Saturday, April 21, 2012

French elections tomorrow/Spanish and Italian 10 yr yields again rise/gold and silver hold

Good morning Ladies and Gentlemen:

Gold closed today up $1.50 to $1642.10.  Silver also rose by 13 cents to $31.64.
Europe was enthralled with German confidence higher together with a higher PMI number.  This lit a match under the Euro and all of Europe's bourses which in turn spilled over to the NYSE,  However on the other side of the coin, the Spanish 10 yr bond yield hit 6% early in the session and finished the day at 5.96%.  The Italian 10 yr bond rose in yield to 5.66%.

Let us now head over to the comex and assess trading today.

The total comex open interest rose by 339 contracts from 399,314 to 399,653.  Gold gained marginally on Thursday, so we gained a few longs. The front delivery month of April saw its OI fall from 501 to 329 for a loss of 172 contracts.  We had 142 delivery notices on Thursday so we probably lost another 30 contracts to 
cash settlements.  Nobody in their right frame of mind would put up 100% of the cash, hold that position
for almost the entire month and then roll without any compensation. The next delivery month is June and
here the OI rose by 1904 contracts from 223,620 to 225,524.  The estimated volume on Friday was very weak at
92,180 contracts.  The confirmed volume yesterday was much better at 174,637 as the bankers tried to orchestrate a gold and silver raid.

The silver open interest continues to confound our bankers.  Yesterday the OI rose by 894 contracts from 119,560 to 120,454.  These longs seem resolute in their conviction as they are quite impervious to rapid
price fluctuations in silver. The front non delivery month of April saw its OI remain constant at 55 despite 1 delivery notices yesterday.  We thus gained 1 contracts or  5,000 oz of additional silver standing. The next
big delivery month is May and we are exactly 1 week away from first day notice. Here the OI rests at 33,040 dropping by 2078 contracts from 35,118.  This is quite normal as those who wished to continue playing without taking delivery rolled to July. The estimated volume at the silver comex today was mediocre at 55,925 if you consider the HFT traders and the rollovers. The confirmed volume was marginally better yesterday at 59,830.

April 21.2012:

Withdrawals from Dealers Inventory in oz
Withdrawals from Customer Inventory in oz
94,450.000  (JPM
Deposits to the Dealer Inventory in oz

Deposits to the Customer Inventory, in
4,291.03 (Brinks)
No of oz served (contracts) today
(48)  48,000oz
No of oz to be served (notices)
281 (28,100)
Total monthly oz gold served (contracts) so far this month
(4683) 468,300
Total accumulative withdrawal of gold from the Dealers inventory this month
Total accumulative withdrawal of gold from the Customer inventory this month


We had considerable activity inside the gold vaults.  The dealer however so no action 
i.e. we had no dealer deposit and no dealer withdrawal.

The customer at Brinks received the following:  4,291.03 oz

The customer at JPMorgan withdrew the following:

96,450.000 oz which is exactly 3.0000 tonnes.
This looks to me like a paper withdrawal. 
We had the following adjustments:

1. We had an adjustment of 4291 oz of gold leaving the customer and entering the dealer at Brinks.
2. We had an adjustment of 50,104.599 oz of gold leaving the dealer and entering the
customer at HSBC.

The registered or dealer gold rests this weekend at 2.503 million oz or 77.8 tonnes of gold.

The CME notified us that we had 48 notices filed for 4800 oz of gold.
The total number of gold notices filed so far this month total  4683 for 468,300 oz
To obtain what is left to be served upon, I take the OI standing for April (329) and subtract out today's
delivery notices (48) which leaves us with  281 notices or 28100 oz of gold to be served upon.

Thus the total number of gold oz standing in this "official" delivery month of April is as follows:

468,300 (oz served)  +  28,100 (oz to be served upon)  =   496,400 oz or 15.44 tonnes of gold.
We lost 3000 oz to probable cash settlements.


April 21.2012

Withdrawals from Dealers Inventorynil
Withdrawals from Customer Inventory4966.3( Delaware,)
Deposits to the Dealer Inventorynil
Deposits to the Customer Inventory732,023.055 (JPM,Delaware.)
No of oz served (contracts)0 (zero)
No of oz to be served (notices) 54 (270,000)
Total monthly oz silver served (contracts)343 (1,715,000 )
Total accumulative withdrawal of silver from the Dealers inventory this month1,192,854.3
Total accumulative withdrawal of silver from the Customer inventory this month 6,435,327.8

Today we saw another big delivery into the silver vaults from the customer or eligible category.

The customer saw:

1. A big 100,983.255 oz enter Delaware vault.
2. A big 631,039.80 oz enter JPMorgan.

The customer withdrew the following from Delaware:

1. 4966.30 oz

we had one adjustment whereby the silver left the customer account and it entered the dealer account:

1.  142,176.01 oz left the customer at Scotia and entered the dealer at Scotia.
The registered or dealer inventory at the silver comex rests this weekend at  29.014 million oz.
The total of all silver rests at 138.74 million oz.

The CME notified us that we had zero notices filed on Friday, thus the total number
of notices filed so far this month remain at 343 for  1,715,000 oz of silver.
To obtain what is left to be filed upon, I take the OI standing for April (55) and subtract out Friday's
delivery notices (0) which leaves us with 55 notices left to be filed upon or  275,000 oz

Thus the total number of silver oz standing in this "non delivery" month of April is as follows;

1,715,000 oz served  +  275,000 oz to be served  = 1,990,000  oz
we gained an additional 5,000 oz standing.


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.

April 21:2012

Total Gold in Trust



Value US$:67,858,939,365.99

april 19.2012




Value US$:68,211,169,311.10

april 18.2012:




Value US$:67,963,805,401.74

april 17.2012:




Value US$:67,613,059,874.45

we neither gained nor lost any gold at the GLD.  Despite the massive volatility
in gold during these past few days we see no gold leaving the GLD vaults.


And now for silver April  21 2012:

Ounces of Silver in Trust307,108,488.100
Tonnes of Silver in Trust Tonnes of Silver in Trust9,552.14

april 19.2012

Ounces of Silver in Trust309,826,852.900
Tonnes of Silver in Trust Tonnes of Silver in Trust9,636.69

april 18.2012

Ounces of Silver in Trust309,826,852.900
Tonnes of Silver in Trust Tonnes of Silver in Trust9,636.69

april 17.2012

Ounces of Silver in Trust309,826,852.900
Tonnes of Silver in Trust Tonnes of Silver in Trust9,636.69

yesterday we lost a massive 2.718 million oz from the SLV vaults.
I wonder where this silver went?



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

1. Central Fund of Canada: traded to a positive 2.6percent to NAV in usa funds and a positive 2.9% to NAV for Cdn funds. ( april 21,.2012)

2. Sprott silver fund (PSLV): Premium to NAV  fell slightly   to  4.27% to NAV  April 21.2012 :
3. Sprott gold fund (PHYS): premium to NAV lowered to   1.15% positive to NAV April 21 2012). 


Friday night saw the release of the COT report:

First the gold COT

Gold COT Report - Futures
Large Speculators
Change from Prior Reporting Period

Small Speculators

Open Interest



non reportable positions
Change from the previous reporting period

COT Gold Report - Positions as of
Tuesday, April 17, 2012

Our large Specs:

Those large speculators that have been long in gold succumbed to the wishes of our bankers as they liquidated another 2296 contracts from their long side.

Those large speculators that have been short in gold took the opportunity and covered a rather large 7648 contracts.

Our commercials:

Those commercials who are close to the physical scene and are long in gold
pitched 2373 contracts from their long side.

Those commercials who have been perennially short in gold surprisingly added 
another 2669 contracts to their short side.

Small specs:

Those small specs that have been long in gold also succumbed to the wishes of the bankers
by pitching 1987 contracts from their long side.

Those small specs that have been short in gold covered a rather large for them 1677 contracts.

Conclusion: the players are vacating the comex (and you can visualize that in the lower OI)
  I would say that this COT report should be considered neutral as the bankers still have intent to supply the necessary non backed paper gold. Demand for the paper gold is tempered courtesy of the CME thugs and their cohort regulators who blissfully watch and do nothing as the banks orchestrate massive raids with non backed paper.

Silver COT Report - Futures
Large Speculators

Small Speculators

Open Interest



non reportable positions
Change from the previous reporting period

And now for our Silver COT:

Our large specs:  (my goodness)
Those large specs that have been long pitched a very very tiny 103 contracts 
from their long side.

Those large specs that have been short in silver covered a tiny 324 contracts 
from their short side.

Our commercials:

Those commercials who have been long in silver and close to the physical scene
added a rather large 2472 contracts to their long side.

Those commercials who have been perennially short in silver added another 2483 contracts to their short side.

The net commercial short interest rose a tiny 111 contracts (2484 minus 2372 equals 111 contracts).

Our small specs:

Those small specs that have been long silver liked the lay of the land as they added
a rather large 2777 contracts to their long side.

Those small specs that have been short in silver, added another 2887 contracts to their short side.

Conclusion: no real change from last week. It seems that everyone is holding their positions and the longs refuse to budge!!



Before heading into some of the "paper" stories of the day, here are some physical stories which will help you understand the nature of gold and silver market.  The first is a story on hedge fund manager James
Rickards who states that the USA government wishes a gradual rise in gold in order to devalue the dollar on a slow pace and with the co-operation of the BIS they rig the gold market to attain their wishes:

(courtesy GATA/James Rickards/Dan Ameduri of Future Money Trends)

Central banks rig gold market to ensure orderly rise, Rickards says

9:20p ET Friday, April 20, 2012
Dear Friend of GATA and Gold:
Market analyst and hedge fund manager James G. Rickards this week told Dan Ameduri of Future Money Trends that the U.S. government wants the gold price to rise gradually in an orderly way to devalue the dollar and works with other central banks through the Bank for International Settlements to rig the gold market. The interview can be heard at Future Money Trends here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.


James Turk explains how gold mining shares are the most undervalued with respect to gold.  He charts the following for 30 years.  Turk is an excellent statistical analyst.  However, when buying gold/silver equity shares you must be cognizant of the fact that the bankers are massively shorting these shares through naked shorting (they do not borrow the shares short).  They need not worry as the bankers own the clearing houses (DTCC) and they never cover.  This is why your gold equity shares are in the toilet:

(James Turk/KingWorldNews)

James Turk shows King World News 'most important chart for 2012'

8:32a ET Friday, April 20, 2012
Dear Friend of GATA and Gold:
GoldMoney founder and GATA consultant James Turk tells King World News that gold mining shares are the most undervalued relative to the gold price in 30 years. An excerpt from the interview is headlined "The Most Important and Extraordinary Chart for 2012" and it's posted at the King World News blog here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.


and finally from Jessie's American cafe.  He is stating what I have been telling you for these past few years:

(courtesy Jessie)


20 April 2012

Comex Silver Inventory Watch - Heading Into May-July Delivery PeriodThis could be interesting.

The only ways to obtain more deliverable inventory to meet a bulge in demand is to game the rules on the ability to take physical delivery or let the price rise.

I keep hearing stories of negotiated prices above the public quotes to buy off large delivery claims. I would be interested to know if anyone has proof of this.

The estimates I have seen of how much silver is real and how much is conflicting paper claims (leverage of unallocated claims) is up to 100:1.


 Let us now see some of the major paper stories which will effect the physical price of gold and silver.
The markets in Europe were lifted with a high German confidence number together with a reasonable PMI number. Europe got excited with a high UK retail sales rising at the fastest pace in a year.

(courtesy zero hedge)

Overnight Sentiment - German Confidence High In Spite Of Everything

Tyler Durden's picture

When in doubt how to cause an algorithmic buying spree, go for the lower common denominator: issue bills, or have a confidence index beat expectations. We had Spanish Bills cause a 200 point DJIA melt up earlier in the week, which means today we get confidence, specifically that of Germany's Ifo Business Survey. While Germany's various PMI may still be declining, and the market going nowhere in a hurry, not to mention international trade especially involving China sliding, if there is one thing German manufacturers have in copious amount, it is confidence. In April, the Ifo index edged higher in April to a level of 109.9 after 109.8 in March, defying consensus expectations of a decline to 109.5, and climbing to the highest level since last July. The assessment of current conditions also increased slightly to 117.5 after 117.4 (close to two standard-deviations above the long-term average). Business expectations remained stable at 102.7 (0.6 standard deviations above historical average).  And since algos only care about headlines on the margin this was enough to light a rocket under the EURUSD, however briefly and send it, and the US futures by implication, over 1.3200. Once again, even Goldman warns against reading much into these data: "The somewhat more muted signals coming from the PMI surveys caution against taking the Ifo at face value and there are not enough hard data available for Q1 that show which survey is the better guide at this point to the underlying momentum of the German economy." That's ok, A desperate for any good news Europe will take it.
Europe will also take soaring UK Retail sales, which paradoxically rose by 1.8% on expectations of a 0.5%, primarily due to the already documented government induced gas buying panic, and of course record warm weather. As Bloomberg explains: "U.K. retail sales rose at the fastest pace for more than a yr in March as the warmest March for half a century boosted purchases of clothing and gardening equipment, panic buying lifted auto-fuel demand."
These two events alone have set the mood for today's trading day, which has pushed futures to a level higher than before yesterday's material claims miss.


However on the other side of the coin, Spanish 10 yr bond yields crossed the 6% barrier together with the Italian 10 yr bond yield finishing the European session at 5.66% yield. The Spanish credit default swaps
are now 500 basis points in 5 yr CDS .

Spanish 10 Year Briefly Crosses 6.00% And Portugal Active

Tyler Durden's picture

European sovereigns peaked in spread yield early this morning before the surprisingly positive German confidence data but while France, Belgium, Austria and more significantly Portugal are all improving, Spain and Italy remain far less positive in this small downtrend after two days of significant selling pressure. Both are now around 35bps post the US non-farm-payroll data with Spain cracking back above 6% yield (and remains above 500bps in 5Y CDS). For those wondering what is going on in Portuguese spreads, it appears CDS-Cash basis traders are very active, according to desk chatter, with the spread between extremely 'cheap' bonds and CDS compressing to 7 month narrows here - bonds remain 232bps wide of CDS though as liquidity, ECB subordination, and CDS trigger concerns remain (though this is in from over 700bps difference at its worst in late January 2012).
Spanish 10Y yield broke 6% yield, remain trending wider/higher, and 5Y CDS remains above 500bps...

Broadly speaking European sovereigns are wider post non-farm-payroll still with Spain and Italy +35bps or so. Note Portugal's plunge in spreads...

but Portugal's spread compression, from what we hear, is being driven largely by active basis traders (simplified - these traders will buy Portuguese bonds and then buy credit protection in the CDS market against those bonds - this locks in (via some more complex asset swapping and hedging) the spread differential between the bonds and the CDS). The massive basis between Portuguese bonds and CDS remains well over 200bps (compared to +/-20bps for rest of Europe) but has been tempting enough since it broke over 700bps. This theoretically risk-free spread carry is however (post-Greece) now carrying some event risk premia on the basis of - should Portugal need 'restructuring' what will that look like and will it trigger CDS in an appropriate way...

The illiquidity in Portuguese bonds in general means that any additional marginal bid from basis traders provides a false hope in the optics of bond spread compression.



Here is the closing yield on the Spanish 10 yr bond:


Add to Portfolio


5.963000.03800 0.64%
As of 04/20/2012.


Here is the closing Italian 10 yr bond yield:

Italy Govt Bonds 10 Year Gross Yield

 Add to Portfolio


5.663000.04900 0.87%
As of 04/20/2012.


I pointed out to you on Thursday, the huge ramifications of the high Target 2 imbalances with respect to Germany and the rest of the PIIGS nations.  Germany has funded the PIIGS purchases of around 625 billion euros.  If the Euro breaks up, then the German Bundesbank must soak up a huge 25% equivalent loss to their GDP.   The German GDP is around 3.25 trillion euros; thus a loss of 625 billion will equate to 25% of their GDP as this would certainly put a stake to its heart. No wonder 82 million citizens are furious when they finally understood who was funding who with respect to PIIGS nations through target 2. If you add in other funding requirements that Germany must fork over, the losses could end up costing Germany 56% of its GDP or  1.83 trillion euros.

This is an important read and I ask you to refresh what you learned on Thursday with the paper written by Wolf Richter on Target 2:

(courtesy zero hedge)

Why German Tempers Are Finally Boiling

Tyler Durden's picture

Back in July of last year, before it was even remotely acknowledged (and in fact it was roundly denied) that Greece would set a debt haircut precedent, which despite all the rhetoric has merely given all the other PIIGS ideas about debt haircuts of their own (and how to achieve these as fast as possible), Zero Hedge was the first media outlet to cut to the truth, with "The Fatal Flaw In Europe's Second "Bazooka" Bailout: 82 Million Soon To Be Very Angry Germans, Or How Euro Bailout #2 Could Cost Up To 56% Of German GDP." Note we said "soon to be" because it was obvious that the modestly complicated math of Germany bearing the cost of keeping the Eurozone alive would take quite a while to trickle down to the common German man. We did, however, underestimate the Bundesbank's mathematically helping hand in the form of one chart, most recently observed here, which makes the math far clearer than anything we could ever do to explain: namely the exponentially grown Bundesbank TARGET 2 balance, which is essentially Germany's way to fund, via the ECB, account imbalances across the Eurozone (explained in gory detail here), and put the national economy on the hook in ever greater amounts to a sudden and disastrous collapse of the Eurozone, because should a fat tail even occur, a solid 25% of German GDP would be Corzined. Today, The Telegraph's AEP does a bring down on the current status of this one biggest wildcard for Europe's future: namely, German anger, or as he puts it "tempers" which it appears have finally begun to boil.
From the Telegraph:
Controversy is raging in Germany over soaring "payments" by the Bundesbank to shore up Europe's monetary system and cope with a tidal wave of capital flight from southern Europe.

Professor Hans-Werner Sinn, head of Germany's IFO Institute, said German taxpayers are facing a dangerous rise in credit risk from a plethora of bail-out schemes. "The euro-system is near explosion," he told Austria's Economics Academy on Thursday.

Dr Sinn said Germany is on the hook for much of the €2.1 trillion (£1.72 trillion) in rescue measures for EMU debtors - often by the back-door - that will saddle Germans with ruinous losses one day.

"It is a horror scenario," he said, warning that the euro system is splitting friendly countries into blocs of mutually hostile creditors and debtors, exactly the opposite of what was hoped.

Earlier this week, the Foundation for Family Business in Munich filed a criminal lawsuit against the Bundesbank, accusing the board of disguising the true scale of risk born by German citizens.

The furore follows a sharp jump in the Bundesbank's "Target2" claims within the European Central Bank's internal payment network from €547bn in February to €616bn in March. Bundesbank claims have risen sixfold since 2008, a rise mirrored in Holland and Luxembourg.
To paraphrase Hans Gruber loosely, "You asked for miracles, Theo, I give you the Bundesbank"

Ironically, that one chart achieved more than we could ever hope to do in conveying the seriousness of the situation.
There has been a dramatic rise in outflows from Spain, despite the ECB's €1 trillion blast of three-year liquidity. The exodus indicates that the ECB action has so far failed to restore basic trust in Spain's banks.

Critics say Target2 allows the vast sums to pile up for ever, unlike the US "FEDwire" that mandates the settlement of regional imbalances within months.

The Target2 saga has become a daily theme in the German press, with Dr Sinn emerging as a television superstar. The coverage is eroding confidence in the euro. The latest poll shows that 56pc of Germans want a return to the D-Mark.

Bundesbank chief Jens Weidmann has fanned the flames by demanding collateral from weaker states for Target2 transfers. The imbalances are not a problem "as long as the eurozone stays together", he said.
Of course, there are those who still think that debt gets repaid at par even when collateralized with doubly reused condom wrappers:
Professor Karl Whelan from University College Dublin said the debate is absurd, whipped up by populists and the German media. "If the euro breaks up, there are still assets to go along with the liabilities. The likely outcome would be a 'Bretton Woods weekend' with a gentleman's agreement to carve up the losses."

"Even if countries told each other to go to Hell, the euro would simply cease to exist and the Bundesbank could write a cheque to itself. There would be no inflation and no loss to the German taxpayer," he said.

"We live in a world of fiat currencies, not the Gold Standard. People making these claims don't understand how a central bank works," he said. His views are shared by ECB experts.
Oh they understand all right: they understand that the biggest problem in Europe - namely that it has run out of money good assets - is now the problem. And now even the common people get it.
However, the issue has taken on a life of its own in German politics. There is deep concern among German officials that ECB monetary stimulus will leak into inflationary credit within Germany, which has the lowest unemployment in 20 years and an incipient housing boom.
As we pointed out last week, now even Soros is involved.
Mr Soros said EU politicians are "leading Europe to its ruin" by trying to enforce misguided contraction on the EMU weaker states, adding that he would "bet against the euro" if he were still an active investor. His Quantum Fund famously made €1bn betting against sterling and the lira in 1992, a gamble triggered by Bundesbank comments at the time.

Even defenders of Target2 admit that such vast transfers need proper scrutiny. The International Monetary Fund said the system is a back-door means of financing the trade deficits of Italy, Spain, Ireland and Portugal.

Dr Sinn's IFO Institute has refused to back down. Its latest report said Target2 violates democracy. "Who are the losers from this process? The savers in those remaining European countries that still have sound economies," it said. They have been pledged their assets "without their knowledge or consent".

"This enormous international credit should have been subjected to the parliaments of Europe," it said.
In the meantime, and as also suggested here first, the best way to bring the current flawed system to a crushing collapse is ironically to do nothing. Courtesy of exponential charts like the one above, which by definition are unsustainable, two things will happen: 1) what is unsustainable will not be sustained, and will crash and burn, and 2) the more the common people look at charts that go vertical, and guarantee massive net worth losses in the future, the more tempers will boil, until finally the anger takes to the streets.


In this UKTelegraph commentary by Ambrose Evans Pritchard, he discusses George Soros' view that the Euro is cooked and he has launched an all out war against the Bundesbank.  He too as stated that Germany is on the hook for 25% of its GDP in financing the PIIGS spending habits.

(courtesy Ambrose Evans Pritchard/UKTelegraph)

George Soros and the Bundesbank’s Patriotic Putsch ... Coming to a head

By Ambrose Evans-Pritchard
Last updated: April 19th, 2012
London Telegraph

George Soros has launched all-out war against the Bundesbank.

In his latest Le Monde interview he said that if he were still an active investor, he would now "bet against the euro", at least until there is a change in European leadership or policy.

The euro threatens to destroy the European Union and, with the best of intentions, the leaders are leading Europe to its ruin by trying to impose inappropriate rules.

The introduction of the euro has led to divergence instead of bringing about convergence. The most fragile countries of the eurozone have discovered that they are in a Third World situation, as if they were indebted in a foreign currency, with a crucial effect that there is a real risk of default. Trying to make them respect rules that don’t work just makes matters worse. Sadly, the authorities don’t understand this.

Mario Draghi has launched extraordinary measures with his €1 trillion injection of liquidity through three-year loans. But the effect of this operation has been broken by the counter-attack of the Bundesbank.

Watching the growth of the ECB’s balance sheet, the Bundesbank has realised that it risks heavy loses if the euro blows up and is therefore opposed to the (LTRO) policy. Let us hope that this does not become a self-fulfilling prophesy.

It follows a Süddeutsche Zeitung interview last Friday in which he accused "Bundesbank bureaucrats" of standing ready to smash the euro, exceeding their constitutional and political authority.

Mr Soros has some expertise in this field. His cue for launching a speculative attack – with others – on Sterling and the Lira in September 1992 came after Bundesbank chief Helmut Schlesinger told Handelsblatt that the two currencies were overvalued within the ERM peg. There would have to be a realignment.

It was a clear signal that the Bundesbank did not intend to intervene in the markets to defend the ERM pegs – as it later did for France. Mr Soros already had a $1.5bn short position on sterling. He upped the ante massively the next morning. "Go for the jugular," he told his partner Stanley Druckenmiller.

The story is vividly retold in Sebastian Mallaby’s new book More Money Than God: Hedge Funds and the Making of a New Elite.

We can argue over the conduct of the Bundesbank in that episode. Technically, the bank failed to uphold its ERM obligations. But that is hardly the point. It was being asked to support an untenable arrangement.

The British government had locked the pound to the D-mark with a mixture of ineptitude and bad luck just as the economic cycles in the two countries diverged massively – with Germany going into overheating, and the UK facing a property slump after the Lawson boom. (It was not the exchange rate that was wrong: it was the interest rate – crucial distinction). Bundesbank actions were a liberation for Britain. Soros deserves a knighthood for his part. Dr Schlesinger should be given an honorary peerage.

The current situation is more ambiguous, and much more dangerous.

Jens Weidmann, the current Buba chief, gave an ultra-hawkish interview to Reuters on Wednesday that borders on caricature. He seems to suggest that the fast-escalating crisis in Spain and Italy is not his responsibility in any way, that it has nothing to do with the Bundesbank or the European Central Bank.

 "We shouldn’t always proclaim the end of the world if a country’s long-term interest rates temporarily go above 6%," he said.

 "That is also a spur for policy-makers in the countries concerned to do their homework and to win back (market) confidence through the pursuit of the reform path."

We have been here before. He made such comments last year as the Spanish and Italian bond markets blew up. On that occasion Mario Draghi managed to repair the damage, launching his LTRO blitz to prevent an imminent collapse of the Club Med banking systems – or a "very, very major credit crunch" as he put it – which gained four or five months of peace.

Mr Weidmann says now that ECB’s bond buying scheme has reached its "limits" and that it is not the job of the central bank to "ensure a particular interest rate level for a particular country."

Frankly, I think such ideological eyewash is well past its sell-by date, and so does the policy firmament across the world, from the IMF to the Fed to the Chinese authorities. Empty legalism and academic sophistry hardly address the issue at this late stage of a systemic crisis in which Germany is and always has been a central actor.

(Yes, there is a poker game going on: the tough talk is supposedly aimed at holding Spanish and Italian feet to the fire. But such a strategy presumes that Spain can possibly carry out the sort of fiscal shock therapy ordered by the EU – under the current policy settings – with unemployment already at 23.6pc and bad loans in the banking system at 8.2pc and rising fast)

It is not clear to me what Mr Weidmann is trying to achieve, unless the intention is to bring about a definitive and dramatic crisis as soon as possible.

The Bundesbank is now €616bn underwater on Target2 credits to the rest of the ECB system (basically transfers to Club Med and Irish central banks to offset capital flight). It has jumped €68bn in one month.

If EMU holds together, the credits are just an accounting detail. Any loses would be divided between the family of central banks, so even a Greek exit could be managed.

But if Germany leaves, those claims would be difficult to enforce, or even unenforceable. The German taxpayer would face very large losses. Ergo, the longer this goes on, the longer the Target2 imbalances build up, the harder it is for Germany to extract itself from the euro.

As one German banker told me, Target2 is the ring through Germany’s nose. It ropes the cash cow.

So, if the monetary hardliners at the Bundesbank do indeed wish to force an outcome, they have to act very soon or the door will shut will for ever.

No wonder Mr Soros follows Mr Weidmann’s utterings with close attention.

There are those who suspect that the Bundesbank is engaged in some sort of Putsch/patriotic resistance. I reserve judgment on this, but if so it is a very strange state of affairs.

Who is running Germany? Is the Federal Chancellor in charge of the country’s foreign policy and strategic destiny, answering to the Bundestag?

Or is the Bundesbank answering to what it believes to be a higher master – the German constitution and the Basic Law – invoking the rulings of the Verfassungsgericht against the encroachments of EU treaty law (which ultimately has a lower juridical status – indeed – no juridical status at all since it is merely treaty agreement)?

Who here is the legitimate defender of the German sovereign nation, built on the Grundgesetz?

It is a remarkable spectacle. You can certainly argue that Mr Weidmann is acting as the final defender of the German nation state, that he is in effect upholding the post-war dispensation that has been the anchor of German freedom and democracy for half a century. He is entirely right to fear that the mechanisms of EMU are subverting Germany’s system of government.

Yet, it is also clear that his attitude threatens to detonate a nuclear bomb. Can Chancellor Merkel let the Bundesbank do this to monetary union? Or is she the one overstepping constitutional bounds, betraying Germany democracy?

Tough call. German readers are better qualified to answer.

I suspect that the realities of the eurozone have reached a point where only two options exist:
  1. The folding together of the eurozone states, with a debt pool, shared budgets, joint taxation, and fiscal union.  In other words, the nation states must abolish themselves (leaving only the shell), and Germany must cease to exist in any meaningful form. This was always the inherent logic of EMU. We are coming close to the moment when it must be decided.
  2. The system blows apart. From a German point of view, Target2 means if the deed were done "twere better it were done quickly". Perhaps very quickly.

All else is Quatsch and wishful thinking. Whatever the cloak of foggy rhetoric, Mr Weidmann seems to understand that elemental point perfectly. Should we cheer him on, or should we tremble?


On Thursday night I highlighted to you the dangers in the new European Stabilization Mechanism.
Now Ellen Brown weights in on this dangerous vehicle.  She details  how Goldman Sachs railroaded Europe in accepting this vehicle as their bailout vehicle. Instead it will totally annihilate them.

The following is essential reading material:

(courtesy Ellen Brown)

The European Stabilization Mechanism, Or How Goldman Sachs Captured Europe

April 19, 2012

In September 2008, Henry Paulson, former CEO of Goldman Sachs, managed to extort a $700 billion bank bailout from Congress.  But to pull it off, he had to fall on his knees and threaten the collapse of the entire global financial system and the imposition of martial law; and the bailout was a one-time affair.  Paulson’s plea for a permanent bailout fund—the Troubled Asset Relief Program or TARP—was opposed by Congress and ultimately rejected.
By December 2011, European Central Bank president Mario Draghi, former vice president of Goldman Sachs Europe, was able to approve a 500 billion Euro bailout for European banks without asking anyone’s permission.  And in January 2012, a permanent rescue funding program called the European Stability Mechanism (ESM) was passed in the dead of night with barely even a mention in the press.  The ESM imposes an open-ended debt on EU member governments, putting taxpayers  on the hook for whatever the ESM’s Eurocrat overseers demand.
The bankers’ coup has triumphed in Europe seemingly without a fight.  The ESM is cheered by Eurozone governments, their creditors, and “the market” alike, because it means investors will keep buying sovereign debt.  All is sacrificed to the demands of the creditors, because where else can the money be had to float the crippling debts of the Eurozone governments?
There is another alternative to debt slavery to the banks.  But first, a closer look at the nefarious underbelly of the ESM and Goldman’s silent takeover of the ECB . . . .
The Dark Side of the ESM
The ESM is a permanent rescue facility slated to replace the temporary European Financial Stability Facility and European Financial Stabilization Mechanism as soon as Member States representing 90% of the capital commitments have ratified it, something that is expected to happen in July 2012.  A December 2011 youtube video titled “The shocking truth of the pending EU collapse!”, originally posted in German, gives such a revealing look at the ESM that it is worth quoting here at length.  It states:
The EU is planning a new treaty called the European Stability Mechanism, or ESM:  a treaty of debt. . . . The authorized capital stock shall be 700 billion euros.  Question: why 700 billion?  [Probable answer: it simply mimicked the $700 billion the U.S. Congress bought into in 2008.] . . . .
[Article 9]: “. . . ESM Members hereby irrevocably and unconditionally undertake to pay on demand any capital call made on them . . . within seven days of receipt of such demand.”  . . . If the ESM needs money, we have seven days to pay. . . . But what does “irrevocably and unconditionally” mean?  What if we have a new parliament, one that does not want to transfer money to the ESM?  . . . .
[Article 10]: “The Board of Governors may decide to change the authorized capital and amend Article 8 . . . accordingly.”  Question:  . . . 700 billion is just the beginning?  The ESM can stock up the fund as much as it wants to, any time it wants to?  And we would then be required under Article 9 to irrevocably and unconditionally pay up?
[Article 27, lines 2-3]: “The ESM, its property, funding, and assets . . . shall enjoy immunity from every form of judicial process . . . .”  Question:  So the ESM program can sue us, but we can’t challenge it in court?
[Article 27, line 4]: “The property, funding and assets of the ESM shall . . . be immune from search, requisition, confiscation, expropriation, or any other form of seizure, taking or foreclosure by executive, judicial, administrative or legislative action.”  Question: . . . [T]his means that neither our governments, nor our legislatures, nor any of our democratic laws have any effect on the ESM organization?  That’s a pretty powerful treaty!
[Article 30]:  “Governors, alternate Governors, Directors, alternate Directors, the Managing Director and staff members shall be immune from legal process with respect to acts performed by them . . . and shall enjoy inviolability in respect of their official papers and documents.”   Question:  So anyone involved in the ESM is off the hook?  They can’t be held accountable for anything? . . . The treaty establishes a new intergovernmental organization to which we are required to transfer unlimited assets within seven days if it so requests, an organization that can sue us but is immune from all forms of prosecution and whose managers enjoy the same immunity.  There are no independent reviewers and no existing laws apply?  Governments cannot take action against it?  Europe’s national budgets in the hands of one single unelected intergovernmental organization?  Is that the future of Europe?  Is that the new EU – a Europe devoid of sovereign democracies?
The Goldman Squid Captures the ECB
Last November, without fanfare and barely noticed in the press, former Goldman exec Mario Draghi replaced Jean-Claude Trichet as head of the ECB.  Draghi wasted no time doing for the banks what the ECB has refused to do for its member governments—lavish money on them at very cheap rates.  French blogger Simon Thorpe reports:
On the 21st of December, the ECB “lent” 489 billion euros to European Banks at the extremely generous rate of just 1% over 3 years.  I say “lent”, but in reality, they just ran the printing presses. The ECB doesn’t have the money to lend. It’s Quantitative Easing again.
The money was gobbled up virtually instantaneously by a total of 523 banks. It’s complete madness. The ECB hopes that the banks will do something useful with it – like lending the money to the Greeks, who are currently paying 18% to the bond markets to get money. But there are absolutely no strings attached. If the banks decide to pay bonuses with the money, that’s fine. Or they might just shift all the money to tax havens.
At 18% interest, debt doubles in just four years.  It is this onerous interest burden, not the debt itself, that is crippling Greece and other debtor nations.  Thorpe proposes the obvious solution:
Why not lend the money to the Greek government directly? Or to the Portuguese government, currently having to borrow money at 11.9%? Or the Hungarian government, currently paying 8.53%. Or the Irish government, currently paying 8.51%? Or the Italian government, who are having to pay 7.06%?
The stock objection to that alternative is that Article 123 of the Lisbon Treaty prevents the ECB from lending to governments.  But Thorpe reasons:
My understanding is that Article 123 is there to prevent elected governments from abusing Central Banks by ordering them to print money to finance excessive spending. That, we are told, is why the ECB has to be independent from governments. OK. But what we have now is a million times worse. The ECB is now completely in the hands of the banking sector. “We want half a billion of really cheap money!!” they say.  OK, no problem. Mario is here to fix that. And no need to consult anyone. By the time the ECB makes the announcement, the money has already disappeared.
At least if the ECB was working under the supervision of elected governments, we would have some influence when we elect those governments. But the bunch that now has their grubby hands on the instruments of power are now totally out of control.
Goldman Sachs and the financial technocrats have taken over the European ship.  Democracy has gone out the window, all in the name of keeping the central bank independent from the “abuses” of government.  Yet the government is the people—or it should be.  A democratically elected government represents the people.  Europeans are being hoodwinked into relinquishing their cherished democracy to a rogue band of financial pirates, and the rest of the world is not far behind.
Rather than ratifying the draconian ESM treaty, Europeans would be better advised to reverse article 123 of the Lisbon treaty.  Then the ECB could issue credit directly to its member governments.  Alternatively, Eurozone governments could re-establish their economic sovereignty by reviving their publicly-owned central banks and using them to issue the credit of the nation for the benefit of the nation, effectively interest-free.  This is not a new idea but has been used historically to very good effect, e.g. in Australia through the Commonwealth Bank of Australia and in Canada through the Bank of Canada.
Today the issuance of money and credit has become the private right of vampire rentiers, who are using it to squeeze the lifeblood out of economies.  This right needs to be returned to sovereign governments.  Credit should be a public utility, dispensed and managed for the benefit of the people.
To add your signature to a letter to parliamentarians blocking ratification of the ESM, click here
Ellen Brown is an attorney and president of the Public Banking Institute,  In Web of Debt, her latest of eleven books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are and

Mark Grant gives us a preview of what France will look like under a Hollande presidency:

1. a tax rate of 75% for the wealthy.
2.a renegotiation of a EU fiscal pact. increase in the minimum wage
4.more government spending
5.a decrease in the retirement age
6. an increase hostility to the banks.

In other words completely opposite to Sarkozy.  This will certainly make a difference in France:

(courtesy Mark Grant)

Oui Monsieur La Difference

Tyler Durden's picture

From Mark Grant, author of Out Of the Box,

No, I will not be speaking of THAT difference but of the difference between the two contenders for the French presidential elections. If I spoke of the other difference I would send my compliance people into cardiac arrest and I am not that unkind on a Friday morning in the spring. In all of the polls for the last six months the socialist, Francois Hollande, is ahead in the run-off election between 6 and 16 points. The first bout is April 22 and the Concours d’Elegance is May 6. Now no one that is not French can understand the French well. The psychology of this nation is singular and lies somewhere between the puffed out chest when uncorking a Chateau Petrus and an air of casual indifference when sitting at Café Lipp in Paris and regarding the citizens of the various arrondissments parading along with that certain disdain which can only be worn by the people of Gaulle; Charles and otherwise.

“Give me six lines written by the most honorable of men, and I will find an excuse in them to hang him.”

                                                                       -Cardinal Richelieu

What Mr. Hollande’s win will mean for France is something to be carefully considered. A tax rate on the wealthy at 75%, renegotiate the EU fiscal pact, raise the minimum wage, impose more governmental spending, a decrease in the retirement age and a hostility directed at the banks and other financial institutions that may be described as combative or perhaps virulent and a complete change in attitude and direction from Napoleon’s strutting reincarnation also known as Sarkozy. If Hollande wins then what France was will not be what it is going to be and it is not a marked shift but a violent upheaval not only for France but for the European Union. There is no love lost between Hollande and Merkel and policies of the two nations will not be countries but worlds apart. In fact, in the EU-17, Germany will be quite isolated and the rancor that will increase will strain the political construct past what they are experiencing at present. 

"Is it to be thought unreasonable that the people, in atonement for wrongs of a century, demand the vengeance of a single day?"


On the Horizon

The G-20 meets this weekend as Ms. Lagarde tries to raise more money for the war chest at the IMF. Some will be forthcoming though there is notable pushback to determine its use by Canada, the United States and some other nations. The outcome of this meeting will be interesting and probably determine the open on Monday. One other interesting note is the upcoming EU meeting where France and Germany will propose the reintroduction of border controls which flies squarely in the face of stated European Union policies for the past decade. No one is paying particular attention to this announcement but it is a clear sign of Federalism on the wane and of Nationalism coming to the fore. If no one on the Continent is going to be European then the price of this game of chance seems rather extreme. It would have been much easier for the Germans to take up “Strip/Risk.” They could have just said, “I have taken over Greece, Portugal and Ireland and now give me your blouse.”


This Sunday is the first part of the French election.  The polls are now indicating that Hollande will win the May 6 election with a 58% to 42% plurality.

(courtesy ANI)

Sarkozy falls further behind Socialist challenger Hollande ahead of French presidential elections

Paris, Apr 19 (ANI): French President Nicolas Sarkozy has lost ground to his Socialist Party opponent, Francois Hollande, just days before the first round of voting in the presidential election, a latest poll has revealed.
The CSA poll shows that 24 percent of potential voters would prefer Sarkozy in Sunday's first round if elections were held now, while 29 percent would choose Hollande, the Wall Street Journal reports.
The survey also shows Hollande would win over Sarkozy 58 to 42 percent in a likely second-round runoff, which is scheduled for May 6.
The poll results seem to claim that most French voters weren't in support of Sarkozy's efforts to end the Euro-Zone crisis on the economy, and felt much convinced that Hollande could end up being a better choice as a president.
Mr. Sarkozy's position on the European Central Bank now claims that he would push for the bank to have more growth-stimulating muscle if elected, which clearly represented a shift for the incumbent, who advocated for a more activist central bank early in his presidency and also matched the ideologies of his socialist rival, Hollande.
The poll predicts that whoever wins the French election will try to reshape the debate within the Euro Zone. (ANI)


A Hollande government in France will throw the Euro to the brink of extinction. Hollande wishes to eliminate the middleman banks who are making the 5% carry trade  (and losing on the trade as bond values decline greater than the yield gain) and have the central ECB loan directly to governments.  This of course, will alienate Germany as they see hyperinflation as the resultant action on this debt monetization.
This is another great commentary by Wolf Richter which will give you an idea on what is going on behind the scene with France and Germany:

(courtesy Wolf

Pushing The Euro To The Brink

testosteronepit's picture

“There is no more risk that the euro will implode,” declared French President Nicolas Sarkozy on Friday, two days before the first round of the presidential election. Europe is “recovering,” he said desperately. Thanks to his leadership. To make sure that Europe doesn’t fall back into the hole, the French would need to reelect him. A few weeks ago, he’d proclaimed “The crisis is finished.” But Spain may require an emergency bailout of such proportions that the IMF is already collecting hundreds of billions of dollars from around the world. Then there is Italy....
However, François Hollande, the socialist challenger and likely winner, has a prescription for fixing the very crisis that Sarkozy declared finished, he confirmed on Friday. If elected on May 6, he would immediately set out to implement his ambitious plan—though it might lead to the break-up of the Eurozone.
He’d renegotiate the fiscal union pact, a hastily drawn-up document that is supposed to induce budgetary discipline into the 25 governments that signed it in even greater haste. The pact is German Chancellor Angela Merkel’s grand oeuvre. She forced it through at the height of the crisis. But Hollande wants to include provisions for additional government spending and borrowing, his “measures of growth,” and he’d block ratification of the pact if he had to.
Then he hammered home just how serious he was in pushing the ECB to print money and lend directly to the governments. “It’s incredible that the ECB floods the market with liquidity,” he said, and that the “banks borrow from it at 1% and re-lend to the States, specifically Spain, at 6%.” Oops, he saw the 5% spread. A breath of fresh air. A politician who looks at the numbers!
“There comes a moment when one can no longer accept phenomena of that kind of income,” he added with an eye on the €1 trillion that the ECB lent to the banks via its Long Term Refinancing Operations. “It would be more judicious, more efficient, and faster for the ECB to lend” directly to governments “as first and last resort.” In other words, he wants to cut out the middlemen, namely the banks. And he has his eyes open: “I know that the Germans are totally hostile to this; well then, this will be part of the negotiation.”
But he is dreaming; in Germany, frustration with the ECB’s bond purchases caused two well-regarded German central bankers, Axel Weber and Jürgen Stark, to resign from the ECB last year. The €1 trillion LTRO actions have heated up opposition to the ECB. And now, the battleground is the “Target 2” balance of €800 billion, of which €635 billion is owed the Bundesbank. Long swept under the rug, then declared harmless while mushrooming unchecked, it is now inciting a rebellion of sorts in Germany. Read.... Bundesbank Gets Sued for Perfidy.
Thus, the conflicts between the ECB and the Bundesbank, and now the German government, can no longer be bridged with soothing words. Former German central bankers are shaking their heads in dismay, wondering if ECB President Mario Draghi will ever draw a line as the ECB, tangled up in sovereign debt and bank bailouts, is abandoning its treaty-set monetary stability priority—and its independence.
Exactly what the Southern European countries, including Draghi’s Italy and Hollande’s France, demand. They’re in the majority. An eternity ago, the Bundesbank with its 27.1% share practically controlled the ECB. No longer. Yet Germany has its own issues. After nearly two decades of declining real wages, a stagnating economy, and high unemployment, optimism has set in and is driving internal demand, even as the powerful export machine has slowed down a notch. Inflation is raising its ugly head. And central bankers see a nascent housing bubble—and the blood-letting that will follow. Read.... Now a Housing Bubble in Germany.
Germany needs a tighter monetary policy—which would be the last straw for teetering economies like Spain and Italy. While the ECB is contemplating even more purchases of sovereign debt, the Bundesbank wants it to exit from its existing positions. And the time frame for the exit is one year.
Just enough time for Hollande to get his feet wet. He is already building alliances to be able to hit the ground running. “I have met with many European heads of State, and hardly anyone is satisfied with the economic situation,” he said in an interview. “I’m not isolated. A common initiative is possible.”
He might succeed in building enough momentum to push the ECB where he wants it and put the fiscal union pact back on the table. Despite his reassurances—“No matter what happened during the campaign, if I’m elected, my first visit will take me to Germany”—his policies are anathema to Merkel’s government and the Bundesbank. And the unity of the Eurozone could be at risk.
Already, there are numerous other conflicts, particularly over taxpayer-funded subsidies. The latest is the nuclear power industry that is going after taxpayers—in other countries. For that ingenious plan that once again pits France against Germany, read.... Suddenly a Nasty Fight over Subsidies for Nukes.


Iran is now threatening to cut off exports to the entire Europe region:

(courtesy Jim Sinclair)

Iran will cut oil exports to ‘entire Europe’ if sanctions not lifted: minister On Line: 19 April 2012 10:53
TEHRAN – Oil Minister Rostam Qasemi said on Thursday that Iran will cut oil exports to all European countries if they do not lift sanctions on Tehran after the next round of talks between Iran and the six major powers in Baghdad.
After nuclear negotiations in Istanbul on April 14, which was described as positive, Iran and the 5+1 group (the five permanent members of the UN Security Council and Germany) are scheduled to meet again in Baghdad on May 23.
The minister stated that the Oil Ministry has “officially” cut crude exports to Britain and France, however, he added that a stop of Iran’s oil exports to refiners in Greece, Spain, and Germany is not “official”.
Qasemi also said that Greece is paying a large sum of its oil debts to Iran.
The minister added that the National Iranian Oil Company has signed new contracts with some customers so that if oil exports to Europe are halted completely, Iran will have alternative buyers

With respect to the jobs picture and employment per se, there is nobody better than Lee Adler at the Wall Street examiner and Charles Biderman of Trimtabs. In this commentary,  for the first time Adler is now worried that the jobless numbers are rising and they are now sending him signals that the economy is indeed in trouble.

again a must read:

(courtesy Lee Adler Wall Street Examiner)

Initial Jobless Claims- Just a Disturbance In the Force or Change of Trend?

seasonally fudged number taking into account the fact that these are actual counts that are always revised up when complete data is in. I ignore the seasonally adjusted fictitious number, and have included an adjustment of +7,000 to the number reported in the government release to account for the normal upward revision in the final data. The adjustment is based on the average of the last 2 weekly revisions. For more on this, and why I only use actual, rather than seasonally smoothed fictitious numbers see this report. If you want to know the seasonally adjusted numbers, that nonsense is readily available from Hizzoner Bloomberg's and Hacker Murdoch's tout sheets.
This week's number is much smaller than the decline for the same week in the past 2 years, and the average decline for this week in the past 10 years. In 2011, the drop in the same week of April was 66,195, and in 2010 when the economy was initially rebounding from the worst period of the depression, it was down by 76,470. The average decline this week for the 10 years from 2002 to 2011 was 30,786. That included both "normal" and recession periods, as well as bubble periods. The last time the weekly decline was this small at this point in April was in the week of April 11, 2009 at the nadir of the depression, when the drop was only 13,108.
These numbers are extremely volatile week to week. On balance, early April is a period where claims always increase. On the basis of the past 2 weeks, claims are up by 55,205 (including the upward adjustment for this week's incomplete data.) This year does not fare well on that score either. It compares with last year's increase of 28,017, and 2010"s 17,161. The average 2 week increase for this part of April for the past 10 years was 21,847. On the basis of short term performance this looks like an indication of economic weakening.

Initial Unemployment Claims Chart- Click to enlarge
Initial Unemployment Claims Chart- Click to enlarge

On the basis of the year to year change, this week's initial claims were down by 1.9%. That is a real slowing in the rate of improvement in the trend, which had consistently been running at declines of 3% to 15% since 2010.  However, there was a similar spike in the trend of improvement last April. It's too early to tell if this represents a change of trend or just a temporary disturbance in the force. It will take 3 or 4 more weeks before this will be clear.
If you flip the claims trend over and plot it on an inverse scale alongside the S&P 500, it's clear that the week to week correlation is non existent, but in terms of the broad trend, claims seem to follow the direction of the stock market. That's no accident because both follow the direction of the Fed's expansion of its balance sheet or lack thereof.

Initial Claims and Stock Prices Chart - Click to enlarge
Initial Claims and Stock Prices Chart - Click to enlarge

When the line connecting the same week each year turns down, that could indicate that the time has finally come for a major decline in stocks.
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In this zero hedge commentary, we find that 46.5 million Americans are on the stamp program
which will cost the taxpayers 82 billion dollars and this will continue to rise.This constitutes almost 15% of the population. To me it just does not look like the USA economy is improving much:

(courtesy zero hedge)

FoodStamp Nation

Tyler Durden's picture

The USDA’s Food and Nutrition Service released a new report on Supplemental Nutrition Assistance Program (SNAP, commonly known as Food Stamps) earlier this week with some fresh data on the program. Given our earlier note on Mr.EBT, we thought the following brief clip from Bloomberg TV on the $82bn-per-year program would provide some rather shockingly sad insights and then Nic Colas' recent focus on the SNAP report provides some much more in depth color.  First and foremost,there are 46.5 million Americans in the program as of the most recent information available (January 2012), comprising 22.2 million households.  That’s 15% of the entire population, and just over 20% of all households.  Moreover, despite the end of the official “Great Recession” in June 2009, over 10 million more Americans have been accepted into the program since that month, and the year-over-year growth rate for the program is still +5%.  The USDA’s report is, not surprisingly, very upbeat on the utility of the program.  Fair enough.  But what does it mean when 20% of all households cannot afford to buy the food they need for their families?  To our thinking, it highlights an underappreciated new facet of American economic life – one that will be felt everywhere from the ballot box to the upcoming Federal Deficit debates.

Food Stamps – The Long Shadow Of The Great Recession
Nic Colas, ConvergEx.
Like most people in finance, I have been trained to think about information that occurs “At the margin.”  Yesterday’s price for a stock plus today’s information yields the closing price at 4pm.  The same holds true for macroeconomic data as it relates to bond prices, levels for commodities, and so forth.  There isn’t time to revisit everything that happened in prior days and weeks and months – we take it for granted that asset prices have that all figured out.  How many times have you heard “Oh, that’s old news; it’s in the stock.”

It’s all fun and games until someone loses an eye, as the old saying goes, and assuming that the past is the past is fine until it’s not.  There wasn’t much about the Financial Crisis of 2007 that wasn’t knowable in 2006; you just had to have a reasonable imagination and a respect for the irrationality of markets once the system began to break down.  But one lesson of the last five years – and there are many – is that you shouldn’t just assume that “It’s all in the stock.”  Reality checks on anything and everything are worth the time and energy.

One topic I personally find worth re-examination is the question, “How has America changed in the past five years that will cast a shadow over the country’s history over the next 50 years?”  Think back to the Great Depression and you’ll find the seeds of programs such as Social Security and even Medicare/Medicaid.  The deprivation of that decade convinced America that it wanted a society that actively tried to make life better for those at the bottom rungs of the economic ladder.  Take care of the old with a stipend from Social Security.  As the generation that lived through the Depression reached older age, they realized that they needed health care as well.  Enter Johnson’s concept of a Great Society and health care for senior citizens and the poor – Medicare and Medicaid.

The modern Supplemental Nutrition Assistance Program (SNAP), which most of us know as Food Stamps, also got its start in the Great Depression.  It was an effort to link the surplus food of the agricultural system with the poor in the nation’s cities.  Those in tough economic circumstances could buy “Stamps” that would entitle them to buy both regular foodstuffs as well as discounted surplus produce.  The program went dormant during World War II but President Kennedy resurrected it in 1960, altering it from a pay-for-stamps system to a straight entitlement.  With some tweaks and alterations, this is the program we have today – a nationwide system of evaluating those who at risk of food insecurity (typically making less than 130% of the poverty line) and giving them money to purchase food.

The trouble, as I see it, is that the SNAP program has become wildly successful.  That is not a slam against the people that use it – I personally agree that no one, especially a child, should go to bed hungry in America.  But it’s not hard to see where this program is creeping its way from counter-cyclical stimulus and support to a lasting entitlement program that will be very hard to change.

The USDA division that provides the infrastructure for the SNAP program, which is technically a joint Federal/State effort, put out an interesting report earlier in the week that gave me a chance to think through the program’s goals and consider its role in American society.  A few points from the report as well as the basics on the program here:
  • As of January 2012, the most recent month available, there are 46.5 million Americans in the program.  That equates to 22.2 million households.  To put these numbers in perspective, that is 20% of all households in the country.  If the “Food Stamp Nation” were it state, it would be the largest one in the Union.  If the adults enrolled in the SNAP program (about half the total) all voted for one Presidential candidate in the Fall, they would represent over 2x the margin of victory in the last election.
  • SNAP is not supposed to be the only source of food purchasing power for a household in the program.  The calculations used by the USDA to determine the amount of the benefit assume that SNAP participants will spend 30% of their income on food.  Keep in mind that the food component of the Consumer Price Index is 8%.  The average household in SNAP receives $277/month; the average participant receives $132/month.
  • The typical SNAP participant is a child under the age of 18.  This demographic accounts for 47% of the program.  Households with children account for 71% of all demand for SNAP. Surprisingly, the elderly are only 8% of the program.
  • Households in the SNAP program are overwhelming reliant on other government transfer payments to make ends meet.  Earnings only represent 30% of their income.  The remainder comes from Social Security (21%), Social Security Insurance/Disability (21%), child support payments (10%), and other mostly government payments.
  • It’s hard to know how long the current cohort of participants – those who started receiving benefits in the last 3-4 years – will be in the program.  Those in the program in the early-to-mid 2000s seem to stay enrolled for long periods of time – 7 years on average.  Over half of those who left the program returned within 2 years.
  • Less than half of the SNAP benefit paid monthly goes to buy food.  This is an unexpected finding, but the math behind it shows that when a household starts to receive SNAP, they shift spending patterns.  If the SNAP benefit for a given household is, for example, $100/person then the typical increase in food purchases is $14-47/person/month.
I could go on and on – the link to the full report is included below.  There’s some surprising stuff in there, like the fact that typical Democratic states are much worse at ensuring that their poorer citizens are enrolled in the program than all those supposedly heartless Republican enclaves.  Or that, contrary to what you’ve read in the press, EBT cards (the credit card-like method of payment used by SNAP) can’t be used at ATMs in strip clubs and casinos.  That is another program entirely.

But my key takeaways are that a large percentage of the population – 20% of households is a big number – is locked into this program.  There are endless studies in the world of behavioral finance that show that people are very quick to budget increases in disposable income as permanent.  And don’t forget that by the USDA’s own numbers, most of the benefit is effectively NOT being spent on food.  In the narrowest sense, the money spent on the SNAP program is tiny relative to the Federal budget - $6 billion a month, or a drop in the $270 billion/month government spend.

But this is where I wonder about the long shadow of the last recession.  Have we reached a point where Americans want a clear and potentially permanent social safety net?  And how far should it go? Again, the current SNAP program is a cheap way to provide this, so from a budgetary or societal standpoint it is hard to argue that it breaks the bank.  But what if it is an emblem of something greater?  In many ways I think this is a big chunk of what the November election will be about, and at least the Food Stamp program seems to show that Americans have made up their minds.

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