EIR is a Larouchepub.com Publication
WEDNESDAY, JANUARY 13, 2016
Volume 2, Number 101
EIR Daily Alert Service
P.O. Box 17390, Washington, DC 20041-0390
Jan. 12 (EIRNS)—“Sell everything except high quality bonds” because 2016 is going to be a “cataclysmic year,” the credit chief of the Queen’s own Royal Bank of Scotland wrote in a recent note to clients, according to a January 11 article by Ambrose Evans-Pritchard published in the Daily Telegraph. RBS’s Andrew Roberts, while stupidly calling China the “epicenter” of what is actually a meltdown of the entire trans-Atlantic financial system, forecast stock market plunges in the U.S. and the U.K. of up to 20%, an oil price that could hit as low as $16 per barrel (a 50% drop from today’s Brent crude price of just under $32), and that a panicked Fed and Bank of England will have to reverse field and start up with quantitative easing again in short order.
The ongoing carnage in commodities, and oil in particular, is on the mind of every speculative banker on the planet. Morgan Stanley is warning of a $20 per barrel price; Goldman Sachs says that oil storage tanks could soon reach a limit, which would “force an immediate halt to some production”; and a Barclay’s research note advises that “recent price declines for major commodities are now greater than in any crisis of the past 30 years, and speculative positioning much more negative than it was even in the depths of the financial crisis.” Bloomberg wire service characterized yesterday’s oil trading as simply “madness,” and the Wall Street Journal warned that U.S. oil and gas producers are currently losing $2 billion per week, and that at current price levels—let alone the additional drops that are coming—fully one-third of such oil and gas companies will go bankrupt over the course of this year.
But the meltdown did not originate in the oil and commodities markets, and it certainly doesn’t end there. The British housing market is also about to implode, as noted by the Telegraph in a Jan. 10 piece headlined “U.K. House Prices Set To Crash as Global Asset Prices Unravel.” They write that the global asset meltdown has already struck commodities and stocks, and it will soon slam the housing sector, which they describe as a “ticking time bomb.” A big problem in the British housing bubble is what they call “buy-to-let,” i.e. people who have bought housing units not to live in them, but to rent them to others while speculating on what they hope will be an unending asset bubble—much like the “flipping” phenomenon and the subprime mortgages in the U.S. in the mid-2000s. “A survey of landlords suggested 200,000 plan to exit the sector. The rapid growth of buy-to-let during the past decade looks set to be slammed into reverse.” And this will intersect a related bubble: “U.K. households are simply drowning in about £40 billion of debt, according to the latest figures from the Office of Budget Responsibility.”
And then there is increasingly panicked capital flight as fear of bail-in expropriations set in—both from carry trade destinations such as Brazil back to the U.S. and Europe; and within Europe from southern tier countries Italy, Spain, Portugal, into German and Dutch banks. But those banks are not lending out those increased funds, not to consumers or businesses, and not even to fellow banks on the interbank overnight market. Instead they are parking the funds at the European Central Bank (ECB), where they earn a negative interest rate.
COLLAPSING WESTERN FINANCIAL SYSTEM
Jan. 12 (EIRNS)— Prominent economists have called for a moratorium on the EU bail-in legislation in Italy. Luigi Zingales and Luigi Guiso first called for it in the financial daily, Il Sole 24 Ore, on Dec. 30, and today in Formiche, Paolo Savona, former head of the Italian Deposit Guarantee Fund, urged the government to push for it.
In Italy, unlike other countries, “small savers own bank bonds instead of deposits,” Zingales and Guiso wrote. With the new bail-in regulations, owners of senior bonds will be involved in the bail-in, representing more than 30% of bank financing for many banks. The smaller the bank, the higher the share.
This situation must be changed, but it cannot be done overnight. “We need a transitional rule which, in exchange for a ban on selling bonds to bank customers, exonerates Italy for a temporary period (12-18 months). The government should negotiate this with Brussels more energetically than it did unsuccessfully during the discussion on bail-in rules.”
Savona goes further in the direction of actually calling for an end to bail-in, pushing the government to demand “equal treatment” with other countries which get a moratorium on other EU rules.
In an article for Formiche, Savona wrote: “Why doesn’t Italy demand a moratorium on bail-in, since Europe is a ‘political area of moratoria’ which have been made necessary by rigidities introduced by EU guidelines in a world which demands flexibility?
“Of course, like all ongoing moratoria, it will be temporary, at least until we find a suitable solution to protect savers. It is what Northern European countries say about the moratorium on the Schengen Treaty on free circulation of people, and it is what is being practiced for violations of the fiscal compact and, even more with the agreement on excessive balance-of-payments surpluses.
Jan. 12 (EIRNS)—The latest marker in the decline of the U.S. energy base was the announcement yesterday of the Chapter 11 bankruptcy filing by Arch Coal, the second largest coal supplier in the nation after Peabody Energy. Arch operations alone account for 13% of U.S. coal production. The company is reported to have more than $4.5 billion in long-term debt, and failed to make an interest payment deadline in December. This big-name bankruptcy follows bankruptcy filings by other mining companies in recent months, including Patriot Coal, a spin-off of Peabody (filed in May 2015), Walter Energy and Alpha Natural Resources, reflecting the inability to stay solvent, despite years of contraction and destructuring of mining operations. It parallels the blow-out in the Obama shale boom sector.
Also this week, major layoffs are underway at mines run by Murray Energy, the largest privately-owned mining company in the United States. Some 600 miners, truck drivers and other support workers are being put out of work in West Virginia (at five mines) and Ohio (at the Powatan Point mine). These layoffs come atop more than 1,000 Murray workers already let go in West Virginia mines since April 2014; and 250 in Ohio mines; and 320 in Illinois.
Coal output in the U.S. has been on a decline for several years. The 2015 production is down 10% from 2014, and far below the peak output of coal in 2008. For the month of April 2015, natural gas electricity generation actually exceeded coal-powered generation for the first time ever, though it has since dropped back below coal.
The value of Arch shares, from a peak of $260 a share in early 2011, has fallen to less than a $1 per share as of yesterday. What propped up coal company share values until 2011, was the prospect of exports making up for the green-enforced decline in coal use in the United States. But the export mirage did not continue.
Beyond being hit by “the markets” in this way, coal producers have been targetted by administrative and legal action for polluting, and by lawsuits for the so-called crime of misinforming the public and investors that coal is acceptable and has a future. Peabody Coal was hit by such a lawsuit from the State of New York. This is a direct British royalist onslaught. Prince Charles in 2015, announced the formation of a worldwide legal hit squad against energy companies, called the “Commonwealth Climate and Law Initiative.”
The effects of this attack, plus the general economic downward spiral, of which coal is a dramatic part, are showing up across all sectors. For example, a sharp decline is underway in the volume of cargo transported by rail—much of which is coal and oil. Railroad cargo overall has fallen—including non-energy related merchandise—the most in recent weeks, at a faster rate than at any time in the past six years. “Carloads have declined more than 5% in each of the past 11 weeks on a year-over-year basis,” states a report out by the Bank of America, released this month.
In the leading coal-mining state of West Virginia, the collapse of economic activity is manifest as misery and depopulation. The state’s death rate now exceeds its birth rate, documented by the U.S. Census for the year from July 2014 to July 2015. This is true elsewhere only in Maine, also depressed, and besieged Puerto Rico, though five other states are now also depopulating (Connecticut, Illinois, Mississippi, New Mexico, Vermont).
Murray Energy put out a sharp statement against Obama on Dec. 31, 2015, when announcing its mass layoffs: “Murray Energy Corporation confirms that certain workforce adjustments [layoffs] and scheduling changes, made in the normal course of business, are necessary to reflect the current coal marketplace, which has been destroyed by President Barack Obama, and his supporters, including the Sierra Club, the increased utilization of natural gas to generate electricity, and the extremely excessive coal severance tax in the State of West Virginia.”
Jan. 12 (EIRNS)—According to data put together by financial analyst Mike Shedlock, large-scale capital flight (deposits) out of southern Europe, but in particular Italy, is fleeing into Germany, Luxembourg, and the Netherlands. The new deposits are in turn put into the European Central Bank, despite the −0.3% interest rate of the ECB for such deposits. This so-called flight capital in fact amounts to an organized, classic bank run, as Franklin Delano Roosevelt faced when sworn in as President in 1933. Analyst Shedlock explains, under the headline, “Europe Fears Bail-Ins,” why this is happening: “Fear of bail-ins, confiscations, capital controls, and bank failures like we have seen in Greece and Cyprus. Recent examples include Portugal and Italy.”
Euros parked by banks as “excess reserves” at the ECB have quintupled from €36.6 billion in January 2015, to €196 billion in December 2015. Analyzing the ECB data on the imbalances thus created within the euro death zone, Shedlock shows this is largely flight of deposits from banks being threatened first under the EU bail-in schemes. He presents a chart. The minuses: first Spain—worst since 2012; France—worst negative since 2011; Italy—worst ever; and some of the winners: Germany—highest since 2012; Luxembourg—highest ever.
Shedlock and his blog collaborators are market purists, and would have nothing to do with FDR and his FDIC deposit insurance scheme. Thus, he has no problem with the EU dictatorial apparatus guidelines for decimating the continent’s banks and depositors. Shedlock approvingly quotes a fellow analyst: “In principle, the BRRD, or ‘bail-in directive’… is a good thing, depositing your money in a fractional reserve bank also has risks, your own. Free marketeers accept that.”
To his own question, are German banks therefore safe? Shedlock answers no. If Italy, Spain, Greece leave the Eurozone the rest are stuck with the imbalances, and the bail-ins there will be all the more on the agenda.
STRATEGIC WAR DANGER
Jan. 12 (EIRNS)—A number of former officials of the Obama Administration are speaking out about the heightened danger of thermonuclear war that his policies are bringing about. An article in the New York Times couches the opposition of leading military and intelligence figures in their becoming “disillusioned” with President Obama’s failure to bring the vision of a nuclear-free world that he expressed in Prague in 2009, closer to fruition.
The former officials are criticizing the administration’s plans to modernize the U.S. nuclear arsenal at a cost (according to some estimates) of up to $1 trillion over the next 30 years, arguing that this policy is lowering the threshold for nuclear warfare. These critics argue that while the explosive “innards” of refurbished bombs may not be new, the smaller yields and better targetting can make the arms more tempting to use—even to use first, rather than in retaliation. Among the critics are retired Gen. James Cartwright, who reiterated that the smaller yield and greater accuracy of the B61-12 bomb makes it more tempting to use; and Andrew C. Weber, a former assistant secretary of defense and director of the Nuclear Weapons Council, who said that the B61-12 is “unaffordable and unneeded.”
The Times explained that, in addition to the B61-12, some experts see a specific danger in the new nuclear cruise missile that the Pentagon is developing. In a recent article co-authored with Weber, former Secretary of Defense William Perry argued that the cruise missile might sway a future President to contemplate “limited nuclear war.” Worse yet, they said, because the missile comes in nuclear and non-nuclear varieties, a foe under attack might assume the worst and overreact, initiating nuclear war. Perry, the Times notes, is a mentor to Secretary of Defense Ash Carter.
Another aspect of the war danger is NATO’s encroachment ever closer to Russia, to which Russia has responded by (among other things) building modern air defense systems. Gen. Frank Gorenc, commander of U.S. Air Forces Europe, told the New York Times that these air defense systems, in Kaliningrad, in Crimea, and even in Syria, have now made NATO’s access to those regions, particularly the Baltic, a very difficult prospect. He said the Russian strategy, which the U.S. military calls “anti-access/area denial,” or A2/AD for short, was among the most worrisome trends he had seen. “They have every right to lay that stuff out,” Gorenc said. “But the proliferation and the density of that kind of A2/AD environment is something that we’re going to have to take into account.”
Jan. 12 (EIRNS)—Russia will stop commercial electricity deliveries to Ukraine, a Russian Energy Ministry source told the Russian business newspaper Kommersant today. The contract for Russia’s delivery of energy to Ukraine expired at the end of 2015, and will not be renewed, because it was linked to an agreement for Ukraine to deliver electricity to Crimea which carried an unacceptable condition demanded by Ukraine.
In talks on the contract’s extension in late 2015, Ukrainian authorities insisted that the contract designate Crimea as an “integral part of Ukraine,” to which Russia said it could not agree. Moreover, in late 2015, Crimea was subjected to repeated power cuts. On Nov. 21, 2015, power lines supplying energy to Crimea via southern Ukraine were damaged. The Ukrainian Interior Ministry later said the power lines had been blown up by Tatar activists and paramilitaries from the Right Sector, who were attempting to blockade the Crimean peninsula, Sputnik reported.
Russia then began an emergency operation to build an “energy bridge” across the Kerch Strait, which separates Russia from Crimea. The first leg of the Russian energy bridge across the strait was completed in early December, and supplies from Ukraine were restored. But on Dec. 30, Crimea’s supply was again cut, with authorities in Ukraine’s neighboring Kherson Oblast confirming that an “explosion” had damaged an electricity pylon. This sudden shutoff coincided with the expiration of Ukraine’s contract to supply electricity.
U.S. POLITICAL AND ECONOMIC
Jan. 12 (EIRNS)—U.S. Senator and Republican Presidential pre-candidate Rand Paul, asked about President Obama’s State of the Union speech on “Good Morning with Dan Mitchell” today, said “I wish that tonight President Obama would announce, ‘I’ve really been a failure as a President over the last seven years, and I’m gonna take off early ‘cause I want to go play golf,’ and resign.”
Jan. 12 (EIRNS)—Over the past few days across the blogosphere, and this morning on National Public Radio, there’s been widespread coverage of the way that the Flint, Michigan water supply was made so toxic that residents experienced skin lesions, hair loss, vision loss, depression, anxiety, and exposure to lead levels that far exceeded what the Environmental Protection Agency (EPA) considers “toxic waste.” This evening, residents of the city of 102,000 were invited to bring their children to an elementary school for a “Lead Testing and Family Fun Night.”
This isn’t the first time Gov. Rick Snyder’s regime has created a water crisis in the state. In 2014, Snyder’s “emergency manager” in Detroit ordered water services to be cut off for residents said to be in arrears on their water bills, while water services for commercial users which owed the city millions in unpaid charges were never halted.
In April 2014, under the demand of another of Snyder’s “emergency managers” nominally looking for ways to save money, Flint’s water supply was switched from Lake Huron to the Flint River, which since 1908 had been used by GM and others as a water source for manufacturing and a waste disposal.
As filmmaker Michael Moore, a Flint native, put it in an open letter to the governor Jan. 7, Snyder “cut off the clean, fresh glacial lake water of Lake Huron that the citizens of Flint had been drinking for decades and, instead, made them drink water from the industrial cesspool we call the Flint River, a body of ‘water’ where toxins from a dozen General Motors and DuPont factories have been dumped for over a hundred years.”
On top of that, chemicals were added to “clean up” the water. But those chemicals ended up stripping the lead from the inside of the city’s aging pipes, and sending the lead and the chemicals into the pipes in people’s homes.
Moore also pointed out that GM announced back in October 2014 that it couldn’t use water from the Flint River for manufacturing any longer—because it corrodes car parts. But Snyder did not acknowledge the unsafe condition of the city’s water until Sept. 30, 2015.
In his letter, Moore noted, “To poison all the children in an historic American city is no small feat. Even international terrorist organizations haven’t figured out yet how to do something on a magnitude like this. But [Snyder] did.” Moore wrote: “The children whom [Snyder has] poisoned have to endure a life of pain and lower IQ’s from [his] actions. [He has] destroyed a generation of children, and for that, [he] must pay. It is time for [him] to go to prison.”
THE NEW GLOBAL ECONOMIC ORDER
Jan. 12 (EIRNS)—China made an unexpected move to re-establish capital controls this morning, an important step in continuing its domestic and international infrastructure investment program.
According to numerous reports in European media, the Chinese State Administration of Foreign Exchange (SAFE) ordered financial institutions to increase controls on foreign exchange transactions, and particularly to limit purchases of dollars by Chinese companies and individuals. Bloomberg quoted a DBS Bank Hong Kong analyst, “The main objective is to reduce volatility, curb capital outflows and limit depreciation pressure on the yuan.”
Pushed by IMF rules, China has liberalized its capital account over the past several years, allowing more direct purchases and transfers of funds abroad, as well as investments, by individuals and institutions. With both China’s interest rates and the value of the yuan being slowly reduced over the same period—to shut down a volatile Hong Kong “carry trade” based on commodity derivatives—the result has been significant outflow of China’s reserves. They have fallen from about $4 trillion a year ago to about $3.5 trillion now. This could reduce China’s investment capacity for the New Silk Road and other international development programs.
China’s domestic savings are very large, about $8 trillion equivalent. Their transfer abroad through international development banks, or investments in foreign companies building the world land-bridges, is stable; but as a Chinese economist noted a year ago, “their outflow as hot money could feed into a global crash.”
Jan. 12 (EIRNS)—At a forum yesterday celebrating the 50th anniversary of the founding of the National Committee on U.S.-China Relations, in which four former U.S. Defense Secretaries were engaged in a “look-back” on the U.S.-China relationship during their tenures, Helga Zepp-LaRouche, the chairwoman of the Schiller Institute, brought a dose of reality to what was becoming a much too comfortable exchange of views among colleagues, which might have occurred on the deck of the Titanic before it hit the iceberg. The secretaries were Harold Brown, William Cohen, Chuck Hagel, and by video, William Perry. The forum was aired on C-SPAN2.
While the moderator, NCUSCR Chairman Steve Orlins, did his best to find someone other than Mrs. Zepp-LaRouche to ask the first question, she succeeded in getting the floor, and introducing herself as the chairwoman of the Schiller Institute. “There are many military experts internationally who are saying that we are closer to nuclear war than at the height of the Cold War period due to a variety of reasons,” she said. “Now if that would happen by accident or otherwise, it would lead to the elimination of mankind. There are many other destabilizing factors. One is that the World Bank just said that we are in front of the perfect political storm because of the new financial crash. The EU is about to detonate over the refugee crisis. My question is, why can we not make a new paradigm, where we answer President Xi Jinping’s offer which he made to President Obama at the APEC meeting in 2014, that the United States should cooperate in a win-win strategy with the New Silk Road?… Why can’t we build an international security architecture based on common economic cooperation?”
Harold Brown, Jimmy Carter’s Secretary of Defense, replied, “I think we have. I think that things would be much worse if there weren’t economic cooperation, but to say you are in favor of peace and cooperation is just the very first step. The mechanics of the details are everything.” Then William Cohen, who had served in Clinton’s Administration, wanted to reply. Cohen said he wanted Perry, who had preceded him under Clinton, to talk about this issue, but that he would comment on his own behalf. “I think we have become too lax in our concern about nuclear weapons,” he said. “I go back to Churchill who said that one day we would return to the Stone Age on the gleaming wings of science. I think what we are seeing with the proliferation of nuclear weapons, Pakistan is building more and more, North Korea is building more, Iran certainly may be building more in the not too distant future…. I believe the threat of the spread of nuclear weapons is much greater today because more and more individuals and radical groups are trying to get their hands on them. So I would put that in the context of an overall architecture, that we have to be concerned about, perhaps more than before, because we had rational governments dealing with this issue, coming even to the point of brinkmanship and possible extinction.”
Moderator Orlins unfortunately ignored Cohen’s suggestion that Perry should also reply.