Cannon to right of them,
Cannon to left of them,
Cannon behind them
Volley’d and thunder’d;
Storm’d at with shot and shell,
While horse and hero fell,
They that had fought so well
Came thro’ the jaws of Death,
Back from the mouth of Hell,
All that was left of them,
Left of six hundred.

When can their glory fade?
O the wild charge they made!
All the world wonder’d.
Honour the charge they made!
Honour the Light Brigade,

Noble six hundred!

—Alfred, Lord Tennyson*

You have to wonder who is going to immortalize Angela Merkel or Jim DeMint?

“Defaults to the left of them,
Defaults to the right!
When can their glory fade?
O the wild charge the made!”

Charge to everyone else’s accounts but their own. Notice how modernity and ‘growth’ have become a series of ever-more futile rear guard actions? The need for these interventions is accelerating. Four years after ‘problems’ emerged in mortgage funding the situation has deteriorated. It’s not just hedge funds and banks going broke, now it’s countries.

After countries comes planet.

China is the ‘Great Growth Story’. Nobody knows what’s going on, people are stuck with looking at concrete towers and guessing. I can do that too! Here is a long Caixin article about China’s bank lending/borrowing bubble:

How China’s Banks Risk Wealth Management Cash

Banks are rolling over wealth management investments to finance real estate and local government projects, raising red flags

Call it the Great Wealth Rollover of China.

The nation’s banks have been introducing new wealth management investment products at a blurring pace over the past year, dazzling upper-class clients with fat catalogues of high-yield investment opportunities.

Yet Caixin has learned from bank and regulatory sources that much of the wealthy investor cash pouring into short-term, high-risk products is being rolled over by banks to provide fresh financing for long-term investments, including unfinished property developments, local government financing platforms, railway projects and private equity.

Borrowing short, lending long, always a fatal banking error!

The rollover game is providing badly needed funds for infrastructure projects for which credit has dried up over the past year with every notch of monetary tightening by the central government. It’s helped offset the government’s rising bank deposit reserve requirement, for example, which has crimped bank lending.

At the same time, some industry experts warn, the banks may be fobbing off long-term investment risks to their wealth management clients.

Roll that wealth and Raise Red Flag High!

About 9,000 types of wealth management products were available to Chinese investors during the first half of 2011, double the number offered in 2010. Capital turnover for these products topped 8 trillion yuan between January and June.

One risk management executive at a commercial bank told Caixin that wealth management product risks in China are far lower than those faced by subprime mortgage investors in the United States. But others say Chinese products are often too good to be true.

“Some products are expected to yield close to 10 percent,” said one bank executive. “But how are banks getting access to so many high-return investment channels?”

China’s banking regulators have taken note of the rollover game and are trying to reign in risk and prevent a potential wealth management meltdown. But the players are already firmly entrenched.

I look into crystal ball and see bailouts to the left, haircuts to the right! The question is what form will bailouts/haircuts take? Right now the Chinese prefer inflation. With ‘6%’ inflation a 10% return on investment is meager. With 16% inflation, 10% is underwater. The real question is who is offering rates higher than the ‘official’ 10%-ers? Somebody has to be doing so otherwise the banks would be offering a measly one or two percent.

Inquiring minds would like to know!

All of this frantic churning and ‘rolling over’ represents the feverish phase of the hyperinflating China bubble. Banks exist to screw their customers with stinginess: that bankers are fighting each other to ‘give’ money away to any customer is a Red Flag! A gift-giving banker is a freak of nature, like a flying whale. What Chinese banks are offering to customers are ‘shares’ in The Great China Ponzi Scheme. The Ponzi gathers force as ‘returns’ become collateral for more lending. In hyperinflationary environments only Ponzi schemes can keep up with change in value of money. Today the banks offer 10% return on money: tomorrow 12% then 25%. Increasing velocity of funds changing hands becomes self-reinforcing. China is Greece inside out, both are caught in compounding spirals of rates-of-change in the cost of money. Like Greece, the Chinese economy is chasing its tail.

Meanwhile, China claims the rolling activity as ‘GDP growth’ the same way the US does. It’s all just more ‘something for nothing’: fusion in a bottle. The difference in ‘fake GDPs’ indicates the Chinese are better liars than the Americans. Their politicians have had thousands of years more practice.

Meanwhile, the EU establishment has offered yet another multi-billion euro bailout to its finance bloc. As with all the other/preceding bails, no policy changes of importance surrounds the naked transfer of purchasing power from citizens to bank ‘investors’. The fantasy is that Greeks — then Irish, Italians, Belgians, Spanish, etc. in their turns — will repay the banks and by doing so bail themselves out. They won’t, they can’t, there is no intention of this ever happening and the (cynical) establishment knows it. The Greeks cannot repay, they have stopped pretending. Now is the time to let Germans pretend for awhile! Ultimate repayment is not now nor has it ever been the issue, the bottom line is that there is no bottom line: all that remains is the bottomless line … spam and more spam!

The leadership cadres and establishments will lie through their teeth about ‘growth’ and ‘progress’ even as folks in the so-called ‘modern’ countries run out of food and their reactors melt down. All of this will be couched as mere ‘speed bumps’ on the road toward electric cars and gigantic hamburgers for all.

EU/China/US credit difficulties represent energy conservation by other means. There isn’t enough fuel to go around, somebody must do without. Instead of directly rationing fuel, funds to buy the fuel are rationed instead. Rationing fuel would illustrate the real problem along with the dearth of means with which to address it. By rationing funds, blame can be fixed upon ‘lazy’ Greeks and ‘drunk’ Irish along with pathetic and universally hated underclasses: liberals, Moslems, ‘terrorists’ and other ‘niggers of the moment’ the establishment trots out as scapegoats.

As the ability of ‘others’ to buy fuel evaporates, more is left for the establishments’ middlemen to market at whatever margins the compressed market allows. What is taking place right now in the EU is its remaking into a gigantic, open air petroleum black market. Go ahead and feel sorry for the Europeans. They really have no other choice. Even if they cut fuel use in half — which they will one way or another — the remainder that must be imported can only be paid for by selling a significant fraction into a captive or manipulated market at a very high price, one that represents real value.

By considering ‘the economy’ as a means to manage energy flows, what is taking place in Greece — and America and China and everywhere else — becomes instantly clear. The ‘Grand Fantasy’ — both in Europe and elsewhere — is that ‘consumption’ represents some kind of intrinsic value. On its own it can’t.

Here’s Wolfgang Munchau (Financial Times):

Some useful steps but not much of a strategy

It looks like there will be deal on a eurozone package for Greece. The full details are still missing, but it appears that the eurozone is forcing Greece into a selective default. As part of such a package, short-term Greek debt will be more or less forcibly converted into long-term debt. The wretched bank tax is mercifully off the table. And the European financial stability facility will most likely be allowed to purchase Greek debt at a discount. Let us not mince words here. This would be a default, the first by a western industrialised country in a generation. I am not quite sure how it is possible for the European Central Bank to agree to this, or to all of this. But I will surely be intrigued to hear how Jean-Claude Trichet will manage to be consistent with what he said a few days ago. There are also reports that the eurozone leaders may accept a more flexible EFSF beyond those bond purchases.

So would this be a good deal? Those who are in the thick of it are running the danger that they got so obsessed with the formidable technical complexities that they lose sight of the bigger picture. The problem of the eurozone is not Greece, or some other small country on its periphery. The existential danger is the rise in market interest rates of Italy and Spain, two large countries in the eurozone’s core. To state the goal of today’s meeting in simple terms would be to say: the survival of the eurozone depends on whether its leaders will be able to take decisions that would allow Italy and Spain, and everybody else as well, to remain inside the eurozone on a sustainable basis. Greece is now just a side-show.

There is that word ‘sustainable’ again. The establishment insists that the EU can pull itself up by its bootstraps, that ‘waste’ is ‘income’. This is what sustainable means to economists: that waste can continue endlessly because the subsidies are hidden, inputs are mispriced, reserves are constantly expanding because of technology and that all costs the economist doesn’t recognize are ‘externalities’.

The establishment fails to appreciate that ‘trickle up’ economics represented by bailout finance is the system driving a stake through the heart of its own narrative. The sales’ pitch is for every sucker to find their own yacht under a christmas tree, not just Bill Gates’ and his friends’. Right now the system is excluding as many from material progress as it can get away with, it doesn’t even need the cheerleaders’ help to do so:

Benefits are untenable.
The sooner something is done,
The better off everyone will be.

Things That Must Change

Defined benefit pension plans for
Government workers must end
Davis-Bacon and prevailing wage laws
That drive up costs of Federal projects
And clobber city and municipal governments
Must come to an end
National right-to-work laws
Must be enacted
Collective bargaining
Of public unions Must end
Existing pension benefits
Must be renegotiated

Unions will not like any of those
But they are all going to happen.

— Michael ‘Mish’ Shedlock

Indeed, the better off everyone will be as soon as working wages are squeezed by main force to a level where the ‘worker’ cannot compete with a ‘financier’ for fuel. Another question clouded by political idiocy in Washington is whether an energy shortage will occur if/when the US defaults?

Figure 1: The Brent crude price appears to be trending down as the longer-term secular bear market in crude is still in force.

Don’t kid yourself, the current price levels are breaking to an economy built to use fuel costing $25 a barrel. There is nothing to prevent prices from spiking higher, either! The bull market high in 2008 was $147. a retest of that high is not out of the question. A price higher than $148 would mean the post 2008 bear has been nothing more than a head- fake. The oil market is so tight right now, that a few hundred thousand barrels held off would have a big effect.

Conventional thinking has the dollar taking a post- default dive compared to other currencies … that would indicate a very high fuel price. This in turn would lead to demand destruction and a price crash. We just went through the $4 gas-instant-deflation gig a few weeks ago. The economic ceiling on oil prices is real. Meanwhile, a default or even a credit downgrade would have money markets hustling for cash dollars.

There is a lot of debt overhang and margin calls would ramp. This is market mechanics, not discretion. The demand for cash would become intense, that is what a margin call is, a demand by a broker for cash to maintain the agreed-to leverage on a particular market position. The Fed will step in and provide whatever liquidity it can. This would tend to force crude prices up again! There are a lot of forces pushing and pulling crude prices including amount of crude brought to the markets

A default would pull margin out of crude. Margin would be needed to support the price of bonds. Falling bond prices don’t ‘benefit’ the economy the same way falling fuel prices do. A rotation out of crude would support the bond market, in fact only the crude market is large and liquid enough to support it. The same drop in crude would take pressure off businesses as well as from other commodity prices as all other commodities embed fuel. That doesn’t mean that more fuel would be used or that more economic activity would result. It would mean that large flows of funds within the overall economy would be directed toward credit markets away from ‘useful’ activities. Call this ‘The Revenge of Dead Money’.

Even with credit support being stripped from crude, more will be stripped from the purchasing power of crude customers. Customers and speculators would be subject to their own margin calls which will put the entire market mechanisms under severe stress!

Any price decline would be met by producers curtailing output. Who knows what would happen after that? A default has inflation and deflation fighting a duel in the Oval office. Producers might decide not to accept dollars by themselves but only dollars and gold or dollars plus other currencies such as Swiss francs that must be bought on foreign exchange markets. In any event, the effects of a liquidity squeeze on the markets would be added to the ‘real’ costs of fuel. Even if deflation was driving prices/purchasing power sharply downward everywhere else in the economy, fuel would still be too expensive.

The US not only imports capital from overseas but two-thirds of its petroleum fuel. Even a small diversion of that amount for any reason would have serious consequences. The US is outwitting itself into an emergency that it cannot understand and does not need.

Half a league, half a league, half a league onward, all in the valley of Death rode the six hundred … across that bottomless line …

* ‘The Charge of the Light Brigade’.

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