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by Alasdair Macleod

[This week, we introduce a new contributing editor to PeakProsperity.com, Alasdair Macleod. He will mostly be contributing commentary focused on the situation in Europe, where he's located. The credit crisis underway there is not Europe's problem alone; it has the potential to send crippling financial shockwaves to the US and elsewhere around the world. Please join us in extending a warm CM.com welcome to Alasdair. — Adam] 

The purpose of this report is to give readers the essential background to the economic problems in Europe and to bring you up-to-date in what has become a fast-moving situation. At the time of writing, there has been a lull in the news flow, but that does not mean the problems are under control. Far from it.

Flawed from the Start

When we talk about Europe today in an economic context, we really mean the Eurozone, whose seventeen members are the core of Europe and share a common currency, the euro. The euro first came into existence thirteen years ago, on January 1, 1999, replacing national currencies for eleven states; Greece joined two years later. In theory, the idea of a common currency for European nations with common borders is logical, and it was Canadian economist Robert Mundell's work on optimum currency areas that provided much of the theoretical cover.

However, the concept was flawed from the start.

 

The Europe Crisis from a European Perspective
by Alasdair Macleod

[This week, we introduce a new contributing editor to PeakProsperity.com, Alasdair Macleod. He will mostly be contributing commentary focused on the situation in Europe, where he's located. The credit crisis underway there is not Europe's problem alone; it has the potential to send crippling financial shockwaves to the US and elsewhere around the world. Please join us in extending a warm CM.com welcome to Alasdair. — Adam] 

The purpose of this report is to give readers the essential background to the economic problems in Europe and to bring you up-to-date in what has become a fast-moving situation. At the time of writing, there has been a lull in the news flow, but that does not mean the problems are under control. Far from it.

Flawed from the Start

When we talk about Europe today in an economic context, we really mean the Eurozone, whose seventeen members are the core of Europe and share a common currency, the euro. The euro first came into existence thirteen years ago, on January 1, 1999, replacing national currencies for eleven states; Greece joined two years later. In theory, the idea of a common currency for European nations with common borders is logical, and it was Canadian economist Robert Mundell's work on optimum currency areas that provided much of the theoretical cover.

However, the concept was flawed from the start.

 

by Gregor Macdonald
 src=Perfect Storms

2011 was an abysmal year for the global insurance industry, which had to cover yet another enormous increase in damages from natural disasters. Unknown to most casual observers is the fact that during the past few decades the frequency of weather-related disasters (floods, fires, storms) has been growing at a much faster pace than geological disasters (such as earthquakes). This spread between the two types of insurable losses has moved so strongly that it prompted Munich Re to note in a late 2010 letter that weather-related disasters due to wind have doubled and flooding events have tripled in frequency since 1980. The world now has to contend with a much higher degree of risk from weather and climate volatility, and this has broad-reaching implications.

And critically, it has a particular impact on food.

Many factors seen over the past decade have produced higher food prices: population growth, urbanization, the decline of arable land per person, and the upgrading of diets for example. But more damaging than food inflation has been the pushing of global food prices out of their long, quiet envelope of stability. From the recently released UN Report on the World Food Situation:

A Punch to the Mouth: Food Price Volatility Hits the World
by Gregor Macdonald
 src=Perfect Storms

2011 was an abysmal year for the global insurance industry, which had to cover yet another enormous increase in damages from natural disasters. Unknown to most casual observers is the fact that during the past few decades the frequency of weather-related disasters (floods, fires, storms) has been growing at a much faster pace than geological disasters (such as earthquakes). This spread between the two types of insurable losses has moved so strongly that it prompted Munich Re to note in a late 2010 letter that weather-related disasters due to wind have doubled and flooding events have tripled in frequency since 1980. The world now has to contend with a much higher degree of risk from weather and climate volatility, and this has broad-reaching implications.

And critically, it has a particular impact on food.

Many factors seen over the past decade have produced higher food prices: population growth, urbanization, the decline of arable land per person, and the upgrading of diets for example. But more damaging than food inflation has been the pushing of global food prices out of their long, quiet envelope of stability. From the recently released UN Report on the World Food Situation:

by Adam Taggart

[Every year, friend-of-the-site David Collum writes a detailed "Year in Review" synopsis full of keen perspective and plenty of wit. This year's is no exception. Moreover, he has graciously selected CM.com as the site where it will be published in full. It's quite longer than our usual posts, but by any measure, 2011 offered an over-abundance of 'business as unusual' developments to summarize. We hope you enjoy David's colorful observations and insights, which are very much his own. — cheers, Adam]

Background

Governments gambled on a return to growth solving all the problems. That bet has failed.

—Satyajit Das—

Every December, I write a Year in Review. Last year's was posted at several sites including Chris Martenson’s [1]. What started as summaries posted for a couple dozen people accrued over 13,000 clicks in total last year. It elicited discussions with some interesting people and several podcasts, including a particularly enjoyable one with Chris [2]. Each begins with a highly personalized survey of my efforts to get through another year of investing. This is followed by a brief update of what is now a 32-year quest for a soft landing in retirement. These details may be instructive for some casual observers. I have been a devout follower of Austrian business cycle theory since the late 1990s and have ignored the siren call for diversification. I vigilantly monitor my progress relative to standard benchmarks. The bulk of the blog describes thoughts and ideas that are on my radar. The commentary is largely stream-of-consciousness with a few selected links that might be worth a peek. Some are flagged as “must see”. Everything else can be found here [3].

 

2011 Year in Review: Signs of an American Spring and a Fourth Turning
by Adam Taggart

[Every year, friend-of-the-site David Collum writes a detailed "Year in Review" synopsis full of keen perspective and plenty of wit. This year's is no exception. Moreover, he has graciously selected CM.com as the site where it will be published in full. It's quite longer than our usual posts, but by any measure, 2011 offered an over-abundance of 'business as unusual' developments to summarize. We hope you enjoy David's colorful observations and insights, which are very much his own. — cheers, Adam]

Background

Governments gambled on a return to growth solving all the problems. That bet has failed.

—Satyajit Das—

Every December, I write a Year in Review. Last year's was posted at several sites including Chris Martenson’s [1]. What started as summaries posted for a couple dozen people accrued over 13,000 clicks in total last year. It elicited discussions with some interesting people and several podcasts, including a particularly enjoyable one with Chris [2]. Each begins with a highly personalized survey of my efforts to get through another year of investing. This is followed by a brief update of what is now a 32-year quest for a soft landing in retirement. These details may be instructive for some casual observers. I have been a devout follower of Austrian business cycle theory since the late 1990s and have ignored the siren call for diversification. I vigilantly monitor my progress relative to standard benchmarks. The bulk of the blog describes thoughts and ideas that are on my radar. The commentary is largely stream-of-consciousness with a few selected links that might be worth a peek. Some are flagged as “must see”. Everything else can be found here [3].

 

by Gregor Macdonald

How the European Endgame Will Be the Death Knell For Modern Economics

by Gregor Macdonald, contributing editor
Monday, December 5, 2011

Executive Summary

  • Central banks are running out of options, leaving only increasingly desperate choices
  • Why Europe is most likely to begrudgingly print a whole lot more money soon
  • The harsh judgment day is approaching for mainstream economists
  • Why 2012 heralds the dawn of a new era of economic understanding

Part I: It’s Time To Give Up On Mainstream Economics

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: How the European Endgame Will Be the Death Knell For Modern Central Banking

Central Banks Becoming Increasingly Desperate

Has Europe decided to print its way out of the crisis? The big-bang announcement last week among global central banks suggests as much. Unfortunately, the global US dollar swap solution only patches up the liquidity portion of Europe’s present dilemma and does nothing to address the solvency issue.

As readers know, I take the mildly heretical view that “money-printing” in our present debt deflation actually functions as a status-quo maintainer. It does not risk hyperinflation, but instead keeps social confidence intact — at low levels, of course — as the familiar institutions of Western economies are maintained. Hard defaults, on the other hand, especially hard defaults that appear out of the hands of either fiscal or monetary policy makers, risk a confidence collapse on a large scale.

In my view, hyperinflation typically begins with a broad rejection of a country’s sovereign debt. This is the initial threshold that is crossed on the path to currency rejection, as foreign holders exit first. Domestic institutions are more restricted, slower to react, often bound by investment mandates, and thus left “holding the bag,” as it were, on a country’s bonds. Eventually, domestic confidence in the currency itself is lost, as the public, having watched its institutions fail, rejects the currency.

In my view, Europe is still at very high risk for such a catastrophic outcome. No global central bank, including the European Central Bank (ECB), can change the fact that the debt of Greece, Portugal, Spain, and Italy cannot be supported realistically through economic growth. But there is still time for the ECB to change its charter and buy that debt. The coordinated central-bank actions this past week will have virtually no consequence unless the ECB conducts QE (quantitative easing) on a massive scale.

Probabilistically, I have to favor the idea that Europe was given the lifeline on the condition that the fiscal union discussed in Europe and the permission granted to the ECB to conduct QE are both forthcoming. For the sake of social stability, I hope this happens. But I am not naive. Much of the debt that the ECB would purchase under such a regime, just like much of the junk debt now on the Fed’s balance sheet, will never recover its par (full price) value. Certainly not in real (inflation-adjusted) terms. But if the ECB does not “print money,” then we will move directly to hard defaults. And the hyperinflation risk that is currently masked by the common currency to the Eurozone will eventually be unveiled.

How the European Endgame Will Be the Death Knell For Modern Economics
PREVIEW by Gregor Macdonald

How the European Endgame Will Be the Death Knell For Modern Economics

by Gregor Macdonald, contributing editor
Monday, December 5, 2011

Executive Summary

  • Central banks are running out of options, leaving only increasingly desperate choices
  • Why Europe is most likely to begrudgingly print a whole lot more money soon
  • The harsh judgment day is approaching for mainstream economists
  • Why 2012 heralds the dawn of a new era of economic understanding

Part I: It’s Time To Give Up On Mainstream Economics

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: How the European Endgame Will Be the Death Knell For Modern Central Banking

Central Banks Becoming Increasingly Desperate

Has Europe decided to print its way out of the crisis? The big-bang announcement last week among global central banks suggests as much. Unfortunately, the global US dollar swap solution only patches up the liquidity portion of Europe’s present dilemma and does nothing to address the solvency issue.

As readers know, I take the mildly heretical view that “money-printing” in our present debt deflation actually functions as a status-quo maintainer. It does not risk hyperinflation, but instead keeps social confidence intact — at low levels, of course — as the familiar institutions of Western economies are maintained. Hard defaults, on the other hand, especially hard defaults that appear out of the hands of either fiscal or monetary policy makers, risk a confidence collapse on a large scale.

In my view, hyperinflation typically begins with a broad rejection of a country’s sovereign debt. This is the initial threshold that is crossed on the path to currency rejection, as foreign holders exit first. Domestic institutions are more restricted, slower to react, often bound by investment mandates, and thus left “holding the bag,” as it were, on a country’s bonds. Eventually, domestic confidence in the currency itself is lost, as the public, having watched its institutions fail, rejects the currency.

In my view, Europe is still at very high risk for such a catastrophic outcome. No global central bank, including the European Central Bank (ECB), can change the fact that the debt of Greece, Portugal, Spain, and Italy cannot be supported realistically through economic growth. But there is still time for the ECB to change its charter and buy that debt. The coordinated central-bank actions this past week will have virtually no consequence unless the ECB conducts QE (quantitative easing) on a massive scale.

Probabilistically, I have to favor the idea that Europe was given the lifeline on the condition that the fiscal union discussed in Europe and the permission granted to the ECB to conduct QE are both forthcoming. For the sake of social stability, I hope this happens. But I am not naive. Much of the debt that the ECB would purchase under such a regime, just like much of the junk debt now on the Fed’s balance sheet, will never recover its par (full price) value. Certainly not in real (inflation-adjusted) terms. But if the ECB does not “print money,” then we will move directly to hard defaults. And the hyperinflation risk that is currently masked by the common currency to the Eurozone will eventually be unveiled.

by Chris Martenson

"I have said it's worse than Chernobyl and I’ll stand by that. There was an enormous amount of radiation given out in the first two to three weeks of the event. And add the wind blowing in-land. It could very well have brought the nation of Japan to its knees. I mean, there is so much contamination that luckily wound up in the Pacific Ocean as compared to across the nation of Japan – it could have cut Japan in half. But now the winds have turned, so they are heading to the south toward Tokyo and now my concern and my advice to friends that if there is a severe aftershock and the Unit 4 building collapses, leave. We are well beyond where any science has ever gone at that point and nuclear fuel lying on the ground and getting hot is not a condition that anyone has ever analyzed."

So cautions Arnie Gundersen, widely-regarded to be the best nuclear analyst covering Japan's Fukushima disaster. The situation on the ground at the crippled reactors remains precarious and at a minimum it will be years before it can be hoped to be truly contained. In the near term, the reactors remain particularly vulnerable to sizable aftershocks, which still have decent probability of occuring. On top of this is a growing threat of 'hot particle' contamination risk to more populated areas as weather patterns shift with the typhoon season and groundwater seepage.

In Part 1 of this interview, Chris and Arnie recap the damage wrought to Fukushima's reactors by the tsunami, the steps TEPCO is taking to address it, and the biggest operational risks that remain at this time. In Part 2, they dive into the health risks still posed by the situation there and what individuals should do (including those on the US west coast) if it worsens.

Click the play button below to listen to Part 1 of Chris' interview with Arnie Gundersen (runtime 36m:31s):

[swf file="http://media.PeakProsperity.com/audio/arnie-gundersen-2011-06-03-part1.mp3"]

Download/Play the Podcast
Report a Problem Playing the Podcast

Or start reading the transcript below:

Exclusive Arnie Gundersen Interview: The Dangers of Fukushima Are Worse and Longer-Lived Than We Think
by Chris Martenson

"I have said it's worse than Chernobyl and I’ll stand by that. There was an enormous amount of radiation given out in the first two to three weeks of the event. And add the wind blowing in-land. It could very well have brought the nation of Japan to its knees. I mean, there is so much contamination that luckily wound up in the Pacific Ocean as compared to across the nation of Japan – it could have cut Japan in half. But now the winds have turned, so they are heading to the south toward Tokyo and now my concern and my advice to friends that if there is a severe aftershock and the Unit 4 building collapses, leave. We are well beyond where any science has ever gone at that point and nuclear fuel lying on the ground and getting hot is not a condition that anyone has ever analyzed."

So cautions Arnie Gundersen, widely-regarded to be the best nuclear analyst covering Japan's Fukushima disaster. The situation on the ground at the crippled reactors remains precarious and at a minimum it will be years before it can be hoped to be truly contained. In the near term, the reactors remain particularly vulnerable to sizable aftershocks, which still have decent probability of occuring. On top of this is a growing threat of 'hot particle' contamination risk to more populated areas as weather patterns shift with the typhoon season and groundwater seepage.

In Part 1 of this interview, Chris and Arnie recap the damage wrought to Fukushima's reactors by the tsunami, the steps TEPCO is taking to address it, and the biggest operational risks that remain at this time. In Part 2, they dive into the health risks still posed by the situation there and what individuals should do (including those on the US west coast) if it worsens.

Click the play button below to listen to Part 1 of Chris' interview with Arnie Gundersen (runtime 36m:31s):

[swf file="http://media.PeakProsperity.com/audio/arnie-gundersen-2011-06-03-part1.mp3"]

Download/Play the Podcast
Report a Problem Playing the Podcast

Or start reading the transcript below:

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