Ben, hope is not a trading strategy.

And notice what isn’t there. The Fed is not charged with distorting natural market pricing mechanisms to the point of perverting risk. It is not asked to promote ever increasing stock prices. It does not have to guarantee that property prices are rising. It is not asked to manipulate bond, equity or commodity markets. It is not asked to seek the profitability of ‘too big to fail/prosecute’ firms on Wall Street, or to promote their interests. It is certainly not asked to indulge in secret and complex financial transactions with no clear benefit to the wider public.

Yet evidence that the Fed may have lost touch with its mandate are mounting. Sometimes it’s the little things. The Fed is reported to have leaked the minutes of its FOMC meeting to a number of major banks, including JP Morgan, Goldman Sachs, Citigroup, Barclays and others. Within hours of receiving the data, Goldman Sachs issued a research note suggesting that clients short gold. It remains to be seen whether that note was based on the leaked Fed information, but Congressmen Alan Grayson and Daryl Issa are rightly seeking immediate clarification of the issue. Whatever the outcome of those investigations – and frankly the Fed’s record in this respect does not generate much confidence – it’s astonishingly inappropriate for such data to be transmitted to major Wall Street firms ahead of the market more generally.

But it’s the bigger things too. I’ve talked about the matter before on these pages, but one of the biggest scandals in recent American history should have been the way that, during the most turbulent phase of the current financial crisis, the Fed – secretly and without the knowledge or consent of Congress – placed vast amounts of taxpayer money at risk in the support of numerous banks, many of them foreign. The idea that unelected officials should dispose of more than a trillion dollars of your money without Congress even knowing is, to my mind, a greater abuse of democracy than the Watergate scandal. Watergate was bad enough, but it didn’t involve a trillion dollars.

And yet, I suspect that there are worse things yet to be uncovered. Suspicious indicators abound.

For one thing, there’s the grotesque leverage being operated by the Federal Reserve Banks. The New York Fed has seen its leverage ratio rise in excess of 100:1. Those are the kind of numbers that make Lehman look prudent. Heck, those are the kind of numbers that make Greece look safe.

Then too, there’s the appalling conflicts of interest that are built into the system. The board of directors of the Federal Reserve banks are largely composed of officers of the very banks the Fed is there to supervise. So when crisis struck Wall Street, how was it a surprise that the Fed – supervised and directed by Wall Street bankers – was so fast to ride to the rescue?

And look too at the rise and rise of the stock market. Europe is in a slo-mo financial crisis. Japan (a country more highly indebted than Greece) has decided to devalue its currency and double up on its money supply in a massively risky gamble to get out of trouble. America is seeing weak growth and a rapid increase in the kind of toxic debt products that brought us to our knees five years back. Corporates are hoarding money instead of investing it. Jobs growth remains anemic.

So how come the stock market is rising? Who is the final buyer behind that rise if not those magic money-printing machines at the Fed? And if the Federal Reserve believes that rising financial markets are necessary to restore the country to health, we deserve an explanation of exactly how bubbling up financial assets to untenable levels is going to help with the things that actually strengthen economies: physical investment, innovation, new business formation, job growth.

It gets worse. The VIX is a measure of stock market volatility or simply put price movements up and down. It’s long been an interesting measure and has long had a part to play in financial markets. But it’s gone crazy recently. Trading in the VIX doubled from 2011 to 2012. The volume of futures contracts traded is up nearly 2000% since 2009.

I’m a hedge fund manager. I deal in these markets. And I have no idea which institution; private sector firm, sector or individual could be trading in these volumes due to the vast margin requirements (not least, because proprietary trading is now heavily restricted, at least in theory.) So could it be the Fed? And is its strategy to reduce price swings, influence and maintain the stock market’s otherwise inexplicable rise? I can’t be certain, but I think that the Fed should come out and publicly disclose any dealing or influence it has had in this area.

These questions go still. further What products and markets is the Fed trading in? The Fed has admitted to trading swaps with the ECB, which compels us to ask: which other off balance sheet derivatives is the Fed currently trading? Is the Fed active in gold swaps? Is it trading in gold, silver or other metals, futures and or options? Bear in mind, that the Fed’s leverage is so extreme that a small movement in prices could make them insolvent. And given that there’s no known exit strategy to their QE program, the risk of a disorderly exit with catastrophic losses is highly probable.

These are disturbing questions, and I’m not the only one asking them. David Stockman, Director of Management and Budget in the Reagan administration, looks at our current financial landscape and calls it ‘a giant Ponzi scheme’. He’s right. That’s why I wrote Planet Ponzi 2 years ago. Nobel Prize winner and former chief economist at the World Bank, Joseph Stiglitz, commented recently, ‘If we [at the World Bank] had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure.’ He’s right too.

All the evidence suggests that the Fed has turned into an entity which is too big to fail/jail/bail or prosecute, manages the financial system on behalf of Wall Street and is accountable to no one. That system delivered one huge financial crisis in 2008-09, but an even larger aftershock is brewing now. Isn’t it time we demanded some answers? Isn’t it time we demanded change?

Order under articles 4 and 5

WHEREAS there is a substantial lack of liquidity and a significant risk in the outflow of deposits which are likely to endanger the survival of the credit institutions with a chain reaction that could lead to the instability of the financial system and to destabilising consequences on the entire economy and the society of the country.

 AND WHEREAS under the circumstances a state of emergency is created, to safeguard public order and public security and for overriding reasons of public interest,  12(I) of 2013The Minister of Finance, in exercising the powers conferred by articles 4 and 5 of The Enforcement of Restrictive Measures on Transactions in a Situation of Emergency Law of 2013, following a recommendation of the Governor of the Central Bank, issues the following Order:  Short title.1. The present Directive shall be referred to as The Enforcement of Restrictive Measures on Transactions in a Situation of Emergency First Order of 2013.  Interpretation2. (1)  In the present Order unless the context shall otherwise prescribe:   «Committee» means the Committee that is introduced under article 9 of the Law.

 «Law» means The Enforcement of Restrictive Measures on Transactions in a Situation of Emergency Law of 2013.

«Credit or debit or prepaid card» means credit or debit card or prepaid card issued by credit institutions.

(2) Terms not defined in this order shall have the meaning ascribed to them by the Law.  Imposition of restrictive measures.

3. By virtue of articles 4 and 5 of the Law, and following the recommendation and agreement of the Governor, the following restrictive measures are imposed:

(1)    A maximum amount of cash withdrawal is imposed, which shall not exceed the daily limit of €300 per person per credit institution, or its equivalent in foreign currency. All cash withdrawals (through debit cards, prepaid cards, and from the bank’s tellers and using credit cards against balances in current accounts) are computed per account holder for all his accounts in each credit institution.

Provided that any amount of the daily cash withdrawal limit, which has not been withdrawn during the day for which the cash withdrawal limit applies, can be withdrawn at any time afterwards.

(2)  The cashing of cheques is prohibited.

(3)  Any cashless payments or transfers of funds outside the Republic or to accounts held with other credit institutions is prohibited, except that:

(i)             Payments for transactions that fall within the ordinary business activities of customers upon presentation of supporting documents as follows:

(A)  Payments of up to €5,000 daily per account are not prohibited;

(B) Payments of amounts from €5,001 to €200,000 are subject to the approval of the Committee. A list of applications for payments that fall within this category shall be submitted to the Committee by the credit institution on a daily basis and shall state the amount of each payment, the total amount and the number of payments that fall within this category. The Committee in making a decision, which must be made within 24 hours, shall take into account the available liquidity reserves of the credit institution.

(C) Payments of amounts of €200,001 or more, if the prior approval of the Committee for the specific payment is obtained after an application has been made by the credit institution. The Committee in making a decision shall take into account the available liquidity reserves of the credit institution.

(ii)           The Payment of employee salaries upon presentation of supporting documents.

(iii)          Living expenses up to €5,000 per quarter, as well as the tuition fees of a person that is studying abroad and is a first-degree relative of a person who has his habitual residence in the Republic. Provided that any payment of living expenses is only permitted if documents are submitted to the credit institution evidencing that the recipient of the cashless payment and/or transfer of funds is a first-degree relative of a person who has his habitual residence in the Republic. Provided further that payments of tuition fees may only be made to the relevant educational institution if supporting documents are submitted.

(iv)          Payments and/or transfers of funds by debit or credit or prepaid card, up to €5,000 per month per person per credit institution.

(4)  The termination of fixed term deposits before the maturity date is prohibited, unless the deposit shall be used for the repayment of a loan within the same credit institution.

(5)  On the first maturity of fixed term deposits, an amount equal to the greater of €5,000 and 10% of the total principal amount of the fixed deposit, shall be transferred, at the option of the depositor, to a sight/current account or deposited in a new fixed term deposit of the depositor in the same bank. For the remaining balance, the maturity shall be extended by one month.

(6)  Funds from transferred from fixed term deposits to sight/current accounts will be subject to the restrictive measures applicable to sight/current accounts.

(7)  Exports of euro notes and/or foreign currency notes exceeding €1,000 or its equivalent in foreign currency per natural person per journey abroad is prohibited. The Director of Customs shall implement this measure.

(8) Any financial transaction, payment and/or transfer that was not finalised before this Order came into force shall be subject to the restrictive measures. Provided that any financial transaction, payment, and/or transfer that was not processed before this Order came into force shall be cancelled and must be resubmitted.

(9) Credit institutions are prohibited from executing any cashless transfers that facilitate the circumvention of the restrictive measures.

(10)The restrictive measures apply to all accounts, payments and transfers regardless of the currency denomination.  Exemptions.4.  Exempted from the restrictive measures are:

1. All new funds transferred from abroad to the Republic.
2. Withdrawal of cash from accounts held abroad using credit or debit card or prepaid issued by foreign institutions.
3. The cashing of cheques issued on accounts held with foreign institutions abroad.
4. Withdrawal of cash from account of credit institutions with the Central Bank.
5. The Republic.
6. The Central Bank.
7. Diplomatic missions.
8. Payments that have been approved by the Committee.

Force of this Order

27 March 2013. This Order shall stay in force for a period of seven days from the date on which it is published in the Official Gazette of the Republic.

Michalis Sarris

Minister of Finance

My printing presses are operating 24/7!

On the first day of Christmas, my country gave to me

A debt bigger than GDP

Yep, that’s right. US Public debt stands at more than 100% of GDP. The last time debt was this high, we were fighting a World War across two continents and building a peaceful prosperous world, whose basic shape would endure for generations. That was money worth spending. On this occasion, however, we’ve run up the debt, in order to protect Wall Street bankers – yet the sebanks are still crammed full of unsustainable assets. It won’t be long before the Fed further loads its balance sheet with worthless toxic assets … thereby transferring liabilities from the reckless bankers to US citizens. Maybe not quite such a good buy, huh?

On the second day of Christmas, my country gave to me

Debt for the poorest

According to Nobel Prize-winning economist, Joseph Stiglitz, the share of American GDP going to wages and salaries has falled to about 43% since 1970. At the same time, the slice going to companies in after-tax profits has doubled since just 2005. How have the US middle classes even vaguely been able to sustain their living standards? Answer: by taking on unpayable debt that chokes the financial system and throttles economic growth. It’s an appalling situation and it’s not set to change.

On the third day of Christmas, my country gave to me

Bernanke trashing dollars

Impact of money printing and currency debasement

Ben Bernanke, Chairman of the Federal Reserve, is not an elected official. Prior to taking his current job, he was a classic ivory tower economist: a guy who couldn’t do any harm because no one was dumb enough to give him any power. Then he took control of the Fed: an organisation whose structure and oversight has barely been altered since 1913 when it was created, under vastly different conditions. Back then, GDP was just $40 billion. By contrast, in 2011, the interest on US debt was $454 billion despite interest rates at 200-year lows. Since taking charge of the Fed, Bernanke has printed trillions of dollars – a plan that trashes the value of the dollar in your pocket, and a plan with no plausible exit strategy. The plain fact is that pumping money into the economy does nothing to boost real growth or real output – it just inflates bubbles in property and stock, as has been shown repeatedly for thirty years and more now. If you’re not convinced, just check the graph.

On the fourth day of Christmas, my country gave to me

Overpriced healthcare

Good quality healthcare is, in my view, a human right and Obamacare, for all its faults, brings that right a little closer to millions of Americans. But the United States, under every administration and every Congress, has completely lost control of health costs. We currently pay about $8,000 per head in health costs. (That figure includes household, corporate and government spending.) Our major competitors spend between $2,900 per head (Japan) and $4,500 (Canada). And they have better healthcare. To find OECD countries with worse performance on ‘years of life lost’, you have to travel south to Mexico or east to Hungary. All other countries in the OECD fare better.

On the fifth day of Christmas, my country gave to me

Quarreling leaders

Iceland is no banana republic

We pay politicians to solve problems, right? We just had an election at which alternative views were put to the people, for their decisions on the way forward. And this country of ours has some fair-sized problems. So what happens? We have the ultimate This-Needs-A-Decision-Now situation in the fiscal cliff, and both sides cleave to their existing rigid positions until (wait for it) they come up with some dumb and unsustainable last minute compromise. That’s not what they’re paid to do. These same politicians think that raising the debt limit will stimulate the economy. Wrong! At a global level, the growth in credit instruments has outpaced growth in the real economy by a factor of around four times. That’s not healthy for the world, and it’s not healthy for the debt-dependent United States. I predict that the US will enter a recession in 2013.

On the sixth day of Christmas, my country gave to me

Corruption on Wall Street

You could have a whole 12 days song just for Wall Street corruption and its toothless regulators, so endemic is the problem. But let’s narrow the microscope, so we’re only looking at SEC enforcement

Zero high profile bankers in jail = 0 regulation

actions since 2009. Firms affected include: Citigroup (multiple times), Commonwealth Advisors, Goldman Sachs, ICP, JP Morgan (multiple times), Mizuho, Stifel Nicolaus, Wachovia, Wells Fargo, American Home Mortgage, Bank Atlantic, Countrywide, Credit Suisse (multiple times), Franklin, Fannie Mae, Freddie Mac, Indymac, New Century, Option One Mortgage, Thornburg, TierOne, Bear Stearns, Charles Schwab , Evergreen, Morgan Keegan, Oppenheimer, Reserve Fund, State Street, TD Ameritrade, Bank of America, Brooke Corp, Brookstreet, Colonial Bank, Taylor Bean & Whitaker, KCAP Financial, and UCBH. The list includes firms where executives from that firm were charged. In total, 133 entities and individuals have been charged. Total penalties and similar charges amount to $2.6 billion. Aside from the SEC, other regulators have been equally active. And has anything fundamental changed? Nope. Nothing at all. Wall Street is still rotten to its core. And why would it change? When these fines represent perhaps 10%, if that, of the ill-gotten gains why on earth would bankers change their business models? They just need to keep paying the toll.

On the seventh day of Christmas, my country gave to me

Despairing workers

This time its worse..

One of the big talking points ahead of the election was whether the jobless rate would come to Obama’s rescue. And sure, the rate has nudged down to below 8.0%, from closer to 10.0% three years ago. But that’s not the most striking piece of economic data to come out of the Bureau of Labor Statistics. The most striking – and saddening – data is that we now have, by far, the lowest civilian labor force participation rate for thirty years. Workers are leaving the labor force because the jobs aren’t there. It’s a waste of a generation. Meantime, we should use a new unemployment metric that reflects the true US jobless rate rather than a politically sanitized version. A little honestry, transparency and accountability can go a long way.

On the eighth day of Christmas, my country gave to me

Corporate tax scams

GE's CEO advises the Obama administration on economics, go figure!

In 2010, General Electric paid no corporation tax. None. Not even one miserable dollar. In the five years to 2010, GE accumulated $26 billion in US profits and do you want to guess how much of that was passed to the IRS? You’re guessing zero, right? Unfortunately, you’re wrong. The answer’s worse than that: they accumulated a net benefit of $4.1 billion. Oh, and though the firm is America’s biggest corporate lobbyist, the truth is that countless big firms are playing the same game – and the data shows that the more you lobby, the better your shareholders fare. I’m guessing that’s not quite the way the Founding Fathers intended things to work.

On the ninth day of Christmas, my country gave to me

A huge Farcebook rip-off

Morgan Stanley banked profits on this IPO

Just in case anyone needed proof that Wall Street has absolutely no ethics at all, the Facebook IPO popped up to remind us. Extravagant valuations on launch led to an intra-day high of $45.00, before reality set in and the stock plunged to a way more realistic $17.55. The winners: company insiders and Wall Street. The losers: the retail investors who believed the hype. (Oh, and since we’re talking about hype, then Apple at its current $500 a share is way more reasonable than it was at closer to $700. It’s a wonderful firm, but it’s in a commodity business where the competition, finally, is catching up.) On Facebook, meantime Morgan Stanley has just been fined $1.5 million for an operation whose profits were well in excess of that sum. Again: why change a business model if the fines are mere pinpricks?

On the tenth day of Christmas, my country gave to me

The power to hope

Ho HO HOPE

This is America. However bad things get, we can still believe in the possibility of improvement. We can believe that our leaders will find the ability to be responsible, to think about the good of the country before the good of their parties. We can believe that the media and regulators can find their teeth. Can demand transparency and enforce accountability. Above all, we can believe in the power of the American people to demand change. To slash debt, return to honest money, to speak truth in politics. And perhaps, who knows, we can return to the old ways of making money: by making stuff and selling it instead of through ever more opaque financial dealings based upon fictional future value, a mountain of debt, and way over-leveraged derivative products.

A merry Christmas to you all.

Bunga, Bunga is back!

The return of the undead

Berlusconi to return to Italian politics. Mario Monti to quit (and return to Goldman Sachs for a annual honorarium of $50,000,000). The Italian long bond to go to 600 basis points over bunds. Investors to notice that Italy is still in the position of having massive debts and a completely stagnant economy. Panic to break out (again).

The bursting of the bubble

London property has been wearing anti-gravity boots for years now. Hey, the market has become so frothy that know-nothing footballers have been turning themselves into property developers (a sell signal if ever there was one.) But those anti-gravity boots are starting to lose their potency. Stand by for a massive fall in London prices. Property elsewhere in the UK will have a sympathy fall too.

Japan to have stable leadership

After too much calamitously indisciplined and indecisive leadership, Shinzo Abe has a real chance to holding onto power for a good stretch. He’s got massive problems to contend with. A structurally weak economy, massive debts and a prickly neighbour to the west. But just possibly, Abe-san is the man for the job. We’re wishing him luck: he’ll need it.

Francois Hollande to become most unpopular French President …

… since the last one. Hollande came to power on the back of anti-austerity promises, as though Sir Taxalot and his good steed Spend-Some-More was going to get France out of trouble. By now, Hollande has started to notice that France is in a fiscal mess, with chronically weak banks and far too much government spending. Will the French public enjoy Hollande’s conversion to the path of fiscal probity? We’re thinking non.

English middle classes to subsist on potatoes

Er, unless porridge is cheaper. As food inflation continues to skyrocket – beef up 75%,  lamb up 55%, fruit up 26% – and real wages continue to stagnate, more and more people will be forced to trade down to the cheapest (and least healthy) foods simply to get by. Oh, and as fuel prices continue to surge, we’re going to see a whole lot more people burning their floorboards to keep warm. But there is good news. The bankers are OK, people! And corporate profits are great! So you don’t need to worry about the FOGOs (Friends Of George Osborne). They’re all going to be fine.

The LIBOR scandal to grow

Three minnows arrested so far in the LIBOR scandal while the whales remain at large. That number’s going to rise faster than the yields on Spanish debt. If we’re lucky, we’ll start to see the stirrings of similar enquiries into the market for US Treasuries market. That market is stitched up tighter than Tony Soprano’s waste management business … and involves less savory individuals.

London Whale a "tempest in a teapot"

More of the same

Ever noticed that central bankers – ivory-tower academics for the most part – have been wrong about virtually everything for thirty years? Ever noticed that the same old advisors (take a bow Larry Summers) are recycled again and again, making the same failed policy prescriptions? Yep, well, 2013 is the year of no change at all. Same faces, same policies, same failures. Our big tip for the next big appointment: J.P. Morgan’s Dimon will smash the Goldman-only rule in Washington politics by leaving Wall Street for public service (that is: looking after his friends on Wall Street at the expense of everyone else.)

‘Triple-dip’ to become phrase of the year

If 2012 was the year of double-dip in the UK, 2013 has every chance of making it a recessionary hat-trick. Of course, the phrase is a con: it suggests that another recession now will be like some kind of temporary setback before the economy’s inevitable resurgence. But we had ten years of growth built on debt. Now we’ve got ten years of stagnation as we pay that debt back down. Triple-dip? How does quintuple-dip sound?

Civil unrest in Spain

Super Mario Draghi saved the world in 2012 (by promising to buy shoddy debt without limit for as long as needed.) We can’t even think what’s wrong with that policy … but here’s our bet: that Spain hits another crunch in 2013. Catalonian unrest grows. Unrest among those 50% of youth unemployed grows. And all of a sudden those – totally understandable – expressions of discontent force a financial, political and economic crisis. How will you escape this time, Mario?

Wanting to be head of the EU......

Merkel to be re-elected with 99% of the vote

Angela Merkel is Ms Reliable in German politics. Unfortunately she’s achieved that position by shirking every major decision in the Euro crisis, as a result of which the continent has racked up massive, unsustainable Ponzi-ish debts aided and abetted by lying bankers and southern European politicians who are either corrupt or incompetent. (Or, Silvio, both.)

Gold to hit new highs

What’s bad for money is good for gold. After a long bout of profit-taking, we expect gold, silver and other commodities to hit new highs. Meantime overvalued tech companies (we’re looking at you, Farcebook) will continue to lose value. And Exchange Traded Funds will increasingly be exposed as the new subprime market. Stand well back if you don’t want to be hurt.

Problem solved

The US fiscal cliff? OK, here’s what’s going to happen. The Democrats will sit down with Republicans. Both sides will call attention to the fact that the US fiscal gap (taking into account the oncoming medical and social security express train) is among the worst in the world. Both sides will set aside party differences and put together a plan which will be based on serious revenue increases and major cutbacks to entitlements. None of these things will be popular, but leaders from both parties will explain the logic truthfully and dispassionately to their electorates. Another US recession avoided. Also, pigs will fly.

Need a compact guide to the crisis?

Fortunately we have one for you: Mitch Feierstein’s Planet Ponzi. If only George Bush and Gordon Brown had had a copy …

If he had only read Planet Ponzi...

Four More Years

Obama’s an accomplished individual. Smart, cool, in control. But his standout quality is probably his ability to create euphoria. Create it, sustain it, ride it. Watch the people celebrating with him at his victory rally in Chicago and you could easily believe that the USA had just won a war or beaten a recession.

Unfortunately for Obama, reality doesn’t have much time for speeches. The economy was dire going into the election. Coming out of it, you can almost hear the engine failing.

Let’s take the first indicator of failure – the stock market. The market mood darkened in September and October, then dropped abruptly as news of Obama’s victory sank in. I don’t actually think that’s because Wall Street hates Obama. I think it’s more that as the election hoopla dies away, investors realise how little they can expect from the government, how bad the economic situation really is. And, for that matter, how bad the political situation is. The House remains solidly Republican, the Senate comfortably Democrat – and the whole divisive status quo guaranteeing gridlock for another four years.

Over the next few weeks, you’re going to hear a lot about the fiscal cliff. In January 2013, a whole lot of things happen together. George W. Bush’s tax cuts expire. A payroll credit expires too. Some automatic spending cuts are imposed across the board. (These last cuts, of course, aren’t thanks to some outbreak of sanity in Washington, but a bad compromise cobbled together in the course of 2011’s debt ceiling crisis.)

The fiscal cliff is huge, and real. Its impact is potentially around 5% of American GDP. By contrast, George Osborne’s fiscal tightening amounts to little more than 1% a year. If you want to get your head round what a comparable tightening would imply in the British context, then just imagine that the basic rate of tax increases by 10 pence in the pound overnight. Or that spending in the NHS is halved, again overnight.

No economy is strong enough to take that kind of punishment. The British economy is struggling to come out of a double-dip recession even with its own weak-as-milk pace of tightening – and, indeed, I think a triple-dip recession is highly probable. The fundamentals of the US economy are in some ways better than ours (less reliance on the finance sector, less proximity to European travails) but a 5% cut in economic demand overnight? The result will be crippling.

Although the US jobless rate has improved slightly in recent months, that’s only because dispirited workers have left the jobs market altogether. The US employment rate is a horror story. Piling a massive fiscal shop on top of those weak fundamentals, and you’re going to see a massive rise in unemployment. (If you look at U6 unemployment data for the US it’s hovering close to 15%, a shocking stat.)

You might think that the solution is obvious. If the fiscal cliff is so bad, then simply decrease the slope. Go for a slow-but-sure Osborne-style tightening so the budget deficit floats gently lower. And sure enough, there are plenty of economists, living comfortably in their ivory towers, who suggest just such a solution.

But that solution is not available. The IMF – hardly a sensationalist organisation – says that the elimination of America’s long run fiscal gap requires both a 35% increase in all taxes and a 35% cut in all entitlements. The fiscal gap is heinous, but it’s only the first step. It doesn’t even take America where it needs to go.

It gets worse. If fiscal policy can’t save America, how about monetary policy? Alas, and just like in Britain, monetary policy is all out of gas. Interest rates can’t go any lower. quantitative easing (QE) has reached its limits. (And, in any case, QE is little more than a way to rescue Wall Street at the cost of inflation for the rest of us.) The worst thing that could happen to America is that Ben Bernanke, the unelected Chairman of the Federal Reserve, tries to rescue things. The best thing that could happen is that he goes on holiday for four years, having left his Blackberry in the office.

The Princeton Professors Economic Experiment

In short, America’s problems are profound and there is no way to deal with them except one that imposes huge short-term costs on the economy and the people. I don’t think it’ll get quite as bad as it has done in Greece – the US economy has a lot, lot more about it than that – but most of the pain still lies ahead.

And in matters of finance, everything is circular. So the government needs to raise taxes and slash spending to sort out its debt problems. The result: a huge reduction in demand and heavy job losses. The result: countless homeowners being unable to service their mortgages and a huge rise in ‘jingle mail’, as homeowners send their house keys to the foreclosing banks. The result: an already weakened banking system sinking further under a tide of ill-advised boom era lending. And of course, as all this happens, the economy will shrink, which means that the US government has to slash spending yet further in a desperate effort to keep its deficit reduction efforts on track.

These words might seem apocalyptic, but I’ve been saying these things for a while. (My book, Planet Ponzi, has the whole story, and it’s out in paperback now.) What’s more, we’ve already seen disaster scenarios such as these come true in well-managed countries of the developed West. Spain had a much lower debt to GDP ratio than the US. It had better supervised banks and less casino-banking. But we all know the state that Spain is in: a death-spiral that even Germany may not be able to help with.

And the signs are everywhere in America. Go-go stocks have lost their lustre. Facebook trades at little more than half its IPO price. Apple, for so long a do-no-wrong stock market darling, is down more than 20% from its recent highs. Businesses are hoarding cash, because they don’t dare invest it, don’t dare return it to shareholders.

I don’t suppose Mitt Romney thinks of it like this, but you could argue that the 2012 election was a heck of a good one to lose. America has outrun financial reality for decades now. Debt-fuelled, government-funded. The future bought on the never-never.

But the debts are falling due. Reality is knocking at the door. And the fiscal cliff is only the start.

QE has created the worlds biggest housing and equities bubbles in the UK markets

Last week, the Bank of England declared its intention to print another £50 billion. Hardly anyone noticed. That £50 billion will bring the Bank’s total money printing to around £425 billion, or about one quarter of British GDP. No one cares. This evening, the U.S. Federal Reserve will announce its own plans for another round of “quantitative easing” aka QE infinity – a euphemistic term for “destroying the currency.” Not to be left out, the ECB has announced plans for unlimited bond buying (though Germany has, thank goodness, set some limits.) Given that the bonds the ECB wants to buy are issued by increasingly bankrupt Mediterranean governments, the ECB too is doing what it can to wreck the currency it’s charged to protect.

Given such public sector diligence, it’s hardly surprising that the private sector is getting creative all over again. And while creativity is normally thought of as a good thing, the same ingenuity in the hands of Wall Street is always a disaster. Take one recent news story. New rules, due to come in place next year, will force derivatives-traders to post collateral for their risky bets. Proper collateral. You know: U.S. Treasury bonds and the like, stuff you can rely on. Trouble is, the derivatives market is huge and good quality collateral is scarce. (Which is a good outcome, right? It would mean that only the most necessary derivatives trades get done.)

QE1 a failure, QE2 a failure, QE3 ??, money printing is all Bernanke knows...

Only that’s not how Wall Street sees these things. When they see the phrase “good quality collateral,” they instantly think, ‘how can we fake things so that crappy collateral manages to sneak through anyway?” And, what do you know, they’ve come up with a solution called collateral transformation. That solution is twisted enough that I won’t even describe it here — but suffice to say that it’s like the subprime markets all over again. It’s worse than that, actually, because at least with subprime there was a house at the end of the chain. Here, there’s dodgy collateral supporting a derivatives trade backed by a financial security backed by something else altogether. It’s subprime squared or subprime cubed.

But enough of all that. The Bank of England (and the Fed and the ECB) are all thrilled to the bottom of their inflation-creating hearts because the financial markets are boosted by all these interventions. The German stock market index, the DAX, is up 46 percent in the past twelve months and has almost doubled from its 2009 lows. Doubled. Would you like to write down on a sheet of paper all the good things that have happened to the German economy since 2009? If you do, you can use a very small sheet and still have room for plenty of doodles. The simple fact is that these financial market interventions have almost nothing to do with the real economy.

That same basic point is obvious in a million different ways. The London property market is hitting new heights — just when the British economy is spluttering to get out of its double-dip recession. The FTSE index is romping away — but George Osborne is hastily rewriting his budget projections as corporate tax revenues fall far short of what was expected. In the U.S., Apple, Inc. is hitting new extraordinary heights, even as the latest U.S. jobless figures show that people are quitting the labor force on a historically unprecedented scale.

That’s not to say that monetary expansion has no effect, just that the effects are almost entirely destructive. So property inflation is bad (that’s part of what got us into this mess), but it’s one of the most obvious symptoms of Mervyn King’s policies. Bubbliness in the financial markets is also terrible (that’s the other major part of what caused this mess), yet there they are once again, bubbling away, utterly disconnected from the brutal truth of the real economy. And of course as the major currencies fight each other in a race to the bottom, the commodities produced by the rest of the world, with their strengthening currencies, becomes more expensive too. Inflation starts to get baked in.

Inflation, and also indebtedness. The ECB wants to protect Europe by buying up ever larger chunks of poor-quality debt. But who are they kidding? Next year, Spain and Italy alone have to refinance more than €600 billion. The same again, give or take, the year after. And those numbers are as nothing compared with the amounts of private sector (mostly financial) debt that has to be refinanced. A trillion euros next year, €1.2 trillion the year after. These numbers can’t be rolled over by more smoke-and-mirrors. They can only be funded by sound public finance and strong private sector business growth. Needless to say, we don’t have either.

In truth, the lessons aren’t difficult to see. We need sound money and an end to financial engineering. If the rules say that derivatives trades need sound collateral, then any scheme which looks to evade those rules needs to get kicked into touch. (Or more. Rules need to be enforced or there’s no point in having them. In a sane world, the banks and bankers currently busy on ‘collateral transformation’ need to be stopped and held accountable.) Central banks need to forget about the ‘health’ of the financial markets altogether. It’s not their health that matters, it’s ours.

People will say — correctly — that coming off these drugs will produce one hell of a withdrawal period. That’s true, but it’s not a reason to keep someone on heroin. Quite the opposite. The Western world needs to relearn some simple lessons. If you make a bad loan, you’ll lose money. (You won’t get rescued by the taxpayer.) Investment banks are there to deliver useful services to real companies. (Anything else is yet another Ponzi scheme, and probably fraud.) Businesses will succeed by making and marketing fantastic products at competitive prices. (Financial engineering is meaningless and will always destroy value in the end.)

QE addicted market participants line up for another central bank fix

These lessons are obvious, but our policy-makers don’t hear them. Maybe George Osborne does to some extent, and Vince Cable too. But they’re swimming against a tide of denial. That tide is running as high as the global equities and fixed income markets. One day soon, the tide will drown us.

Solution? Business secretary Vince Cable has said he wants to nationalise the 18pc of RBS that isn’t already owned by the taxpayer

Vince Cable wants to nationalise RBS. You can see his logic. The taxpayer owns 82% of the firm already. Nationalisation is hardly such a radical idea; it’s more the logical completion of a process.

It’s true that full nationalisation was never the advertised outcome. We were promised that these part-nationalised banks would be rapidly strengthened and restored to full private ownership.There were even muttered suggestions that the government could end up making a profit on its stake.

But it would be daft to make policy on the basis on what bankers and governments choose to tell us. In 2007, the US Treasury Secretary, Hank Paulson, told the world that he didn’t see the subprime mortgage market as ‘imposing a serious problem. I think it’s going to it’s going to be largely contained.’ Sure, Hank. We know how that prediction worked out.

That same year, the head of financial insurance giant AIG’s financial products division said ‘it is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these [credit default swap] transactions.’ He was almost right – he was off target by just $183 billion, the amount the US government ended up spending on AIG’s bailout.

It’s the same in Europe. Greece has missed 210 of 300 economic targets given it during the course of its extended bailout misery. More recently, the Spanish government of Mariano Rajoy promised financial markets that it would meet its deficit targets and that a bailout was out of the question… until of course it missed those targets and the only bailout question remaining is how many hundreds of billions of euros are required. It was much the same thing in Ireland and Portugal. It will be much the same in Italy too.

So let’s set intentions and promises to one side and look at the facts. First of all, it’s clear that RBS is not about to return to the private sector. The company has just made a six-monthly loss of £1.5 billion. Its computer systems are clearly dysfunctional. It seems certain to get hit with major fines for its role in the LIBOR fixing scandal. The bank’s core business of lending to British companies is gummed up and directionless. The bank’s size makes proper management difficult and restricts competition both on the high street and in business lending.

Struggling: RBS has been dogged by technical problems and poor management, running up a £1.5bn first half loss

And if private ownership remains a pipe-dream, the current arrangement seems like the worst of all worlds. The principal shareholders (you and me) can’t take effective operating decisions because of the private minority. Meanwhile the entire country suffers from a failing banking system. So nationalisation is the first part of the answer – and Vince Cable is brave and right to suggest it.

But nationalisation is only the first step of a long and difficult journey. The next step – the tough one – involves utter honesty about the balance sheet. European sovereign bonds need to be valued at their actual market value. That’ll imply huge losses. Loans backed by British real estate also need to be fiercely written down. Outside a developing property bubble in London and surrounding areas, UK property prices are nosing down. That’s not surprising. In a world where real wages are decreasing, and after a decade long property bubble, prices have nowhere to go but down. That means RBS’s property book is softer than a baby’s bottom.

So government auditors need to bring reality to these accounts. No soft-soaping for the stockmarket. No desperate excuses about ‘trading out of trouble’. (You can’t trade out of trouble if you make losses of £1.5 billion in half a year. That’s trading into trouble, right?)

My own suspicion is that if RBS’s assets were properly valued, it would not be solvent. (I don’t think RBS is alone there, by the way. I think most European banks are insolvent: a belief that others, including the head of Deutsche Bank, share with me.) The traditional government response to financial distress is to pour your money into the stricken institution. It’s what Gordon Brown did like crazy in 2008-09. It’s what countless other governments did too.

And it’s the wrong way. Funnily enough, capitalism already has a solution to insolvency, and it’s called bankruptcy. Bankruptcy is a wonderful thing. In most cases, bankruptcy doesn’t mean the death of a company. If a company is a going concern – that is, if its core business is fundamentally OK, just encumbered by too much debt and too much bad management – bankruptcy is the place to clean it up. Shareholders lose their money (but it’s already lost anyway). Creditors lose a slice of theirs (and it’s already gone too, just slowly and painfully.)

But that’s good. Those losses are good. They’re good for two reasons. One, if creditors make bad loans, they need a reminder to do their due diligence. That’s the only way to avoid the same mistakes in the future. Secondly, as creditors take their losses, RBS can emerge from the ashes with a strong balance sheet, and a sense of confidence. It can start to invest again: in computer systems, in business lending, in all that bread and butter stuff that the firm has neglected so long.

Bankruptcy would help for a third reason too. RBS is too big, too bloated. It needs to be broken up into smaller, nimbler firms that can reintroduce competition to our dysfunctional industry. That can’t be done with a firm that’s already struggling for financial solvency. It needs to be done on the back of a new, strong balance sheet. And it needs to be done without taxpayers contributing a single penny more to the process. We’ve done enough already. It’s time for a new start. It’s over to you, Vince.

Mitch Feierstein is CEO of Glacier Environmental Fund and author of Planet Ponzi: How Politicians and Bankers Stole Your Future

The post garnered a remarkable number of comments, the majority of which agreed strongly with the view I expressed. Just one thing disturbed me, however, which was the number of people who assumed I was taking a partisan position. To remind you: the article argued strongly for a full and open enquiry into the Fast and Furious affair. I guess a lot of people reasoned as follows, ‘The Republicans are bashing the Democrats over this enquiry, this guy Feierstein wants an enquiry, so he must be a Republican.’

I don’t blame people for making these assumptions. Our whole country has become infected with this kind of logic. Our entire political debate has caught the virus. Yet it makes no sense. No sense at all. Here are two facts and one conclusion. Fact One: A federal agent has been shot dead. Fact Two: there are allegations — which may be true or false — that the gun used to shoot him was in circulation only because of an ineptly managed operation conducted by the Bureau of Alcohol, Firearms and Tobacco. Conclusion: These allegations are serious enough to deserve an open investigation, period. Partisan bickering and political spin is simply a diversion from the action that a dead federal agent deserves — and the truth that the American people require.

I say all this because I’m about to call attention to another government department. That department is the Bureau of Labor Statistics. Now I know that Republicans are currently bashing President Obama over his jobs record. I know that Obama is bashing back. But, people, the issue at stake is the creation of jobs in America and the way those things are being recorded and reported. The issues I’m about to address were present under George W. Bush. They haven’t changed under Barack Obama. The depression which struck this country in the wake of financial crisis might have peaked under a Democrat, but it was born in a Republican era. If you yourself are so partisan that you want to make fine distinctions about these things, you should go ahead and make them. Me: I see two peas in a pod.

Good. Preamble over. Here’s the issue. The number of jobs created in America stood at 80,000 in June. That wasn’t nearly enough to budge the jobless rate, which remains stuck at a high 8.2%. (Mitt Romney’s comment: ‘another kick in the gut to middle-class families.’ Barack Obama’s rejoinder: ‘a step in the right direction’ whilst he acknowledged, ‘it’s still tough out there.’)

But let’s put the partisan spin-factory to one side, and instead have a think about the number of jobs being reported. Businesses are born and businesses die. When a business is occupied with either of those processes, it has better things to do than call up the BLS and discuss hires and fires. The BLS therefore estimates the net impact on the joblessness figures of the birth and death of businesses. You can read its full discussion here, but the key line says:

‘There is an unavoidable lag between an establishment opening for business and its appearing on the sample frame and being available for sampling. Because new firm births generate a portion of employment growth each month, non-sampling methods must be used to estimate this growth.’

A non-sampling method: that’s geek-speak for ‘guess.’ We don’t know how many new jobs are being created or lost by business churn, so we’ve got to guess. And you want to know the BLS’s estimate for the number of such jobs ‘created’ (net of losses) in June? Answer: 124,000. In May, the answer was over 200,000.

So, in crude terms, the net jobs growth reported by the BLS — the same one being lambasted by Romney and praised by Obama — is only in positive territory at all because of some number that’s simply a guess. A smart guess probably. One made by intelligent statisticians… but still. In this economy? With Europe in turmoil, China slowing, the country heading for a fiscal cliff which could thrust us back into recession, plus massive uncertainty over the path of healthcare costs per employee? The BLS has never been in this position before, because the economy hasn’t been. And after all, who in their right minds would be hiring new staff given these conditions? Most savvy businesspeople will be watching, waiting… deferring spending and hiring.

The truth is employment in the U.S. might be growing or shrinking. We just plain don’t know. What we do know is that if you add together the unemployed, workers discouraged from seeking work, plus those working part-time when they’d prefer to be working full time… you have an ‘underemployment’ rate of at least 15% — while our labor force participation rates are kicking around decade long-lows. These things are terrible economic news, but they’re terrible on a human scale too. Let’s consider the graduates looking to repay the more than $1 trillion in government-guaranteed student loans. These graduates are America’s future. Those BLS data points represent human lives, human potential. And the outlook is grim.

Vangelia Pandeva Dimitrova

To repeat, I’m not making a partisan point here. I’m making a bigger one. The American economy is in deep trouble. The reported data we have is unreliable. What we do know is that we have too much debt, too much money printing, a culture of total irresponsibility on Wall Street and consequently an absence of credibility in the financial and political promises that underpin our economy. All this, plus a political culture which is not addressing these things in a mature and responsible way.

This country’s in a mess. And partisan bickering will never pull us out of it. We all need to change our mindsets. I voted for change in the last election and I believe that today’s DC landscape is the most polarized in my lifetime. Are things better? Are we going to be offered a real choice in this election year? And where can I get a refund?

I published this article in today’s Huffington Post.

Those same finance ministers are also set to approve a year’s delay in the deadline given to Spain for reaching a budget deficit of 3% of GDP. That won’t, of course, be the last bailout for Spain and, please note, a budget deficit of 3% is still pushing debt ever upwards in acountry whose economy is getting smaller not bigger.

Unsurprisingly, government bond markets have once again been wildly unimpressed. Spanish bond yields briefly touched 7% today, before falling back. Given that Spanish debt (according to the misleading official figures) is around 7% of GDP and rising fast, interest rates at this level mean that about 5 cents in every euro are going to pay the interest on that debt.

The costs of euro collapse will be huge, but those costs are coming anyway. And they only get bigger the longer you defer the moment of truth

Put another way, Spaniards have to work about three weeks a year, simply to pay off the interest they owe on the national debt. No wonder their economy is failing under the weight of that burden. No wonder unemployment is so extravagantly high.

It’s time to end this massive Ponzi Scheme. If the problem is too much debt, you don’t solve the problem by extending more debt. If the problem is banks with irresponsibly reckless lending practices, the solution is not to “gift” them more money. If the problem is a wildly uncontrolled money supply, you don’t solve that problem by printing money until the presses are smoking hot.

A Ponzi Scheme is any merry-go-round fraud where you have to keep pulling new idiots into your scheme to keep things going. It’s the economics of the chain-letter. People can sometimes make money, but only if the supply of idiots is big enough. These things always collapse – and collapse disastrously – in the end.

We’re near that point now. Spain can’t receive a Greek-style bailout: all the EU rescue funds combined don’t have the resources to do it. Even if Germany decided to do all it could, the scale of these debts would simply overwhelm Germany’s (already very indebted) economy. In any case, if the fairies came and Spain were rescued, the pressure on Italy would soon become almost overwhelming. And though France hasn’t been hitting the headlines recently, it has higher debt than Spain, a history of deficits and a huge banking sector with vast exposure to Spain, Italy and Greece.

So why not let’s just call it a day? For Spain. For Italy. For the Euro. For this whole misconceived and duplicitous Ponzi Scheme. The costs of euro collapse will be huge, but those costs are coming anyway. And they only get bigger the longer you defer the moment of truth.

David Cameron wants to hold a referendum on Europe sometime after the next election. But he’d better get on with it. Europe, in its current form, doesn’t have that long to live.

I published this in the Daily Mail.