will it get these dollars? From the FED. This is what the coordinated announcement was designed to forestall. This is the "bazooka." TWO BAZOOKAS What is the bazooka? It was the word used by then-Secretary of the Treasury Hank Paulson to describe his promise that the Treasury would provide funding for the two visibly tottering, over-leveraged mortgage companies, Fannie Mae and Freddy Mac. He told Congress: "If you've got a squirt gun in your pocket, you may have to take it out. If you've got a bazooka and people know you've got it, you may not have to take it out." This has been identified as one of the 21 dumbest business moments in 2008. Two months later, both outfits went bust, and Paulson, on his own authority, nationalized them. The taxpayers picked up the tab. Michael Pento commented on this on November 14. But years after Secretary Paulson fired his bazooka, those formerly thought of as "safe" investments are now trading at just pennies a share. And just last week the government – or more appropriately the taxpayer – was forced to throw an additional $7.8 billion at the GSEs for the last quarter's losses. That was on top of the $169 billion they have already spent to rescue the black holes known as Fannie and Freddie since 2008. Pento then commented on the newly installed head of the ECB: "Similarly, Draghi now believes that the problem with European debt is fear, not one of insolvency." And just like Hank, Mario will soon learn that offering to purchase an unlimited amount of Italian debt does nothing in the way of bringing down the debt to GDP ratio. In fact, it has the exact opposite effect. It encourages more profligate spending, just as it also lowers the growth of the economy by creating inflation. What's even worse is that yields on Italian debt will reach much higher levels in the longer term. That's because the purchasers of sovereign debt have now become aware that their principal will be repaid with a rapidly depreciating currency. Therefore, the yield they will require in the future must reflect the decision to use inflation as a means of paying off debt. This is the first bazooka. The joint announcement of the six central banks is the second. This one tells the world that any rush out of euros into dollars will take place in an orderly way. A PANIC-DRIVEN SELL-OFF I assume that Prof. Bernanke understands the #1 principle of chapter 1 of any college-level economics 1 textbook: "When the price of any scarce resource falls, more is demanded (other things remaining equal)." This is described graphically in the famous intersecting S/Q supply and demand curves. The economist assumes that the reason why demand increases faster than supply does is because speculators believe that the price of an asset will rise. So, they buy it now. In the case of currencies, they sell one and buy the other. Why would speculators buy dollars and sell euros? Because they fear a major event that will threaten the euro as a currency. So far, the price of dollars in euros has not revealed any such imminent fear. It is clear that the central bankers think this lull in the storm is unlikely to last much longer. So, they hauled out the bazooka. What are they aiming at? They did not say. We can figure it out. TIMING IS EVERYTHING If French banks lose the value of Italy's bonds on their balance sheets, some of them will face bank runs. This could easily cause a system-wide banking panic in France. That panic could spread to other nations' commercial banks. This will not be allowed by the Powers That Be. They will find some loophole to bail out the banks. But they would prefer to implement it soon, before the dominoes start falling. Strategically, the public support of Italy is wiser. The Powers That Be don't want to face an Iceland event. At that point, they would have to save France's big banks. But the Powers That Be are the big banks. There will be panic, bank to bank, national banking system to national banking system. They want to forestall this. The first bazooka – the ECB saving Italy – needs a legal cover. There has to be an annulment of the treaties. The ECB will be hesitant to fire the bazooka if it is not given authorization. What if it isn't? What if the crisis hits Italy before the annulment can be codified by some cooperative announcement by the summit – an announcement that the members can get their governments back home to agree on? That's where the second bazooka comes in. The FED will supply dollars to the ECB, which can then sell them to investors fleeing the euro. Back to economics 1. If you can see that the supply of any asset will run out, and there is a rush to buy, it will do no good for the sellers to promise more of the sought-after asset. They will not be believed. The low price subsidizes skeptics to buy even more. At a lower price, more is demanded. So, the central bankers have to hope that there will not be a panic run out of the euro into the dollar. They are buying time. They have a deadline: February, 2013. So, they think that the panic will be short-lived. A show of force – a bazooka – may cut it off before it begins. Note: it didn't work for Paulson. They must assume that a panic will force the hand of the ECB to inflate and buy either Italian bonds (early) or the debt of the French government (late), which will lend money to the largest French banks. The second bazooka is supposed to lend credibility to the first one: the one the ECB could use to save Italy from default. The ECB's managers at present are afraid to invoke it. "We are not going to use it." If the ECB fails to act fast enough, Italy could cease making payments. A run on large French banks could begin. That will force the hand of the ECB. The central banks have handed the ECB lots of bazooka ammunition. CONCLUSION Bernanke and his peers are in panic mode. They are taking steps to deal with a run out of French banks and maybe out of the euro. They are in effect subsidizing this run, assuming that the ECB sells dollars to all buyers who bid. I think the goal is to sell to big banks only – those being hit by runs. They will do this because they don't think the panic will last beyond January 2013. We shall see how much longer Italy continues to make its interest payments. Long-term, Italy will default. There will be an Iceland event. I think there will be more than one. December 2, 2011 Gary North [send him mail] is the author of Mises on Money. Visithttp://www.garynorth.com. He is also the author of a free 20-volume series,An Economic Commentary on the Bible.

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I hope you all have a grand weekend.

I will see you Monday night

Harvey