Thursday, October 11, 2012

S and P downgrades Spain by two notches/ECB initiates margin calls/South Africa rejects mining offer/ Greece needs another two years to get its house in order as per IMF/

Good evening Ladies and Gentlemen:

Gold closed up today by $5.60 to finish the comex session at $1768.80.  Silver finished nicely above 34 dollars at $34.05 although down 2 cents.  The small banking attack against silver today had no effect.
The bankers seem intent on keeping gold below 1775 and silver below the 35.00 dollar level.

James McShirley, a long time GATA supporting describes gold trading over the past 12 years:

(COURTESY James McShirely/GATA)

* It rarely exceeds 1% gains on any given trading day.
* It virtually never has any follow-through even after a 1% gain.
* It virtually never has any follow-through on key outside reversal days.
* It virtually never has any follow-through on technical breakouts.
* It virtually never rallies on bullish news.
* It never rallies on news of good physical demand.
* It is shunned or disparaged by 98% of the alleged pundits.
* Waterfall crashes occur with regularity, often in thin-trade markets.
* The producers of the commodity are largely silent about its prospects.
* The commercials are perpetually short and mega-bearish.
* The 2 major promotional firms hired by the producers never forecast higher prices.
* The 2 financial cable news networks give little to no coverage, and shun the expert analysts. 

In the news today S and P lowered the ratings on Spain by two notches to BBB- and thus creating more headaches for the ECB as they must now do a margin call to Spain on all of those swapped sovereign bonds purchased through the LTRO 1 and LTRO 2.

South Africa miners rejected the latest pay increase and as such expect the rand to continue to head south tomorrow.

The IMF stated that Greece will need another 2 years to get their house in order.  Lagarde did not mention who will fund Greece during these two years.

We will go over these and other stories but first...............................

let us head over to the comex and assess trading today.

The total comex gold open interest fell by a monstrous 7484 contracts as the bankers succeeded in removing some of our weaker gold leaves from the gold tree. The active month of October saw it's OI fall by only 2 contracts.  We had 3 notices filed yesterday so in essence we gained another 1 contract or 100 oz of additional gold standing.  I hope you have noticed that we are not experiencing any cash settlements.  It seems that those standing wish only physical metal. The non active November gold contract saw it's OI fell by 123 contracts to 1072.  The big December contract will ultimately prove to be the battleground for supremacy of gold with the bankers playing host to the visiting long speculators. In this month, the OI fell by 5108 contracts from 352,149 down to 347,041.  The estimated volume today came in at a very weak 113,260 contracts.  The confirmed volume yesterday was a touch better at 137,768.  It seems that our bankers are now becoming a little frightened to supply the non backed paper.

The total silver comex OI defied all odds by fending off the continual relentless attacks by our bankers by again increasing it's OI by 925 contracts from 140,426 up to a multi year high of 141,351.  Note that silver does the opposite to gold as our silver players are immune to the bushwacking antics of our crooked bankers.

The non active October contract saw it's OI fall by 60 contracts from 156 to 96.  We had 62 notices filed yesterday so again we gained in silver oz standing to the tune of 2 contracts or 10,000 oz of additional silver will stand in October.  The non active November contract saw its OI fall by 3 contracts to 63.  The big December contract saw it's OI rise by 588 contracts from 87,243 up to 87,831.  This surely caught the eyes of our bankers and no doubt will cause them to have another of their frequent midnight oil meetings trying to figure out how to force our silver leaves to fall from the silver tree.  The estimated volume today was very anemic at 33,301.  The confirmed volume yesterday was better at 47,069. It seems that the bankers are loathe to supply the non backed paper.  The boat is getting lopsided with their huge short position. Either this resolves itself or else we are heading for a commercial silver failure.

Comex gold figures for Oct:

Oct 11-.2012    

Withdrawals from Dealers Inventory in oz
Withdrawals from Customer Inventory in oz
46.3 ( Manfra)
Deposits to the Dealer Inventory in oz
Deposits to the Customer Inventory, in oz
4930.41  (Brinks)
No of oz served (contracts) today
(17)  1700 oz
No of oz to be served (notices)
(318)   31,800 oz
Total monthly oz gold served (contracts) so far this month
(6831)  683,100 oz
Total accumulative withdrawal of gold from the Dealers inventory this month
Total accumulative withdrawal of gold from the Customer inventory this month

Today, we again had tiny activity inside the gold vaults.

The dealer had no deposits and no withdrawals.
The customer had the following deposit:

1)  4930.41 oz into Brinks

The customer had the following withdrawal:

i) Out of Manfra: 64.30 oz

total withdrawal:  64.3 oz
There was no adjustments.
Thus the dealer inventory rests this weekend at 2.565 million oz (79.78 tonnes of gold)

The CME reported that we had only 17 notices filed for 1700 oz of gold.
The total number of notices filed so far this month is represented by 6831 contracts or 683,100 oz of gold.
To obtain what is left to be served upon, I take the OI standing for October
(335) and subtract out today's notices (17) which leaves us with 318 notices or 31,800 oz left to be served upon our longs.

Thus the total number of gold ounces standing in October is as follows:

683,100 oz (served)  +  31,800 oz (to be served upon) =  714,900 oz.(22.23 tonnes)
we gained another 100 oz of gold standing.
The total physical amount of gold standing in October is awesome for what is generally perceived to be a very tiny delivery month. The amount standing equates to 27.86% of total dealer inventory.


Oct 11.2012:

Withdrawals from Dealers Inventorynil
Withdrawals from Customer Inventory 717,073.26(Brinks,HSBC)
Deposits to the Dealer Inventorynil
Deposits to the Customer Inventory 764,222.78(JPM)
No of oz served (contracts)18  (90,000)
No of oz to be served (notices) 78  (390,000)
Total monthly oz silver served (contracts)435 (2,175,000 oz)
Total accumulative withdrawal of silver from the Dealers inventory this month72,236.88 oz
Total accumulative withdrawal of silver from the Customer inventory this month2,619,748.2

Again, we had huge  activity inside the silver vaults today.
However we had no dealer deposit and no  dealer withdrawal.

We had the following customer deposit:

i) Into JPMorgan:  764,222.78 oz

total deposit: 764,222.78 oz

we had the following customer withdrawal:

i)  Out of brinks: 122,947.49 oz
ii) Out of HSBC:  594,125.77 oz

total withdrawal:  717,073.26 oz

we had 1 adjustment and it was a  removal of silver from the customer into the dealer account at... you guessed right JPMorgan:

a)  511,815.73 oz from the customer into the dealer account at JPM

The dealer or registered inventory rests tonight at 41.625 million oz
The total of all silver rests at 144.466 million oz.

The CME reported that we had another very tiny 18 contracts served or 90,000 oz of silver.  The total number of silver notices filed so far this month is represented by 435 contracts or 2,175,000 oz of silver.  To obtain what is left to be served upon, I take the OI standing for October (96) and subtract out today's notices (18) which leaves us with 78 notices or 390,000 oz left to be served upon our longs.

Thus the total number of silver ounces standing in this non active delivery month of October is as follows;

2,175,000 oz (served) +  390,000 oz (to be served upon) = 2,565,000 oz
we gained a tiny 2 contracts or 10,000 oz of silver standing
The amount standing is still very high for a non active month. 


The two ETF's that I follow are the GLD and SLV. You must be very careful in trading these vehicles as these funds do not have any beneficial gold or silver behind them. They probably have only paper claims and when the dust settles, on a collapse, there will be countless class action lawsuits trying to recover your lost investment.
There is now evidence that the GLD and SLV are paper settling on the comex.

Thus a default at either of the LBMA, or Comex will trigger a catastrophic event.

First the SPDR gold trust:

Oct 11 2012:

Total Gold in Trust



Value US$:76,232,333,675.27

Total Gold in Trust



Value US$:75,899,151,031.92

Oct 9.2012:




Value US$:76,428,784,679.03

Oct 6.2012:




Value US$:76,451,681,813.27

we had no gold enter or leave the GLD vaults today.


And now for silver:

Oct 11.2012:

Ounces of Silver in Trust318,941,345.000
Tonnes of Silver in Trust Tonnes of Silver in Trust9,920.18

Ounces of Silver in Trust318,941,345.000
Tonnes of Silver in Trust Tonnes of Silver in Trust9,920.18

Oct 9.2012

Ounces of Silver in Trust318,941,345.000
Tonnes of Silver in Trust Tonnes of Silver in Trust9,920.18

oct 8.2012:

Ounces of Silver in Trust318,941,345.000
Tonnes of Silver in Trust Tonnes of Silver in Trust9,920.18

today, we had no change in inventory of silver into the SLV vaults.

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

Sprott and Central Fund of Canada. 

(both of these funds have 100% physical metal behind them and unencumbered and I can vouch for that)

1. Central Fund of Canada: traded to a positive 4.8 percent to NAV in usa funds and a positive 4.8%  to NAV for Cdn funds. ( oct 11.2012)  

2. Sprott silver fund (PSLV): Premium to NAV rose to  4.75% to NAV  Oct 9/2012  :
3. Sprott gold fund (PHYS): premium to NAV rose to 2.68% positive to NAV Oct 9.2012. (not updated)  

 Now we witness the Central fund of Canada  gaining big time in its positive to NAV, as we now see CEF at a positive 4.8% in usa and 4.8% in Canadian.This fund is back in premiums to it's former self and it is  about time. Even the Sprott silver fund is almost back to a normal positive to NAV with its premium  at 4.75%. Investors are seeking out physical supplies.  .

It looks like England may have trouble in finding gold and silver for its clients.
It is worth watching the premium for gold at the Sprott funds which is a good indicator of shortage as investors bid up the premiums.


And now for some important physical stories:

First this important video where German journalist Lars Schall interviews Dimiti Speck on the entire gold suppression scheme.  To any of our nay sayers, this should change your mind;

(courtesy, Lars Schall, Dimitir Speck/GATA)

Gold suppression researcher Dimitri Speck interviewed by Lars Schall

11:16p ET Wednesday, October 10, 2012
Dear Friend of GATA and Gold:
GATA's friend the German financial journalist Lars Schall today interviews German market analyst and GATA consultant Dimitri Speck about gold price suppression. Speck is author of the gold price suppression study "Geheime Goldpolitik" ("Secret Gold Policy") and partner in the European investment house Staedel Hanseatic. The interview is a 24-minute video headlined "Gold Market Manipulation Explained" and it's posted at Schall's Internet site here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.


Greece has considerable amounts of gold in the ground that could bail them out of trouble if Greece had proper leadership.  Canadian miner Eldorado Gold Mines shelled out 2.4 billion USA to buy out Goldfields which housed the important development mines in Greece: the Skouries project and the Olympias.  They also own the Perama gold project .  Together these 3 mines are expected to produce 345,000 oz of gold per year but are held up due to bureaucratic red tape.

Australian gold miner, Glory Mines has the Sapes project and that is expected to produce 80,000 oz

These 4 mines could produce 425,000 oz of gold (13.2 tonnes per year) and that should bring Greece out of its financial turmoil.  But alas, rioting by citizens and lack of government control has blocked production from these mines.

(a great look inside the mining fields in Greece, courtesy of Wolf Richter/

Gold, Molotov Cocktails, Rubber Bullets, Teargas: A Rift In Greece

testosteronepit's picture

Wolf Richter
A Greek economist’s terse sarcasm: “GDP has decreased by €47 billion in the last five years. Economy is expected to contract by 3.8% in 2013, the 6th straight year of recession! Unemployment has reached 24.7%. Youth unemployment... 55.4%! No worries though—we have the sun, the sea, our cultural background.” And they have something else: GOLD. 
Last year, the Canadian company Eldorado Gold Corp. shelled out $2.4 billion to acquire European Goldfields, which had been struggling for years to develop its Skouries and Olympias gold mines in Greece. Eldorado also owns the Perama Hill project. The three mines are expected to produce 345,000 ounces a year. The Australian company Glory Resources Ltd. is developing its Sapes mine with an expected production of 80,000 ounces a year. The four mines together would produce 425,000 ounces of gold by 2016, or about $750 million at today’s price—making Greece the largest gold producer in Europe.
Alas, development has been blocked for a decade by bureaucratic impossibilities, environmental groups, leftist political parties, and local residents—despite the manna of tax revenues, royalties, and jobs. Well, 1,700 jobs for 1.17 million unemployed.
But they’re just scratching the surface, so to speak. “We think Greece has the potential to be a major gold producer,” said Glory Chairman Jeremy Wrathall. He found it “bizarre” that the country was “virtually unexplored,” and he was full of hope that it had “woken up to the potential of the mining industry.”
Eduardo Moure, Eldorado’s general manager for Greece, had similar visions. “I think people realize we are part of the solution,” he said, convinced that they would “come to realize that mining can be a positive force for change.”
Operations are most advanced at Eldorado’s Olympias and Skouries mines in Halkidiki, a peninsula in Northern Greece marked by its three “fingers”—including Athos, whose Mount Athos is a world heritage site. Tourism is by far the largest industry and employer. And in July 2011, the Environment Ministry awarded the licenses to mine gold.
Tensions flared up in late March when protesters occupied the road leading to the Skouries quarry on Mount Kakkavos and scuffled with workers who were trying to get through. Then, in the nearby village of Ierissos, a municipal council meeting that had convened to discuss the project was broken up by protesters who overturned cars and fought street battles with riot police that had been brought in to keep things under control. A member of the protesting committee later told the paper Kathimerini, “A complete cessation of mining is the only action we are prepared to accept from the state.”
Local residence associations, cooperatives, and professional groups filed six appeals with the Council of State, Greece’s highest court, to stop further mining activity, arguing that it would destroy local forests and the ecosystem. On July 24, the court threw out the first appeal on the grounds that the investment would be “very beneficial for the economy.”
On August 6, riot police that had once again been brought in fired rubber bullets and teargas at protesters who marched from the village of Ierissos towards the Skouries mine, where workers had begun chopping down trees. On September 9, events took a nasty turn when protesters—some local, some bused in from Thessaloniki—tried to reach the mine. Police fired teargas. Protestors threw flares and Molotov cocktails. A number of fires broke out. People were injured. Police arrested several protestors and confiscated more than 50 firebombs.
The issue has split the community in two. Both sides brandish reports in support of their points of view. There are those who fear that mining will degrade the environment, ruin tourism and their livelihood, and leave behind, after the gold is depleted, untold damage. They’re worried that sodium cyanide will be used to extract the gold from the ore, which could contaminate the drinking water and the air. They’re backed by the left-wing SYRIZA, the Alternative Ecologists, the Green Ecologists, and other leftist groups.
And there are those, including many local minors, who see the economic benefits of the mines and believe that the environmental concerns are overblown. They say that new technologies won’t require cyanide to extract the gold. And Eldorado continues to emphasize that it adheres to all environmental and other regulations.
The whole debacle has laid bare one of the fundamental problems of Greece: utter lack of trust in its institutions.Nick Malkoutzis lamented “the murky way that public sector contracts have been handed out and the impunity enjoyed by companies that have violated all kinds of regulations. While the wealth and influence of this minority has grown, people’s confidence has withered.” And now, “every scheme tendered by the government” is greeted “with suspicion.” He called it “a social affliction brought on by years of graft.”
So, when an acquaintance of mine in Greece had dinner with an official at the Bank of Greece, the discussion inevitably came around to the Troika—and how Greece should send them packing. “Of course,” the central banker said, “it would help considerably if we actually had a functioning government these past 182 years.” Read....  Merkel Hides Behind The Troika Report, The Greeks Seethe, And The Drachma Beckons.
And here is SILVER: In July, Japan decided that utilities would be paid three times more for electricity from solar sources than from conventional sources. That premium will ignite the installation of solar panels—which use a lot of silver! Read....  The Solar Silver Thrust.


This is something that I have stated as a solution to the world financial dilemma..a big revaluation in the price of gold. The big problem then for the USA is the fact that they have probably leased all of their gold stationed at Fort Knox:

(courtesy zero hedge/GATA)  

Another thoughtful speculation on a huge upward official revaluation of gold

11:43p ET Wednesday, October 10, 2012
Dear Friend of GATA and Gold:
Zero Hedge today called attention to another thoughtful speculation on the rationale for an official revaluation of gold to a price far higher than the current paper-suffocated price. It was written by the chief investment officer of Guggenheim Partners in New York and Chicago, Scott Minerd, who concentrates on an angle often raised by Jim Sinclair, the (purported) U.S. gold reserve's "coverage ratio" of the U.S. money supply.
Minerd writes: "The U.S. gold coverage ratio, which measures the amount of gold on deposit at the Federal Reserve against the total money supply, is currently at an all-time low of 17 percent. This ratio tends to move dramatically and falls during periods of disinflation or relative price stability. The historical average for the gold coverage ratio is roughly 40 percent, meaning that the current price of gold would have to more than double to reach the average. The gold coverage ratio has risen above 100 percent twice during the 20th century. Were this to happen today, the value of an ounce of gold would exceed $12,000."
That sort of gold pricing will come in handy as a Big Mac then likely will cost $30.
Minerd's speculation is headlined "Return to Bretton Woods" and it's posted in PDF format at Zero Hedge here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.


James Turk is seeing what I am telling you, that the paper sellers are losing big time and a short squeeze will commence soon

(courtesy Kingworldnews/GATA James Turk)

Turk sees paper gold sellers losing in short squeeze soon

1:10p ET Thursday, October 11, 2012
Dear Friend of GATA and Gold:
GoldMoney founder and GATA consultant James Turk today tells King World News that the market for real gold is overpowering the sellers of imaginary paper gold and that a short squeeze with soaring prices is likely soon. An excerpt from the interview is posted at the King World News blog here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee


The trouble in South Africa continues to mount. Today the big 3 mining companies saw the miners reject the pay rise offer. Tomorrow we should see another run on the SA rand:

(courtesy Dow jones newswires)

S Africa Union: Striking Gold Miners Have Rejected Pay Raise Offer

Dow Jones
By Patrick McGroarty

The union representing workers on strike at mines owned by South Africa's three top gold producers said Thursday that the miners had rejected a package of pay rises and would continue their strike.
"The offer has been rejected by the members," said Lesiba Seshoka, spokesman for the National Union of Mine Workers, a body that he said represents the majority of workers on strike at mines owned by AngloGold Ashanti Ltd (ANG.JO) and Harmony Gold Mining (HMS.JO).
But the Chamber of Mines, negotiating on behalf of the three mining companies, said it hadn't received word that NUM members had rejected the offer. Elize Strydom, a negotiator for the chamber, said she wasn't sure the offer had been clearly communicated to all of the striking workers.
"We can't communicate with our own employees," Ms. Strydom said. "We are determining from our side what needs to happen to properly communicate with our employees."
Mr. Seshoka, the spokesman for NUM--a branch of COSATU, the powerful union body allied to the ruling African National Congress--also said the chamber didn't have the capacity to reach workers directly.
"We are the people that represent the workers. If the chamber thinks not, and wants to take it there, let them try. I don't know whether they've got that capacity but as far as we are concerned we went to speak to the members and they said no."
The strikes have shut all seven of AngloGold's South African mines, which account for about a third of its total production. Chief Executive Mark Cutifani has said the company may permanently close some mines if the unrest continues. Two of Gold Fields' mines and one operated by Harmony are also closed due to the strike.
Strikes spread to the gold industry after first crippling the platinum sector, most visibly with a six-week-long strike at a mine owned by Lonmin PLC north of Johannesburg. Police opened fire on protesters at that mine in mid-August, killing 34 people.
Mining output rose 0.8% on the year in August despite the strikes, data showed Thursday, largely because the data measures refined mining products, not the kind mined at Lonmin's platinum mine.
Write to Patrick McGroarty at
(END) Dow Jones Newswires


This letter was sent to the CFTC yesterday from a GATA and strong silver supporter:

October 10th, 2012
To the Honorable Commissioners,
In reference to the silver manipulation, I must agree wholeheartedly with Mr. Butler’s comments in which he has copied the CFTC in his subscription newsletter of October 10th, titled "History Does Repeat."
Per Mr. Butler,
"While I know that the CFTC can’t publicly identify any single trader by commodity law, there is nothing preventing them from confirming the quantity of silver contracts held by the two largest shorts on the COMEX. The Commission can also respond to allegations that a 43% market share by two banks is manipulative. For the agency to remain silent on such basic matters is undermining market integrity and is instilling a public distrust of the regulator. The same goes for JPMorgan and the CME. The level of market concentration on the short side of COMEX silver is an issue that is not going away quickly or quietly."
Based on a record of prosecutions over the last year for entities and individuals that could not afford the adequate legal assistance, I would like to think the CFTC is the eagle of financial regulators regardless of financial, sovereign and political ability.
"A man found an eagle's egg and put it in a nest of a barnyard hen. The eaglet hatched with the brood of chicks and grew up with them.

All his life the eagle did what the barnyard chicks did, thinking he was a barnyard chicken. He scratched the earth for worms and insects. He clucked and cackled. And he would thrash his wings and fly a few feet into the air.

Years passed and the eagle grew very old. One day he saw a magnificent bird above him in the cloudless sky. It glided in graceful majesty among the powerful wind currents, with scarcely a beat of its strong golden wings.

The old eagle looked up in awe. "Who's that?" he asked.

"That's the eagle, the king of the birds," said his neighbor. "He belongs to the sky. We belong to the earth we're chickens." So the eagle lived and died a chicken, for that's what he thought he was." Anonymous


James Hanson


And finally, gold trading early this morning, from Europe and Asia

(courtesy Ben Traynor/bullionvault)

Gold Bounces Back after Spanish Ratings Cut, Investors "Still Confident in Gold" but Fresh Buying "Not Seen on Monetary Policy Alone"

By: Ben Traynor

-- Posted Thursday, 11 October 2012 | Share this article| Source:

London Gold Market Report
SPOT MARKET gold bullion prices climbed back above $1770 an ounce during Thursday morning's London trading – still a few Dollars below where it started the week – as the Euro also recovered ground following falls overnight after Spain had its credit rating cut.
Stock markets edged higher this morning, as did most industrial commodities, while US Treasury bonds fell and German bund prices gained.
Silver bullion climbed as high as $34.33 an ounce, also slightly down on the week.
"We are watching support [for silver] at $33.37," says bullion bank Scotia Mocatta's latest technical analysis.
"A breach through that level…could indicate a double top in silver, which would target the low $31 level."
The volume of gold bullion backing the world's largest gold ETF, SPDR Gold Shares (GLD), held steady yesterday at an all-time high of 1340.5 tonnes.
Earlier this week, holdings of gold by all ETFs tracked by newswire Reuters hit a new record at 2333.7 tonnes.
"The continuously rising ETF holdings show that investors are still confident in gold in the longer term," says Jinrui Futures analyst Chen Min in China, adding that last month's US Federal Reserve decision to extend quantitative easing indefinitely "has put a floor under gold".
The European Central Bank also announced open-ended bond buying last month, while the Bank of Japan extended its long running QE program.
"Additional monetary policy easing in the United States and other countries is no longer fresh news," points out HSBC commodities analyst James Steel.
"We do not anticipate further significant buying of gold based on monetary policy accommodation alone."
"We have seen easing policies come from both Europe and the US in recent weeks," adds a note from Ed Meir, analyst at commodities brokerage INTL FCStone, "but we have yet to see it coming from China, which in some ways, is the last 'hold-out' and one that could provide the gold market another lift in the event that authorities signal more monetary relaxation."
"[Chinese policymakers] don't seem to be rushing to pump growth up again," reckons Paul Sheard, chief global economist at ratings agency Standard & Poor's.
"I think they're somewhat comfortable in the 7-8% zone [for GDP growth]. But, were the Chinese economy to show signs of dipping below this level, then I do think you would see the policymakers galvanized into action."
"China is no longer in the mood to provide a massive stimulus [as it did in 2008]," agrees HSBC group chief economist Stephen King.
"China's exports have succumbed to the downswing in world trade. Once the global economy's savior, China has become its latest scalp."
Gold bullion imports into China from Hong Kong, the primary conduit for Chinese gold imports, fell to 53.5 tonnes in August – 29% down on a month earlier and a 26% year-on-year drop – figures published by the Hong Kong Census and Statistics Department show.
"Increased prices have clearly left their mark on gold demand," says today's Commodities Daily note from Commerzbank.
"A further reason for the lower net import figures recently is likely to have been the higher level of domestic gold production, which in August totalled 41.4 tonnes according to the Chinese government."
Here in Europe, Spain had its credit rating cut to one notch above junk last night by S&P, which downgraded Spain from BBB+ to BBB- while maintaining a negative outlook.
"The negative outlook on the long-term rating reflects our view of the significant risks to Spain’s economic growth and budgetary performance," said an S&P statement.
"[There is a] lack of a clear direction in Eurozone policy…[and] the deepening economic recession is limiting the Spanish government's policy options."
Countries like Spain should be given more time to reduce their government deficits, International Monetary Fund chief Christine Lagarde said Thursday.
"That is what I have advocated for Portugal, this is what I have advocated for Spain, and this is what we are advocating for Greece," Lagarde told reporters in Tokyo, where the IMF and World Bank are holding their annual meetings.
Lagarde added that Greece should be granted the additional two years prime minister Antonis Samaras is seeking to implement austerity measures.
Earlier this week, the IMF cut its growth forecast for the Euro area and projected a sharper 2013 contraction for Spain than previously forecast three months ago.
Gold mining workers on strike in South Africa have rejected the latest wage offer from employers, the national Union of Mineworkers has said.
"This was a final offer from the companies," said NUM spokesman Lesiba Seshoka.
Ben Traynor

And now for your more important paper stories which will certainly have an influence on the physical price of gold and silver:

 Now the fun begins, as S and P downgrades Spain to BBB- with a negative outlook.
The haircuts begin as the ECB will issue margin calls on all Spanish bonds in its possession obtained during LTRO 1 and LTRO 2:

(courtesy zero hedge) 

S&P; Downgrades Spain To BBB- (Negative Outlook) As European Support Wanes

Tyler Durden's picture

Just two weeks after Egan-Jones started the party, S&P has downgraded Spain to BBB- (with a negative outlook). As we discussed here when Egan Jones pushed all-in with Spain to CC, of course, Moody's (Baa3 Neg) will likely follow shortly with Fitch (BBB Neg) deciding to avoid the office-raid and keep its French parents happy. The main reasons - and concern going forward, via Bloomberg:

Full Statement (via S&P)

(see zero hedge for full statement.)


 Is there enough collateral left?

(courtesy zero hedge)

Spanish bonds' ECB haircut now hinges once and for all on DBRS

AVFMS's picture

From 14 June 2012
The guys at Moody’s were behind their peers’ curve anyway (see 11 Jun post “Unfinished Sympathy”), but have now taken the lead by putting the Kingdom right away on junk outlook. ECB Haircut increase from 4 to 9 % in 10 YRS and probably worse from 1.5 to 6.5% in LTRO-laden 3 YRS paper (ECB link p.73) is thus now hinging on DBRS’ views (Eurosystem credit assessment framework ECAF link).
Spain at AL neg since 08 Aug 2012
Haircut table download


A very critical read

Major points:

 1. No solution for Cyprus no solution for Spain and certainly no solution for Greece.

The IMF has made two points quite clear:

a)  nobody will give Greece any more money.
b)  Europe must take an unavoidable financial hit on Greece and no doubt that the citizens of Europe will have to pay for the bill.

The hit on the ECB with a Greek default will initially be in the 50 billion euro level which will surely wipe out the ECB's capital.

Big question:  how will be the recapitilization be financed?
How will Spain and Italy pay?  How will Cyprus pay?

Also a Greek default will force huge sums of money that will be needed by Cyprus.

Prepare yourself..the drama will commence in November.

(courtesy Mark Grant)

The Bump In The Night

Via Mark J. Grant, author of Out of the Box,
“How many times have we stood here, you and I, surveying the field before the battle? How many times have we won? How many times must we lose to have lost all those victories and promises of victory? Just once, old friend. Just once.”

-The Wizard

I know it is sometimes difficult. Europe puts out the numbers which many assume are real. Then they talk about the data as if it was real. Then they point to the numbers time and time again as if they were real and finally people make decisions and act upon the figures thinking they are real and then the train begins to go bump in the night and derailment is possible on the next track and people wonder how it happened. We are at that point where “bump” is about to happen because there is nothing left that can happen.

The dream is about over. Soon everyone will be waking up. It will not be a good morning.

After all of the horses and all of the King’s men have met, convened and had one more council of war; the bills are still unpaid. We have no solution for Cyprus, no answer for Spain and no plan for Greece as the IMF has made two things quite clear. Number one is that they will not give Greece any more money and number two is that they expect Europe to take the unavoidable financial hit and that it will not be them that is going to get left holding the proverbial bag. Now the public bondholders of Greece have already been whacked and even with a modest extension of two years in payments Greece would need $25-40 billion in new funding as Austria and the Netherlands have said they are done providing money. All of this is on one side of the equation with other being that Greece will be out of money sometime in November. This, my friends, is what is known as “Crunch Time” because there is no open door that does not lead to pain. Does the ECB take the hit and wipe out their $18 billion capital base and have to be refinanced? Does the EU Stabilization fund take it so that there will be a capital call on the participating nations which some may refuse to pay? Perhaps Germany will surreptitiously force Greece back to the Drachma so that the people of Greece take the hit while providing some sort of financing that uses Greece as a conduit so that Europe can repay itself. We are about thirty days out on this because the country of Greece is about to run out of Euros. The days of wine and roses and mucking about in the sandbox are just about over and real decisions with real consequences are about to come storming into the Great Game and I suggest you prepare your portfolios for the event.

Then the money requested by Cyprus will be nowhere what is needed if Greece returns to the Drachma as the Cypriot economy, already banged by the Greek Public Sector Involvement, will be forced to its knees as the tragedy plays itself out in Greece. Then we have the “Big Bang,” which is Spain, whom Germany contends does not need any money, which is about an accurate a statement as Wichita, Kansas can be found in Bulgaria. Spain is reeling; calls for secession, banks that are insolvent and held together by paperclips and scotch tape, regional debt that is fifty percent of the country’s total and now the downgrade by S&P with one by Moodys placing them into junk and out of the major European Indexes which can be expected shortly. “Dead man walking” would be the accurate phrase. I will tell you; when there is no place left to run and no place left to hide then it is “tag and you are it” and Europe is now days away from getting tagged.

You have to prepare yourself now for the possibility that Europe is a misrepresentation. You must own running shoes and be prepared to use them!

Your opening Spanish 10 year bond yield:  6: 52 am


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5.810000.00700 0.12%
As of 06:31:19 ET on 10/11/2012.


Initially, Spanish bonds tumbled in price (rose in yield) as Spain's Rajoy refuses to ask for a bailout he desperately needs for his nation.  (see Mark Grant above). Initially the Eur/USA plummeted but by 4 am this morning, everything reversed with thoughts that Spain will be forced to accept a bailout (through the route used against Berlusconi)

a wild morning from Europe...your overnight sentiment
(courtesy zero hedge)

Overnight Sentiment: Short Squeezy

Tyler Durden's picture

The overnight session started with broad weakness following last night's downgrade of Spain to BBB- by S&P, once again led by Egan Jones, due to fears that an outright junking by one or all rating agencies is on deck, now that the status quo means business and is hard pressed to advice Mariano Rajoy that the ECB will not be toyed with, and if need be the same tactics used to oust Silvio Berlusconi just under a year ago can be applied to Spain which is now proving very difficult to handle: all Spain needs to do to ensure at least a few more months of banker pay is to demand a bailout. And yet it remains unwilling to stick to the simple script so far. Sure enough, Spanish bond prices tumbled, as did the EURUSD. Yet sometime around 4 am Eastern, a levitation commenced across all risk assets, EURUSD, and US futures, with Spanish bonds retracing the entire earlier loss, showing that the ECB has now once again shot itself in the foot and that any attempt to recreate the same playbook as was used to remove Silvio, will be far more problematic when applied to Spain.
The primary catalyst for what is seen as a squeeze is the announcement that for the first time since September 2011, Spanish banks borrowed less from the ECB, with gross borrowings declining to EU399.9 billion, down from a record EU411.7 billion, which was to be expected in the aftermath of the earlier announced TARGET2 Spanish liability. That this decline is driven primarily by a plunge in the current account deficit as the local import industry shuts down (the export has been long gone) and with it more and more of the economy, is irrelevant. For now the flashing red headline is all that is needed to send the EURUSD nearly 80 pips from overnight lows, even more horrible economic news out of Greece notwithstanding (more on that shortly). All that matters for now is how long the short squeeze in a ultra low liquidity market will persist for.
The full overnight recap comes from Deutsche:
Asian equities are mostly lower in the overnight session not helped by a negative US lead yesterday. Bourses in China, Taiwan, and South Korea are down -0.2%, -1.7% and -1.0% respectively. Chinese equities are down for the first time in three days on weaker auto sales and new bank loan data. The Hang Seng (+0.2%) is the key outperformer overnight while the AUD ($1.0287) hit an 8-day high following a better-than-expected headline employment print. Credit indices are off the day’s wides with new issues remaining the key focus in Asia.
The EUR reached a low of 1.2826 after S&P’s Spanish rating downgrade but is now off those lows as we type at 1.2865. Elsewhere, the Bank of Korea expectedly cut its benchmark rate by 25bp to 2.75%. As mentioned above, the lack of any meaningful positive catalyst saw markets endured another risk-off session yesterday. The S&P 500 finished the day -0.62% lower, not helped by Alcoa’s downbeat outlook on demand and Chevron’s Q3 profit warning as it expects substantially lower earnings than Q2. US credit indices stood firm and were only moderately wider despite the broader market tone.
In Europe main bourses were lower across the board led by the weakness in Spain (IBEX -1.00%). Peripheral bond yields were little changed yesterday though. A joint press conference following the meeting of Monsieur Hollande and Rajoy revealed little news and shed no light as to whether Spain is edging closer to a bailout request. We had some firmer European data flow yesterday with French (+1.5% mom v -0.3% mom expected) and Italian (+1.7% mom v -0.5% mom expected) IP both rising more than market consensus in August.
Moving on to today, we have inflation reports across the euro area as well as trade data and initial jobless claims in the US. We also have a handful of Fed speakers over the next 24 hours including Raskin, Plosser and Bullard. Italy is also scheduled to sell up to EUR3.75bn in 2015 bonds and will also offer between EUR1.5-2.25bn in reopening its 2016, 2018 and 2025 bonds. The G7 finance ministers are also meeting in Tokyo today, the Spanish cabinet will meet at 9am (London time) later and Merkel will meet with EU’s Barroso in Berlin at 3pm (London time).

Today, the EU stated flat out that the ESM will not bailout PIIGS banks directly (recapitalize the banks) totally in conflict what Rajoy reiterated what he thought was agreed upon in June.  We stated otherwise and now it is in print courtesy of Ambrose Evans Pritchard:

(courtesy Ambrose Evans Pritchard/UK Telegraph/special thanks to Robert H for sending this to me;)

Spain keelhauled by Germany and AAA chicanery
By Ambrose Evans-Pritchard Economics
Last updated: October 11th, 2012

As Gary Jenkins from Swordfish says this morning: Spain is junked if it does, and junked if it doesn’t.
A key reason for Standard & Poor’s two-notch downgrade of Spain to near junk last night is the refusal of premier Mariano Rajoy to bite the bullet on a rescue. His "hesitation" is "potentially raising the risks to Spain’s rating".
By contrast, Moody’s said earlier that it will cut Spain to junk if it DOES request a bail-out. What a marvellous mess.
Here is S&P’s rationale:
A severe and deepening economic recession that could lead to increasing social discontent and rising tensions between Spain’s central and regional governments;
A policy setting framework among the eurozone governments that in our opinion still lacks predictability. Our understanding from recent statements is that the Eurogroup’s commitment to break the vicious circle between banks and sovereigns – as announced at a summit on June 29 – does not extend to enabling the European Stability Mechanism to recapitalize large ongoing European banks. Our previous assumption was that official loans to distressed Spanish financial institutions would eventually be mutualised.
So there you have it. The decision by the AAA bloc of Germany, Austria, Finland and Holland to walk away from the June summit deal for direct ESM recapitalisation of Spanish banks (lifting the burden off Madrid's shoulders) has keelhauled Spain.
Yes, the AAA quartet now claim they never agreed to cover "legacy assets" or the mess left from the EMU bank bubbles of the Noughties (in which German and Dutch banks were central players). That is a very dubious claim.
The Council document circulated for several days and was discussed by key officials from all countries. The purpose was crystal clear: to break the vicious circle between banks and sovereigns. Everybody knew that it was intended to stop Spain spiralling out of control.
I have been assured by Council officials that the text was not changed in the small hours of the night. The leaders agreed to it, then discovered they could not sell the package to their own parliaments – especially the Bundestag – and are now wriggling out on a technicality.
No doubt it is difficult for a small country like Finland to resist the crushing peer pressure of EU summits, but that does not apply to Germany. It is hard to conclude that Chancellor Merkel has behaved in an honourable fashion.
Personally, I can fully understand why the German people do not wish to be led by the nose into a fiscal union (or a backdoor version called a banking union) that is not properly accountable to any elected body and would ultimately eviscerate German democracy. Indeed, Germany should have no part of this constitutional leap in the dark.
However, if Germany is going to pursue that course, it must face up to the consequences. It must accept that EMU has fundamentally failed and should not be saved.
It must prepare for the least traumatic way to break up monetary union, which is the withdrawal of Germany and its satellites from the euro.
As we have all discussed many times on this thread, that would allow the south to keep the euro and to uphold their euro debt contracts. The Latin euro would fall to an equilibrium value.
The D-mark bloc would have a huge stake in pegging their currency to the euro for a while to prevent an exchange rate overshoot and huge losses for their own banks and insurers.
Once the dust had settled, the Latins et al could carry on together under French leadership or, if they chose, restore their historic currencies without the risk of spiralling devaluation.
The problem is that nobody is willing to grasp the bull by the horns, least of all the French. Nobody can bring themselves to accept that the status quo is deeply destructive, and the euro not worth saving. The crisis drags on and on, and as the IMF said this week, the lasting damage from failure to act is rising all the time.
The AAA volte-face is perhaps the most shocking chicanery, deception, and cowardice that I have seen over the 20 years or more that I have been writing about Europe’s affairs (on and off). The EU has broken its word to the markets. The Latins feel betrayed. So do the Irish. There will be deep consequences, even if these are not obvious at first.
There have been worse outrages from the EU of course, though of a different kind. The decision to relaunch the European Constitution in dressed-up form (the Lisbon Treaty) after it had already been rejected by voters in France and Holland was a disgrace. Then to override a fresh rejection by voters in Ireland – the only country to hold a referendum – was unforgivable.
Chancellor Merkel was the driving force behind the Lisbon Putsch. It was the Kanzleramt that cooked up the revival plan and pushed it through. France’s Nicolas Sarkozy went along with it – shamelessly – for his own motives. The acquiescence of the Dutch government was pitiful. As for Gordon Brown’s refusal to be photographed in the same room in Lisbon signing the treaty, well, what can one say?
As is now obvious, the Lisbon Treaty solved nothing in any case. Europe’s governance is as dysfunctional as ever.
So to those German readers who think I am too harsh on Berlin, my answer is that your leader – while a paragon of democracy at home – has been the arch-exporter of anti-democratic and authoritarian excess on the European level.
Yet having pushed relentlessly for "more Europe", we can now see all too clearly that Germany will not in fact accept the implications of "more Europe" when push comes to shove. So we have a disaster.
The sooner Germany outgrows its schizophrenia on Europe and takes its full place as a flourishing, proud, and democratic nation state – as it deserves – the better for all of us. "Less Europe" would a splendid development.
With that off my chest, here is a some more on the S&P note.
Spain is enduring a severe and, in our view, deepening economic recession as reflected in our real GDP forecast of -1.8% in 2012 and -1.4% in 2013. The pace of private sector deleveraging, together with the government’s budgetary consolidation measures, is likely to lead to an even deeper contraction of investment and consumption in both the public and private sectors.
Since 2008 the policy responses from Europe’s monetary and political authorities have not, in our opinion, been effective in permanently reversing the tight financing conditions faced by large parts of the Spanish private sector. While lending rates have declined in recent months for blue chip corporate borrowers, small and medium sized enterprises (which employ 76% of the national workforce) are paying average interest rates of 6.6% as of August on borrowings up to five years, versus 4.8% in 2009. Inour view, the shortage of credit is an even greater problem than its cost. According to data published by the Banco de Espana, loans to nonfinancial domestic enterprises have declined by €161 billion from the end of 2008 through August 2012. We estimate this to equal about 15% of GDP.
Overall, against the backdrop of a deepening economic recession, we believe that the government’s resolve will be repeatedly tested by domestic constituencies that are being adversely affected by its policies. Accordingly, we think the government’s room to manoeuvre to contain the crisis has diminished.
One has to feel sorry for Mr Rajoy. Having agreed to stringent terms on Spain’s bank rescue only to be shafted on the ESM, it is understandable that he is very reluctant to submit to fresh terms on a sovereign bail-out only to face treachery a second time.
Judging by comments from his team, he hopes to muddle through on the mistaken assumption that "speculators" will not dare to short Spanish debt as long as the ECB stands in the wings waiting to crush them.
If this were a story of speculators, such a strategy might work. Spreads would stay low. But that is not the story. The risk for Spain is that "real money" investors such as sovereign wealth funds, central banks, pensions fundsinsurers, etc, will take advantage of the lull to extricate themselves from Spain at reduced loss.
If that happens – and the IMF gave a very broad hint that this is exactly what will happen – the spreads will creep back up, with knock-on effect for Spanish companies. Each month of delay traps Spain deeper in depression.
But feeling sorry for Spain is perhaps not the right emotion. The country can at any time restore control over its own destiny by leaving the euro. It comes down to cojones.

Greece needs two more years.  Who on earth will fund them?

(courtesy Bloomberg)

IMF’s Lagarde Says Greece Needs More Time to Meet Targets

Oct. 11 (Bloomberg) --International Monetary Fund Managing Director Christine Lagarde said Greece should get two years to meet fiscal targets and suggested debt reductions are needed before a 130 billion-euro ($167 billion) bailout can proceed.
“It’s sometimes better to have a bit more time,” Lagarde said today at a press conference in Tokyo marking the start of the fund’s annual meeting. “This is what we advocated for Portugal, this is what we advocated for Spain and this is what we are advocating for Greece.’
Christine Lagarde, managing director of the International Monetary Fund (IMF), speaks during a news conference at the Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group in Tokyo, Japan, on Thursday, Oct. 11, 2012. Photographer: Kiyoshi Ota/Bloomberg
Comments by IMF officials over the past weeks suggest that the fund will seek commitments from European policy makers to help Greece in ways ranging from writing off debt to providing additional loans before agreeing to disburse its share of the bailout agreed in March. The IMF has indicated that it won’t lend more money to Greece.
As lenders negotiate with the Greek government over new budget cuts, Lagarde said today that fiscal and structural measures are only part of what has to be discussed:
‘‘We also have to look at the financing and the debt situation of the country. All four chapters have to be looked at,” she said.
The Greek government forecasts that general government debt will climb to 179.3 percent of gross domestic product in 2013, pushing it further from the IMF’s target of 120 percent of GDP by 2020.
“We will spare no time, no effort to actually do as much as we can in order to help Greece,” Lagarde said. The fund’s purpose is “to make sure that Greece is back on its feet, that it can one day return to markets, that it doesn’t have the need for constant support.”
To contact the reporter on this story: Sandrine Rastello in Tokyo at
To contact the editor responsible for this story: Paul Panckhurst at

Your opening Italian 10 year bond yield: (6:52 am est)

Italy Govt Bonds 10 Year Gross Yield

 Add to Portfolio


5.079000.03600 0.71%
As of 06:36:32 ET on 10/11/2012.


Credit default swaps seem to indicate that France and Italy are the next nations to have bond problems once Spain and Cyprus kick the bucket:

(courtesy zero hedge)

S&P Will Downgrade France And Italy Next, CDS Implies

Tyler Durden's picture

With government bond markets increasingly manipulated directly via central-bank intervention - and becoming increasingly illiquid - the odd situation we find ourselves in once again is that CDS markets perhaps provide a 'cleaner' picture of where credit risk is actually being traded between market participants (hedgers or speculators). To wit, Bloomberg's ever-insightful Michael McDonough has noticed a significant divergence between market-implied perceptions of risk (CDS) and ratings-agencies perceptions among several nations. Most notably France and Italy (with Belgium close behind) appear considerably 'over-rated'. Italy's implied rating is equivalent to BB+ at S&P - well below its average rating of BBB+ and France's implied rating of A is around four notches below its composite rating. Spain also appears set for more pain as its market price implies a sub-investment grade rating is imminent.

On the bright side - maybe Vietnam is due for an upgrade?

Source: Bloomberg Briefs

Your key currency crosses early this morning at 6:53 am showing  USA dollar weakness

Eur/USA  1.2918  (up 0.0067)  
USA/Japan 78.38 (up .307)
GBP/USA    1.6035 (up .0031)

USA/Canada  .97846 (down .0038) 


Your early European trading levels prior to NY opening  (6: 55 am) 


FTSE  up 12.18 points or .50%
CAC   up 24.11 points or 0.72%
German DAX up 58.62 points or 0.81%
Spanish ibex down 17.6 points or .23%


And now data on Europe closing figures:

 First,your closing Spanish 10 year bond yield:  (minor drop in yield)


Add to Portfolio


5.76200 0.04200 0.72%

Your closing 10 year Italian bond yield;  (a big fall in yield)

Italy Govt Bonds 10 Year Gross Yield

Add to Portfolio


5.02300 0.08700 1.70%

Your closing figures from Europe: and USA :  all bourses finished in the green offsetting all of yesterday's losses:

FTSE  up 53.04 points or 0.92%
Paris CAC up 47.85  points or 1.42%
German DAX up 76.47 points or 1.06%

and Spanish Ibex up a huge 66.7  points or .87%.

The Dow closed down 18 points(0.14%)

Your closing currency crosses tonight showing uSA weakness
: the euro, the Canadian dollar, GBP  are all higher.   Yen also rose against the dollar.

Euro/USA 1.2931  up .0079
USA/Japan: 78.33 down .166

GBP/USA  1.6040 up .0034
USA/Can:  .97833 down .0034

And now for some USA stories. 

For what it is worth, more garbage coming from the BLS:

Data Massaging Continues: Initial Claims Tumble To 339K Lowest Since 2008, Far Below Lowest Expectation

This is just getting stupid. After expectations of a rebound in initial claims from 367K last week (naturally revised higher to 369K), to 370K (with the lowest of all sellside expectations at 355K), the past week mysteriously, yet so very unsurprisingly in the aftermath of the fudged BLS unemployment number, saw claims tumble to a number that is so ridiculous not even CNBC's Steve Liesman bothered defending it, or 339K. Ironically, not even the Labor Department is defending it: it said that "one large state didn't report some quarterly figures." Great, but what was reported was a headline grabbing number that is just stunning for reelection purposes. This was the lowest number since 2008. The only point to have this print? For 2-3 bulletin talking points at the Vice Presidential debate tonight. Everything else is now noise.
It is also sad that the US "economy" has devolved to such trivial data fudging on a week by week basis, which makes even the Chinese Department of Truth appear amateurish by comparison. Needless to say, Not Seasonally Adjusted initial claims jumped by 26K to 327K in the past week but who's counting. Finally, what is the reason for ongoing QEternity if the employment situation is now back to normal. Finally, in completely ignored news, because who needs global trade when you have toner cartridge, and generally ink, the US trade deficit in August rose by 4.1% to $44.2 billion, on expectations of a deterioration to $44.0 billion. Then again nobody talks about the US trade deficit during presidential debates so all good here.
Jobless Claims beat by the most since May 2009 and is the lowest since Jan 2008 - the new normal...

with the biggest 3-week drop since Jan 2006..

and the idiocy of relentless revisiosn continues...

as the six-sigma beat plays out...

 Art Cashin of UBS does an anatomy of hyperinflation that which occurred in Germany in 1922-1923:

Cashin Remembers Germany's Hyperinflation Birthday

Tyler Durden's picture

Via Art Cashin of UBS,  
Originally, on this day in 1922, the German Central Bank and the German Treasury took an inevitable step in a process which had begun with their previous effort to "jump start" a stagnant economy. Many months earlier they had decided that what was needed was easier money. Their initial efforts brought little response. So, using the governmental "more is better" theory they simply created more and more money. But economic stagnation continued and so did the money growth. They kept making money more available. No reaction. Then,suddenly prices began to explode unbelievably (but, perversely, not business activity).
So, on this day government officials decided to bring figures in line with market realities. They devalued the mark. The new value would be 2 billion marks to a dollar. At the start of World War I the exchange rate had been a mere 4.2 marks to the dollar. In simple terms you needed 4.2 marks in order to get one dollar. Now it was 2 billion marks to get one dollar. And thirteen months from this date (late November 1923) you would need 4.2 trillion marks to get one dollar. In ten years the amount of money had increased a trillion fold.
Numbers like billions and trillions tend to numb the mind. They are too large to grasp in any “real” sense. Thirty years ago an older member of the NYSE (there were some then) gave me a graphic and memorable (at least for me) example. “Young man,” he said, “would you like a million dollars?” “I sure would, sir!”, I replied anxiously. “Then just put aside $500 every week for the next 40 years.” I have never forgotten that a million dollars is enough to pay you $500 per week for 40 years (and that’s without benefit of interest). To get a billion dollars you would have to set aside $500,000 dollars per week for 40 years. And a…..trillion that would require $500 million every week for 40 years. Even with these examples, the enormity is difficult to grasp.
Let’s take a different tack. To understand the incomprehensible scope of the German inflation maybe it’s best to start with something basic….like a loaf of bread. (To keep things simple we’ll substitute dollars and cents in place of marks and pfennigs. You’ll get the picture.) In the middle of 1914, just before the war, a one pound loaf of bread cost 13 cents. Two years later it was 19 cents. Two years more and it sold for 22 cents. By 1919 it was 26 cents. Now the fun begins.
In 1920, a loaf of bread soared to $1.20, and then in 1921 it hit $1.35. By the middle of 1922 it was $3.50. At the start of 1923 it rocketed to $700 a loaf. Five months later a loaf went for $1200. By September it was $2 million. A month later it was $670 million (wide spread rioting broke out). The next month it hit $3 billion. By mid month it was $100 billion. Then it all collapsed. Let’s go back to “marks”. In 1913, the total currency of Germany was a grand total of 6 billion marks. In November of 1923 that loaf of bread we just talked about cost 428 billion marks. A kilo of fresh butter cost 6000 billion marks (as you will note that kilo of butter cost 1000 times more than the entire money supply of the nation just 10 years earlier).
How Could This All Happen?
In 1913 Germany had a solid, prosperous, advanced culture and population. Like much of Europe it was a monarchy (under the Kaiser). Then, following the assassination of the Archduke Franz Ferdinand in Sarajevo in 1914, the world moved toward war. Each side was convinced the other would not dare go to war. So, in a global game of chicken they stumbled into the Great War.
The German General Staff thought the war would be short and sweet and that they could finance the costs with the post war reparations that they, as victors, would exact. The war was long. The flower of their manhood was killed or injured. They lost and, thus, it was they who had to pay reparations rather than receive them.
Things did not go badly instantly. Yes, the deficit soared but much of it was borne by foreign and domestic bond buyers. As had been noted by scholars…..“The foreign and domestic public willingly purchased new debt issues when it believed that the government could run future surpluses to offset contemporaneous deficits.” In layman’s English that means foreign bond buyers said – “Hey this is a great nation and this is probably just a speed bump in the economy.” (Can you imagine such a thing happening again?)
When things began to disintegrate, no one dared to take away the punchbowl. They feared shutting off the monetary heroin would lead to riots, civil war, and, worst of all communism. So, realizing that what they were doing was destructive, they kept doing it out of fear that stopping would be even more destructive.
Currencies, Culture And Chaos
If it is difficult to grasp the enormity of the numbers in this tale of hyper-inflation, it is far more difficult to grasp how it destroyed a culture, a nation and, almost, the world.
People’s savings were suddenly worthless. Pensions were meaningless. If you had a 400 mark monthly pension, you went from comfortable to penniless in a matter of months. People demanded to be paid daily so they would not have their wages devalued by a few days passing. Ultimately, they demanded their pay twice daily just to cover changes in trolley fare. People heated their homes by burning money instead of coal. (It was more plentiful and cheaper to get.) The middle class was destroyed. It was an age of renters, not of home ownership, so thousands became homeless. But the cultural collapse may have had other more pernicious effects.
Some sociologists note that it was still an era of arranged marriages. Families scrimped and saved for years to build a dowry so that their daughter might marry well. Suddenly, the dowry was worthless – wiped out.And with it was gone all hope of marriage. Girls who had stayed prim and proper awaiting some future Prince Charming now had no hope at all. Social morality began to collapse. The roar of the roaring twenties began to rumble.All hope and belief in systems, governmental or otherwise, collapsed. With its culture and its economy disintegrating, Germany saw a guy named Hitler begin a ten year effort to come to power by trading on the chaos and street rioting. And then came World War II.
We think it’s best to close this review with a statement from a man whom many consider (probably incorrectly) the father of modern inflation with his endorsement of deficit spending. Here’s what John Maynard Keynes said on the topic:
By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some…..Those to whom the system brings windfalls….become profiteers.

To convert the business man into a profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards.

Lenin was certainly right. There is no subtler, no surer means of over-turning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose….By combining a popular hatred of the class of entrepreneurs with the blow already given to social security by the violent and arbitrary disturbance of contract….governments are fast rendering impossible a continuance of the social and economic order of the nineteenth century.
To celebrate have a jagermeister or two at the Pre Fuhrer Lounge and try to explain that for over half a century America's trauma has been depression-era unemployment while Germany's trauma has been runaway inflation. But drink fast, prices change radically after happy hour. And,tell Fed. Chairman Bernanke that it was the “German Experience” that caused many folks to raise an eyebrow when he alluded to the power of the “printing press” a few years ago.
It is why so many, including some of the FOMC, express concern about unintended consequences of each new wave of quantitative easing. (And, if you think no government would ever sponsor wild inflation to liquidate its debt, take a look at Zimbabwe.)


Well it is time to say goodnight.
I will be away for a week and probably I will have my computer and I may
not have internet access.

My son will be home to answer any questions.

I will try my best to get something out during the week.

Until then, all the best


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