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The Power of the Wave Principle

Savers Protect Your Deposits From Bankrupting Banks and Quantitative Inflation

Stock-Markets / Credit Crisis 2011 Oct 23, 2011 - 05:27 PM GMT

By: Nadeem_Walayat

Stock-Markets

Diamond Rated - Best Financial Markets Analysis ArticleThe Euro-zone continues to teeter over the edge of the financial abyss as bankrupting countries that cannot print Euro's threaten the collapse of its banking system that would would soon collapse the whole global banking system in a matter of hours as electronic bank runs sweep across the worlds financial system resulting in trillions of dollars worth of deposits being withdrawn in a matter of hours and thereby collapsing first the Euro-zone and then within 24 hours the UK, USA and Asia along with it. My recent article (Euro-Zone Prepares to Print Trillions in Advance of Greece Debt Default) covered the potential consequences for the world in the event of financial armageddon, this article continues on from the last article that covered the inflationary depression consequences of money printing that the likes of Britain and the United States are engaged in and that the Euro-zone WILL eventually replicate (Bank of England's Quantitative Inflation Bankster's Paradise Inflationary Depression Economy ).


The focus of this article will be on concrete steps that depositors need to take now to reduce the real risk of the actual loss of their funds on deposits at bankrupting banks before they should go on to protect against the ongoing real terms loss of value in the face of the perpetual money printing Quantitative Inflation Mega-trend.

Banks Going Bankrupt - Lehman's Bankruptcy Example

The 2008 Lehman's bankruptcy irrevocably changed the financial world as within a matter of days a chain reaction of the worlds banks and insurers were on the verge of going bust, pushing the world towards financial armageddon as the following video illustrates of just how close the U.S. Financial System came towards total collapse. At 2 minutes, 20 seconds into this C-Span video clip, Rep. Paul Kanjorski of Pennsylvania in February 2009 explains how the Federal Reserve told Congress members about a "tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars." According to Kanjorski, this electronic transfer occurred over the period of an hour and threatened a further $5 trillion to be drawn out triggering a total collapse of the Financial System, which prompted Hank Paulson's emergency $700 billion TARP bailout action.

Video Served by Youtube

This is the real problem that the credit rating agencies, mainstream press and politicians are not stating which is that the fallout from sovereign default will not be orderly, yes the actual default process may be orderly, over seen and managed by the ECB with planned haircuts of first 20%, then 40% and then 60%, but the markets response won't be orderly, depositors will panic and pull their funds from those they perceive as having the greatest exposure to a. sovereign debt and b. to sovereign debt derivatives. THIS IS ALREADY HAPPENING. Which is the real reason why the banks are not lending, because they know they cannot unwind their over-leveraged positions in the event of default so have been hoarding cash now in advance of sovereign default.

Eurozone-zones Bogus Stress Tests Busted, Ignored Sovereign Default and the Derivatives Monster.

Today's financial system is in a worse state than when Lehman's went bust as measured by the credit default swaps, because there are multiple Lehman's out there ALL teetering on the brink of bankruptcy as a consequence of exposure to bankrupting PIIGS as the ongoing news coming out of Europe illustrates with the bailouts of Lehman wannabe's such as the French / Belgium bank Dexia and Greek banks. That's before we start to even approach the consequences of banks such as the German giant Deutsche Bank going bust.

All of the now failing banks passed the eurozone's bogus stress test that never took into account the obvious that Greece would eventually default on its debts and therefore the banks are sitting on losses of at least 50% on their Greek sovereign debt holdings, never mind losses on other PIIGS debt.

The reality is that virtually ALL of the European banks would fail the PIIGS defaulting and triggering haircuts of 40-60% of sovereign debt holdings which means the bank stress tests were pure political propaganda with no basis in reality.

The solution that the mainstream press obsesses over is for the recapitalisation of the banks, which theoretically should work though involve amounts far beyond anything being put forward today, i.e. you can forget Euro 100 billion, even Euro 250 billion, what would be needed are amounts north of Euro 500 billion. However as I have repeatedly warned over the years this does not address the real issue of ultimate exposure, which is not that of the PIIGS debt but that of the OTC derivatives market, which globally now exceeds $600 trillions as a consequence of over leveraged positions.

You can tell that the banks are sitting on huge losses (bad loans) when they are buying insurance against their own debt defaulting (credit default swaps) such as Goldman Sachs recent announcements of profits on this basis as a consequence of the increase in the value of the CDS on its debt.

The risks are that of how much is the ultimate liability once the PIIGS start to default and banks start to go bankrupt requiring recapitalisation bailouts, where will it end?

That question is unknown, it could stop at Euro 1 trillion, then again it may require Euro 10 trillion or Euro 100 trillion, I and no one else knows, and the risk is global because ALL banks swim in the same derivatives ocean where the sovereign debt exposures are mere tips of over leveraged ice-bergs. These are the un-quantifiable risks that the banking system is exposed to that depositors need to protect themselves against in the event of sovereign defaults.

Meanwhile, whilst the BBC more prone to regurgitating central bank propaganda as evidenced by the fact that the likes of BBC new broadcast of continuous statements as to why UK inflation is always destined to imminently start falling (for near 2 years now), recently let itself become infected by the dark side by letting a perma-bear trader wonder into the news studios :

"know the stock market is finished. The euro, as far as they're concerned, they don't really care".

"For most traders, we don't really care that much how they're going to fix the economy, how they're going to fix the whole situation — our job is to make money from it," he said.


"Personally I've been dreaming of this moment for three years. I have a confession, which is I go to bed every night, I dream of another recession."

"The governments don't rule the world. Goldman Sachs rules the world. Goldman Sachs does not care about this rescue package, neither does the big funds."

It's interesting to see that the stock market is up over 10% since he spoke of a market crash!

Depositors Not Being Paid For Risk of Financial Armageddon

Even though a european banking crisis seems inevitable, I personally rate actual financial armageddon i.e. the banking system ceases to operate as a low probability as a consequence of unlimited money printing by the governments and central banks pumping an infinite amount of liquidity into the banking systems to avoid financial collapse at all cost (highly inflationary), however the problem with the Euro-zone is that it functions as a committee of 17 countries that literally takes months to respond to crisis, when they may only have hours to act!

For instance recently we witnessed the spanner in the works that the little Czech Republic had thrown as it initially rejected expansion of the European bailout fund because they did not want to contribute to a potential bailout themselves, despite the fact that for a decade the likes of the Czech republic had been gorging on vast quantities of E.U. financial aid, off course financial armageddon would hit the likes of small countries such as the Czech republic much harder as investors pulled out funds.

Against the current system of operation of the Euro-zone that appears designed for maximum effect for the potential for failure, depositors are just not being paid enough interest to to carry the risk of loss of capital, i.e. annual interest rates of between 1-3% (before tax) are just not enough for the real risks being carried for the nominal loss of the value of savings, therefore as I have iterated on several occasions during the past few years, and most recently in June (Bankrupt Greece Blackmails Europe, Bailout or Euro Zone Dies, Global Financial System Collapse) that depositors really do need to ACT BEFORE THE EVENT, because they will be unable to do so DURING THE EVENT.

UK Bank Downgrades, Now Rated Worse than Lehman's

The Moody's credit rating agency downgrade of 12 UK banks reminds readers that it's not just european mainland banks that are under pressure, but all banks across the globe, including the UK.

The downgrade is in response to the real risk that the UK government will no longer bailout all UK financial institutions in the event of default and bankruptcy.

Most notable downgrades were for the UK big banks:

  • RBS from Aa3 to A2
  • Lloyds TSB Aa3 to A1
  • Santander Aa3 to A1
  • Nationwide Aa3 A2
  • Co-op A2 to A3

The downgraded banks in near unison stated that the downgrades do not make any difference to their businesses, well they would say that, instead as is the case with every borrower that if you become a higher risk then you pay a higher interest rate and more collateral is demanded against market derivatives positions, remember these banks are leveraged upto the hilt so small changes in ratings have huge impacts on their financial health. In fact a large part of the summer stock and commodities market correction can be put at the feet of banks having to liquidate assets to cover derivatives positions.

Also, remember that the credit agencies are BEHIND THE CURVE, the true state of the banks is far worse, for instance Lehman's was rated as A2 just days prior to its bankruptcy ! That's the same as RBS, Nationwide, and better than where Lloyds and Santander stand.

The trend towards bank bankruptcy continues since which time governments have edged closer towards bankruptcy themselves which has increased the risks of debt defaults.

Eurozone Meetings Trending towards a 2 trillion bailout.

We have had eurozone meetings, after meetings after meetings for the duration of the sovereign debt crisis, where the underlying message coming through is that the banks need to be re-capitalised, with Germany wanting the banks to seek funds from private investors whilst France wants public funds involved, preferably central bank unlimited funding because of the exposure of French banks that risk bankrupting France itself and thus France ultimately requiring an IMF/ EU/ German bailout which was illustrated by the recent downgrade of French debt.

There is no instant fix, the ratification of the Euro 440 billion pot is just sticking plaster, it is not enough, my expectations are for 2 trillion but the longer crises goes on then so will the ultimate costs and economic damage escalate.

The ratified 440 billion will have to be leveraged to at least Euro 2 trillion but that will still not be enough for when France comes knocking on the bailout door, still as I have earlier illustrated the banks if not stabilised now could result in a situation infinitely worse.

Greece Default to Trigger PIIGS Wide Default

When Greece defaults on its debts the rest of the PIIGS, Ireland, Portugal, Greece and Spain will all look at Greece being let off the hook, do the sums and come to the same conclusion that they should also follow the Greece example in an orderly default as opposed to being suckers that continue to pay for debt that they cannot afford.

Will Germany Pay the Bill ?

Well Germany paid the bill for German unification which in real terms will ultimately be similar to the total cost of bailing out Europe, starting with Greece but probably ending with France itself.

Current State of the Banking Crisis

European Leaders have been meeting during the weekend where the objective is to agree to leverage the already agreed bailout fund higher to act as insurance for sovereign debt holdings to a certain percentage against default, therefore this increases liabilities without actually committing to put any money in the pot. However the risks are unknown, i.e. the risks could be Euro's 1 trillion, 2 trillion, or perhaps 3 trillion ? No one knows because the amount of sovereign debt outstanding continues to expand at the rate of about 500 billion euros per year across the Euro-zone and with it so does the banks derivatives exposure at between X10 and X30.

I won't admit to understanding exactly what the Euro-zone are agreeing to do because I don't think they want the people to understand the facts because the losses as a consequence of default will be many times the face value of the outstanding debt, so definitely serves the politicians not to mention the multi-trillion Euro liabilities being agreed to on behalf of the electorates, especially Germany, where politicians have already rejected calls for new monies, so smoke and mirrors are being used to achieve the same outcome, which at the end of the day bodes ill for the value of the Euro.

All I know is that the euro-zone ultimately are destined to follow the example of the UK and USA, that of monetizing debt in which respect the UK £275 billion Q.E. would translate into an ECB debt monetization of about Euro 1.5 trillion, so they do have the scope to make some major market moving announcements, if they are able to agree to do so.

PIIGS Debt Default Could Trigger Economic Booms

The PIIGS are locked into the German backed Euro, which means currency downside is limited i.e. Greece are not going to experience the high inflation rates that the likes of Iceland experienced following its own default and currency crash. This gives the PIIGS a great opportunity that following the initial pain will result in a economic booms as debt interest burdens approaching total government revenues evaporate.

Many academics out there put forward a multitude of reasons why default would be bad for the PIIGS i.e. such as they will no longer be able to borrow money on the world markets.

Firstly, they don't need to borrow for the next few years because they have the likes of the German backed ECB to pump as much money as needed into the PIIGS to alleviate the initial pain of default.

Secondly, the markets do not act on the basis of academic theories, the markets DISCOUNT the future and not dwell on the past, they will see the opportunities that will flow from future booms and soon FORGIVE the PIIGS defaults, this is after all the lesson of history where we can see from the experience of Russia, Brazil, Argentina and even Greece that markets forgive and forget and base their investing decisions on the basis of what is to follow in the future, just as their current pricing of PIIGS debt and reluctance to lend is on the basis of future default, so will the markets AFTER default price and lend on the basis of future growth.

The Bottom line is when Greece defaults, ALL of the other PIIGS will also quickly default, then it depends on what happens to other countries in and outside of the euro-zone on whether the systemic risk has been contained at that point, then you will see economic booms starting first in the defaulted PIIGS from their knocked down economic levels and soon spreading to countries that have stealth defaulted by means of Inflation such as the UK.

Protect Your Deposits From Bankrupting Banks

Your first priority must be to protect your deposits from Banks that could go bankrupt during a sovereign default induced global bank run, I last covered this in depth in June 2011 (Bankrupt Greece Blackmails Europe, Bailout or Euro Zone Dies, Global Financial System Collapse ), if you have not already done so then you need to act TODAY because amidst a banking crisis you may not get the opportunity to act.

My last article covered the risks per individual banks, however the truth is that in the event of a banking sector collapse - ALL DEPOSITS OVER THE £85k (100,000 Euro's) WOULD BE AT RISK as per government guarantee limits, so I am not going to repeat the analysis of stating the risks of individual banks, because the only truly SAFE UK bank is the 100% government backed National Savings and Investments.

Therefore KNOW THIS - IF the Banks in Europe Start to Collapse as a series of domino bank runs- NO DEPOSITS OVER £85k will be safe in ANY BANK other than National Savings & Investments.

Steps You Need to Take Now !

The following are my updated lists of tasks you need to do to protect your deposits because you are NOT being paid to carry the REAL RISK OF LOSS OF FUNDS ON DEPOSIT!

1. Ensure that you have at least 2 current accounts across banking groups and at least one with a safer bank such as HSBC.

2. Next make a list of all of your deposit / bank accounts, with the amounts on deposit.

3. Now group your accounts by banking sector group (see list here as a guide).

4. If you are anywhere near the £85k limit with any banking group then move those excess funds immediately!

5. Small banks and building societies are at greater risk than larger banks and building societies because the government is the larger banks such as HBOS pose a greater risk to the financial system and economy so the government will be more reluctant to let them fail, but that does not mean they will actually cover deposits beyond £85k in the event of a collapse, so you still need to limit exposure to £85k

6. Consider transferring funds to your spouse so as utilise their compensation limit across a banking group.

7. Ensure you have procedures in place so that you can at short notice transfer funds from high risk banks to lower risk banks so as to limit the fallout from any banking system crisis. For instance open an NS&I Direct Saver account NOW (pays 1.75% gross), then use this during an unfolding sovereign debt crisis event to transfer your cash to as this is the safest deposit account available for UK depositors (Max £2mill, Min £1). Again do this now as you may not be able to do so during a debt crisis event due to high demand for the account.

Instant Access Savings Accounts with Lower Risk banks

  • NS&I - 1.75%
  • Tesco - 2.90% (includes 1.65% bonus for 12 months)
  • HSBC - 0.75% (includes 0.5% bonus if you do not withdraw in a calendar month)

Higher Risk banks

  • Santander - 3.1% (includes 2.6% bonus for 12 months)
  • Barclays - 1.25% (includes 0.35% bonus when you do not withdraw in a month).
  • ING Direct - 3% (includes a 2.46% bonus if you do not withdraw in a month)
  • SMILE (Co-op) 0.25%

Extreme High Risk Banks

  • Halifax Online Saver - 2.8% (includes 2.7% bonus for 12months).

All accounts pay significantly less than current CPI Inflation of 5.2%.

8. Do not have ANY savings are fixed deposit exposure to banks that do not fall under the UK Financials Services Compensation Scheme.

9. Limit exposure to PIIGS banks, that is Greece, Ireland, Spain, Portugal and Italy as these are at the most risk of going bust thus triggering a lengthy process for savers having to wait for compensation. Remember that if Spain comes under pressure following perhaps Ireland and Portugal joining Greece, then the risks posed to Santander depositors will also significantly rise.

10. Keep enough in cash to cover at least 1 months expenditure, (I keep 2 months worth of cash).

11. Utilise instant transfer accounts between spouses, i.e. if you have accounts with the Halifax then you can instantly transfer funds between one another, therefore during a crisis you can instantly reduce the exposure if one person is above the £85k compensation limit at that time.

The bottom line, is if you want ZERO risk then dump all of your excess funds into National Savings & Investment accounts, for which the cost is 1.25% in terms of interest rate differentials.

Red Pill or Blue Pill ?

Do you want to continue sleep walking towards the total loss of the value of your wealth or walkup to the stealth inflation theft matrix?

the red pill

This is what the worlds central bankers fear the most, that their respective populations wake up to the truth of the inflation mega-trend that they have been lied to for decades as to the real level of inflation that has forced them to work harder and borrow huge amounts to just maintain their standards of living.

They fear that workers will see through economic propaganda and start seeing the reality of what INFLATION is doing to them. THAT is the ONLY thing the likes of the Bank of England fears (well apart from banking sector induced financial armageddon) the workers of Britain starting to demand PAY rises that MATCH INFLATION AND TAX RISES (the wage price spiral).

Debt Deflation a Flawed Theory That Services the Purpose for Economic Propaganda

UK CPI Inflation smashed through the 5% barrier by rising to 5.2% for September (4.5%), which is now approaching near triple the Bank of England's 2% target that continues to make a mockery of the central bank whose primary remit is supposedly price stability, where 3% was supposed to have been the maximum level a break above which was supposedly to trigger a series of panic measures to bring inflation under control, instead of which the Bank of England has instead opted to print money as it recently announced another £75 billion of electronic money printing that the fractional reserve banking system would eventually leverage to over £1 trillion, for the primary objective for the monetization of government debt, i.e. the same policy that the Weimar republic had been engaged in on its path towards hyperinflation. UK public debt is probably being monetized at the rate of 15% per annum with approx 30% monetized to date, only the deflation fools and the vested interest academic economists cannot or choose not to realise the highly inflationary consequences of governments monetizing their debt.

Meanwhile the more recognised RPI Inflation measure surged higher to a 20 year high of 5.6% which is set against average pay rises of just 2% that illustrates an Inflationary Depression in progress.

CPI rising to above 5% should not come as any surprise as it has been expected to take place for several months now (14 Jun 2011 - UK CPI Inflation Holds at 4.5% as Stealth Theft of Wealth and Debt Default Continues )

UK CPI inflation looks destined to hit 5% within a few short months especially as energy companies continue to milk customers with outrageous unjustifiable price hikes of as much as 20%, all conducted in an environment of record low interest rates, now held at 0.5% for more than 2 years, all as a consequence of the Bank of England's primary focus in ensuring that the still bankrupt banking sector continues to generate artificial profits that are only partially being used to write down bad debts, with the balance paid out as bonuses on what amount to fictitious tax payer funded profits.

UK inflation has soared to above my already high expectations as per the January forecast for 2011 (17 Jan 2011 - UK Inflation Forecast 2011, Imminent Spike to Above CPI 4%, RPI 6% ) that expected Inflation to remain above Bank of England's 3% upper limit for the whole of 2011, which is set against the Bank of England's Feb 2011 Inflation Report that expected CPI of just 1.7% by the end of 2011.

However, actual inflation as experienced by most people in Britain currently stands at an even hideously higher rate of 7.36%, which explains why your weekly groceries bill is inflating at a rate twice the official inflation indices that have been manipulated by successive governments to under-report the true rate of inflation.

According to the debt deflation theory we should have had deflation for the past 2 years, instead of high inflation in consumer prices. The reason why is obvious in that the economic models are FLAWED, the reality is this, which not something new but something I have repeatedly iterated for 2 years now and that is that ALL FIAT CURENCIES ARE IN FREEFALL AGAINST ONE ANOTHER !

Which means exchange rates may give the illusion of currency stability but the reality of the overall trend is that ALL currencies are FALLING at an exponential rate ! Which is why you have compound inflation i.e. the trend for the inflation curves are exponential.

This is why as savers and investors you need to leverage yourself to the Inflation mega-trend because deflation will not be allowed to exist in our fiat currency fractional reserve banking money printing world, regardless of what the debt deflation theory of ivory tower academics state should take place.

The bottom line is that some 2 years on from my initial warning (18 Nov 2009 - Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend ), debt deflation remains and has shown it self to be a red herring!

The real world example of Iceland illustrates the consequences of the collapse of currency where despite soaring unemployment and a contracting economy they had inflation soaring to 20%!

DEPRESSION - YES

DEFLATION - NO

What you get is an INFLATIONARY DEPRESSION, which the UK clearly exemplifies with rising unemployment, and a stagnating economy and ACCELERATING ANNUALLY COMPOUNDING INFLATION.

DEPRESSION DESTROYS DEMAND, RESULTING IN UNEMPLOYMENT

That does not mean supply will result in falling prices, because DEPRESSION DESTROYS SUPPLY, RESULTING IN UNEMPLOYMENT

Unemployment results in higher government spending / deficits resulting in more money / debt printing resulting accelerating drop in the fiat currency (does not matter what it does relative to others, as all currencies are in perpetual free fall against one another).

Therefore a falling currency results in RISING PRICES REGARDLESS OF ECONOMIC THEORY, REGARDLESS OF THE DESTRUCTION OF DEMAND, REGARDLESS OF THE RISE IN UNEMPLOYMENT AND REGARDLESS OF THE DESTRUCTION OF CREDIT!

Global Occupy Wall Street Comes to London

The injustice of the workers, students, retirees and savers being forced to pay for the crimes of politicians and bankster's has come to London with demonstrations across the financial district of London.

The demonstrators seek greater equality in the distribution of wealth as they see the top 1% get richer whilst the rest suffer during the economic depression which is where Britain and most of the western world have drifted into.

However, the demonstrators appear confused as to who is actually to blame because most of their slogans put the blame at the foot of capitalism, when capitalism is not to blame but politicians and the bankster elites as a consequence of the fractional reserve banking system that is designed to turn everyone and everything into debt slaves that requires the inflation stealth tax to function as I covered at length recently (Bank of England's Quantitative Inflation Bankster's Paradise Inflationary Depression Economy ).

At worst the multi-nationals are to blame for off shoring jobs, but all corporations are charged with maximising profit for their share holders.

The real problem is that people in the west are being over paid, this is part of the mega-trend for the convergence of GDP between the developed and developing world which no government can fight against, basically because there are workers in countries such as China, India, and Brazil who are doing the same jobs as those in the in west for 1/10th of the pay.

This is not just west vs east mega-trend but we see it in Europe today where the likes of Greek public sector workers protesting against downward pressure on wages whilst they are being paid as much as six times as public sector workers doing the same jobs in other european countries such as the Czech republic.

So in many respects the Occupy Wall Street have it wrong, they are fighting to maintain jobs especially in the public sectors that the countries cannot afford and only finance through debt. In fact many of the demonstrators need to fight for less debt and borrowing rather than more for there is no free lunch, all borrowing more money will do is to increase the real rate of inflation, thus making the workers and savers poorer.

Protect Your Wealth From the Quantitative Inflation Mega-trend

The crisis is that the bankrupt banks have bankrupted virtually every western nation. The advantage for the likes of the UK and USA is that these countries are stealthily defaulting on their debts and liabilities by printing money and inflating the debt away as real inflation stands several points above the official indices, something that each and everyone experiences when we go to shop for goods and services. Whilst this avoids the loss of the value of your savings in nominal terms however over the course of INFLATION MEGA-TREND 2010's decade, the value of your savings will STILL BE WIPED OUT because at the end of the day the price is and will continue to be paid by savers and workers in loss of purchasing power of accumulated wealth and earnings.

Contrary to government and central bank propaganda, high inflation is here to stay because :

a. It is a government stealth tax on the workers and savers that especially hits the middle classes hard as it is a mechanism for the transference of wealth to all those who are in receipt of government handouts be they the bankster elite or those on benefits.

b. It is for the purpose for the stealth default on total UK debt (Public+private+unfunded liabilities), that totals in the region of £11 trillion. As a reminder that despite all of the economic propaganda the Coalition government has so far NOT PAID DOWN ANY DEBT, instead debt continues to accumulate at the approx rate of £140 billion a year. The reason for this is simple because the government is not experiencing any financing pain for new borrowings, i.e. 10 year gilt yields are trading at 2.5%, looking at this from another angle, this means investors are willing to loan the UK government money for 10 years at 2.5%, in which case the UK government as would be the case with any borrower, is effectively in receipt of free money as inflation is running at twice the rate of interest charged. Off course this is not sustainable as countries such as the PIIGS have found out, there is always a crunch point when the market wakes up and is no longer willing to finance un payable borrowings.

Therefore a 5.6% RPI means that the value of total UK debt is being devalued and stealthily defaulted on at the rate of £616 billion which is MORE than TOTAL Government Revenues of some £500 billion.

Which is why regardless of what you will read in the mainstream press INFLATION IS the PRIMARY FORM OF TAXATION IN THE UK, that exceeds ALL other taxes put together.

That is why Inflation is perpetual, forever, given the huge benefit enjoyed by government and why all the talk of inflation falling is just worthless propaganda because the government wants / needs inflation. This is something that I espoused right at the very beginning of the current phase of the perpetual inflation mega-trend in January 2010 Inflation Mega-trend ebook (FREE DOWNLOAD).

Therefore the coalition government, as is the case with every government is ONLY focused on one thing and that is to get re-elected, and to achieve this it has to borrow and spend enough money to generate the illusion of economic prosperity in the last year or 2 into the lead up to the next election.

My next series of articles will seek to update the Inflation Mega-trend wealth protection strategies such as Housing (people waiting for prices to fall are forgetting about the effect of inflation), Stocks (summer correction clearly looks over, dividend increasing stocks are leveraged to the inflation mega-trend ) and Commodities (whilst you can mine gold and silver they can't be printed, though oil and agriculture are probably better long-term bets because they are consumed). So ensure you are subscribed to my always free newsletter to get these in your email in box.

Your wealth protecting inflation mega-trend analyst.

Source and Comments: http://www.marketoracle.co.uk/Article31124.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2011 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of three ebook's - The Inflation Mega-Trend; The Interest Rate Mega-Trend and The Stocks Stealth Bull Market Update 2011 that can be downloaded for Free.

Stocks Stealth Bull Market Ebook DownloadThe Interest Rate Mega-Trend Ebook DownloadThe Inflation Mega-Trend Ebook Download

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Rick
24 Oct 11, 00:07
Savers Protect Your Deposits From Bankrupting Banks

It's a very nice article Nadeem, but even a government backed bank would be last place where I would trust my savings right now. Remember this. Such a government would only guarantee that depositors will be repaid in full in the event of a banking failure. However, it may be a very long time indeed before the depositors actually regain any or all of their savings. Moreover, any accrued interest from those deposits during that "holding period" is automatically forfeited to the bank. Finally, the government does not guarantee the "value" of those deposits in that failed institution. During that time when such deposits still are unaccessible to the bank's clients, that "value" could drop substantially in periods of high inflation.


Nadeem_Walayat
24 Oct 11, 03:51
National Savings & Investments

Nope, during a banking crisis NS&I will be flooded with money as the only 100% guaranteed place to deposit ones funds in the country, the government will probably eventually close its doors and not allow any more funds to be deposited and instead entice depositors to withdraw funds by dropping interest rates.

Yep, inflation erodes the real value deposits, but during a banking system siezure the initial result would be for deflation as money stops circulating, how long for ? weeks ? months it is no unknown as the government would print money like no tommorrow and start dropping it from the sky.

The NS&I is the governments bank, its the same as depositing your money with the government, probably less capital risk than buying UK government bonds.

Best

NW


Kelvin
24 Oct 11, 06:20
Interest Rates

Nadeem,

Thank you so much for all your excellent posts.

I would be very grateful to have your view on whether fixed mortgage rates are likely to rise significantly over the next year.

Recently, a number of banks have increased their fixed rate mortages (e.g. Barclays, 5 year) and I was wondering whether you think it might be best to fix now or later in the future.

I noticed the ten year gilt yields have been increasing recently, but technically this does not seem to be a new trend (YET!). Perhaps, I am wrong. I was wondering what your take was on this.

I would really appreciate your urgent response on this.

Many thanks,

Kelvin


Justin
24 Oct 11, 06:31
Mortgage interest rates

Hi Nadeem,

Thank you for your insights.

I was just wondering what you think might happen to mortgage interest rates if the banks are in such a dire situation. Do you forsee further hikes in fixed rate mortgages or do you think the central banks will continue to try to reduce the long term yields over the next few years (e.g. FED until 2013). Do you think mortgage holders should be fixing now or in the future?

Also, I was wondering how a banking collapse might affect the stock market. Do you forsee a major collapse in the stock markets if banks have to continue selling their share holdings, or has this already been done during the recent vicious correction we have just witnessed.

If we are rhyming with the 1970's (e.g. 1973 - 1982), gold stocks, physical gold and silver and commodities did well. The general stock market did not. Do you still believe high dividend non commodity stocks will do well over the next five years?

Also, do you think owning commodity stocks is as good as owning commodities directly or a commodity index?

Many thanks,

Justin


Fergus
24 Oct 11, 06:37
Central Banks

Thank you Nadeem for your recent articles.

May I ask whether it is possible that central banks can continue to buy long term Government bonds and thus reduce the interest rate yield indefinitely. Mathematically, it is possible to keep halving the yield by buying bonds, but pratically is this possible?

I remember reading a couple of articles about:

1. Sterling going to 1.70/1.80 against USD and;

2. The trend for interest rates was up

Do you still think this is the case, or have you changed your view on this in the short term?

Thank you for all of your advice.

Fergus


Henry
24 Oct 11, 06:43
Martin Armstrong

Hi Nadeem,

Armstrong (Armstrong Economics) believes that at some point people should get their money out of public assets and into private assets as the world wakes up to the fact that the problem is with Governments, not large private organisations. He thinks this will happen in the furture, not now.

Do you agree with this?

Also, I would be very interested to learn any trading tips you might have in determining entry and exit points. With regard to spread betting, do you think these organisations are rigged to stop people out (e.g. hunt stops) - especially with the FOREX markets.

Many thanks,

H


Nadeem_Walayat
24 Oct 11, 10:03
Markets, Rates, Bonds, Inflation

Hi All

Mortgage Interest rates - Current official interest rates are artificial, market interest rates will always be significantly higher and destined to trend higher. If it was me I would fix a mortgage sooner rather than later.

A gilt rate of 2.5% does not reflect Inflation of 5.6%, if the UK were in the euro-zone then the yield would be north of 5%, there will be an adjustment higher, the Q is when ?

Stocks - The most money is made when most people are scared to invest. Theres not going to be much profit left when all the news is good.

I don't think were rhyming with the 1970's I think we are in the 2010's (NEW), high inflaiton, low growth, should be good for dividend stocks.

Banking collapse is a risk, its a low probability but a risk one has to counter.

I prefer stocks to owning commodities outright, i.e. oil companies instead of oil.

Interest rates - The govenrment is manipulating the yeilds by printing money and buying bonds, but this is showing through in inflation. The interest rates are being surpressed, Its like an elastic band the more manipulation the greater will be the eventual snap back, rates will go much higher, but when ? Thats upto the market, probably when the market forgets about the eurozone and goes back to seeing the UK and US as being more broke than the Eurozone.

Armstrong - Public / private assets ? - All I know is to focus on protectign from the inflation mega-trend that wants to eat all of my wealth away ! To do this I have to take risks, have to buy dividend stocks, have to buy commodities, and soon housing.

Spread betting - Well you need to set wider stops, else you willbe stopped out, I have had moments when I have been stopped out at prices the markets never traded at and argued and won my point ! So yes, there IS a problem to some degree, you have to be aware of this tendency when using spread betters and set stops very distant and monitor open positions.

Sterling, I will need to do an analysis to see where next, its not really a priority at this moment in time.

Best

NW


Harry
24 Oct 11, 10:55
Interesting Points

Hi Nadeem,

The problem I have with your analysis above is that we entered a secular stocks bear market back in 2000. This was the start of the commodities super cycle bull market (e.g. gold around $250).

I understand along the way we have cyclical bull markets (lasting on average two to four years), but on balance stock markets tend to trend sideways during much longer secular bear markets (e.g. Zeal "Eve of a Bear" - Adam Hamilton)

The posts above seem to make sense in terms of owning gold, silver (physical), gold/silver stocks and commodities (hard/soft). I am less sure about non commodity stocks paying dividends which is why I am bothered to write.

Anyway, if the fixed mortgage rates are determined by longer term gilts/bonds, then why would interest rates rise significantly if central banks are manipulating these markets. I am now drawn to Bill Gross (PIMLICO) throwing in the towel (although Jim Rogers is still shorting these worthless Government bonds). Do you remember when the FED said that interest rates would remain low for a number of years? Who do you think is in there manipulating these market interest rates lower? They don't just go lower because a central bank says so. Look at M2 and yet we not heard any new announcement of QE3 in America, have we not?

Furthermore, it is almost impossible for America to experience hyperinflation as USD is still the reserve currency. I wonder why there are US military bases around two thirds of the world? Could it possibly be to protect the US's hedgemoney? I would summise America will fall in similar circumstances to Rome. It is sickening to witness the countless wars going on in the name of "terror".

Have you done an analysis on where and when the trend for higher longer term "market" rates will be in the future?

It would be foolish to fix a mortgage at say 4-4.5% (5 year fixed) only to see fixed rates going below 3% in the future. However, I am intrigued to explore further why and when you think market rates will start to rise on a long term trend.

Lastly, I too, would be extremely interested to hear any trading tips you might have. I am sure your readers would also be greatly interested to learn some trading tips as to when to get into positions on a technical basis. Any advice/experience you have in this matter would be greatly appreciated. I only mention this because so many novice traders fall into the trap of not trading properly or risking too much on a position.

As an adjunct to the above, one must remember that if you were to widen your stop losses you are increasing your risk (or diluting your position if fixed risk). What you want to be doing is limiting your risk for unlimited reward. Hard to fade a method like this if you are on the other side! Spreadbetting is frought with many dangers and I am not surprised whatsoever that stop hunting goes on in this industry to the detriment of the customer(s), in much same way as I am not surprised how the primary dealers manipulate the markets (e.g. takedown of silver from $50 not so long ago). It is not capitalism which is wrong, but the market manipulators. These are the primary delaers whicj have the trillions of dollars of OTC derivatives on their books, if anyone is interested.

Thank you for your thougts/advice.

Harry


Richard
24 Oct 11, 14:27
Asset Managers

Hi Nadeem,

What is your take on asset managers where cash and shares are held in nominee accounts?

For example I have cash and shares with Hargreaves Lansdown and TDWaterhouse. I have spoken to both and they confirmed that the cash is held in nominee bank accounts across a number of third party banks.

Many thanks

Richard


Geordie Rich
25 Oct 11, 03:37
UK House Prices as an inflation hedge?

Another great article and one which acurately reflects what I see.

I do have one problem; if interest rates were to rise, energy costs rise and wages stay below the rate of inflation then who is going to be able to buy houses at an already inflated level? Surely the last 10 years has been a huge housing bubble, with much of the population purchasing houses with very low deposits with some borrowing up to 8 times their salaries in order to buy a house. How can house prices stay flat or even rise (as indicated in above and previous articles). Surely if rates rise and bankrupt banks require bigger deposits and better quality home owners, house prices must fall, and drastically?

Keep up the great work Nadeem!


Fred
25 Oct 11, 03:46
Housing

Nadeem,

Re your comment

"Housing (people waiting for prices to fall are forgetting about the effect of inflation)"

Do you include yourself in those people? You have been very negative about UK housing all through the period you describe as the "inflation megatrend". You did a very negative UK housing piece as recently as July. If you look at the housing indices the bottoms were two years ago. Now you are going to say housing is an inflation hedge? You seem a bit confused about interest rates rising or not? Surely if you think there will be a spike that's when house prices will be hit hardest?


Nadeem_Walayat
25 Oct 11, 04:01
UK housing

Hi

You have to factor in that the credit crisis is already at an extreme, i.e. bank lending and market rates.

Inflation continues to erode the real value of housing so whilst prices may not have been falling, the real value has.

My next article will look at UK housing and inflation.

Best

NW


Nadeem_Walayat
25 Oct 11, 04:28
UK Housing and inflation

Fred

Your reading what you want to read into my articles, the facts are that housing needs to rise by about 5.6% to keep pace with inflation so it has fallen / stagnated in real terms during the past 2 years.

Offcourse housing is a long-term hedge against inflation, the question that my next analysis will answer is if has reached the point where it will now start to keep pace with inflation during the next few years or not and I have been correct to remain bearish since June 2007 right upto this point given the real terms drop in house values where my expectations of the past 2 years following the 2007-2008 crash was for a depression in house prices. FOUR YEARS is a lot of inflation induced loss of value on top of nominal price falls, again i will cover this in my next article.

I am not confused about rates rising, the problem is that the rates are artificial, I don't know how long the market will put up with UK bonds at 2.5% when they should be over 5%.

Best.

NW


Ben
25 Oct 11, 05:10
Interest Rates

Nadeem,

I just want to say a big thank you for your articles and comments above.

Do you have any inkling as to when market interest rates are likely to rise on a more sustained basis. Is Harry above correct that market interest rates may go down further before they go up? I suspect he means America is following the path of ancient Rome with all the wars and debt incurred because of them.

As someone who just wants to protect himself and family against the ravishes of inflation, I would be grateful for any trading advice you might be able to give. Your technical analysis is first class. How can someone like myself learn this technical analysis / price action in order to trade correctly?

Any advice you may have would be appreciated.

Thank you very much for all that you have contributed so far. You are one of the few people who actually tells it like it is. I can't begin to tell you how refreshing this is!

Best

Ben


Kevin
25 Oct 11, 05:24
Trading

What a fantastic article and comment thread.

I have just stumbled accross this website and was drawn to Nadeen's articles. Too many to read right now, but I get the gist.

If people are willing to share trading tips to protect themselves against the manipulators, then I will be the first to contribute.

In the pit, the first thing you learn when you are ready to stop the bleeding and trade properly is to cut your losses short. This basically means that your first loss should be your best lost.

In forex, the first thing you learn when you are ready to trade properly is to only play the "hot hands" - the strongest of weakest markets get my business and;

only be willing to buy a market if it is up on the day

only be willing to sell a market if it is down on the day

I class 6GMT as the start of the day and only trade the first 6-7 hours - the money trades.

It's not hard really. The markets tend to "feed" where the orders are.

Anyway, that is my small contribution for the time being. I would like to see other people contribute as I have been inspired by this thread and Nadeem's excellent articles.

How about it Nadeem? Why not post some articles on trading or technical analysis for us mere mortals?

Whatever you decide to do, well done for showing some people the actual truth of what is going on right now.

Keep it up.

Best,

Kevin


Fred
25 Oct 11, 08:40
UK Housing

Nadeem,

What is going to bring about HPI at the moment? Surely it can only be a return to loose credit or rampant wage inflation. The loose credit must seem unlikely given you speak of banks failing. The wage inflation would lead to even higher general inflation and a spike in interest rates. You say people in China, India, Brazil, etc are already paid 1/10th of people in the West. We have room for wage inflation? If we had wage inflation without interest rate rises boomers would be dead in the water and trying to sell their houses and so increasing supply.

As regards general inflation if people have a pot of money waiting to buy a house, the general inflation is a positive for that money. If other people without that cash pot have higher food and bills to pay and pay rises below that inflation, it means they have less money to use to bid up house prices. If you have £1m in the bank to buy a £900k house 5% inflation only erodes the purchasing power of the £100k remainder by £5k (less after bank interest). A 5% fall in house prices would be worth £45k.

It's human nature to try to justify your own circumstances. I have not bought a house yet so want prices to fall. Maybe you are turning bull because you have bought? The problem is you have more influence them me!


Nadeem_Walayat
25 Oct 11, 11:37
Trading / Housing

Ben

There are several trading lesson articles in my archive, my plan is to eventually get around to doing a book on trading but I am not going to make promises as to when.

UK housing is my focus for now because it has been a year since I last took a look at housing.

Fred

The reasons are always clear as to 'why' in hindsight, AFTER the market has moved. Same holds true for the bull market that bottomed in March 2009, at the time many were expecting far lower levels on the basis for the expectation of a collapse in corporate earnings.

The same will hold true for the housing market. Standard economics will always focus on what will nearly always turn out to be red herrings, which is why the debt deflation theory has been wrong for over 2years now.

I don't invest / grow my wealth on the basis of what I want, I invest on the basis of what appears to be the most probable and adjust / hedge accordingly.

And for your information, I currently hold NO PROPERTY.



26 Oct 11, 03:33
Interest rates

Nadeem, please give me your opinion/answer on my question below

Nadeem do you not think interest rates have to stay low for the foreseeable future to protect the housing market that the whole UK economy is now reliant/based on?

The one thing the government cant afford is house prices to fall, if that happened then more and more people come into negative equity & cant afford to pay there mortgage and default, economy then suffers hugely as more and more people become poor have no money to buy things. This could trigger deflation and as you say the government wants/needs inflation to service/pay its debts.

Did the banks create super high prices for housing on purpose over the last 20 years to get the government trapped & in their pockets so they could always get bailouts/cash when they need them and generally call the shots?

As always thanks for your hard work & sharing you expertise with us all.

All the best

Toby


Nadeem_Walayat
26 Oct 11, 04:02
Housing, interest rates and inflation

Hi Toby

1. The government is using high inflation to give the illusion that house prices are not falling.

2. Interest rates remain under government control up to the point they lose control, this could happen suddenly within weeks or even days. So you should be prepared for the interest rate world for the UK to suddenly change, remember the fundementals are for UK gov bond rates north of 5%.

3. There is no threat of deflation because it is easy to counter with money printing as I said just prior to the Bank of England QE money printing in March 2009

4. The fiat currency fractional reserve banking system is designed to trend towards the ultimate conclusion of hyperinflation, it is the system not the individuals, without changing the system then nothing has changed, but yes the banks want to keep this system because it in riches them and overtime turns everyone into an interest paying debt slave, so they buy politicians and entire political parties, as well as the mainstream press as well as using market hammers on the government.

Best

NW


Toby
26 Oct 11, 10:22
Housing, interest rates and inflation

Hi Nadeem,

I cant thank you enough, i feel privileged to be able to ask a question and get a response.

1: I agree house prices are falling steadily using stealth methods of high inflation, but if interest rates went up making mortgage costs 3x 4x 5x what they are now then house prices would fall dramatically, am i wrong?

2: If government loses control of interest rates at that point potentially it could be the tipping point, the SWHTF, people will be in the streets and the fiat currency system as we know it will have to be reset/changed? Could you imagine globally right now if rates in the US and UK were 5% would there not be anarchy as people cant afford to pay the mortgage, bills and feed themselves.

3: I agree deflation is not an option for governments/banks which goes back to my point that rates cant go up with out the SHTF big time, so they have to stay low, just to keep the peace, after all the savers wont revolt.

4: totally agree

All the best

Toby


peterr54
26 Oct 11, 16:02
EU's Do Nothing Option Isn't Working

All this doom and gloom for what?

We are all going down and heading toward world conflict.

War you say?

No,,,,...world conflict. The haves and the have nots will perpetually face off with each other and dog will eat dog.

The middle classes will be torn apart at 2 ends.

The lower (benefit consuming) blue collar class will rob, mug and terrorize the small shopkeepers, the large supermarket chains, the white goods store-holder franchisers and the salaried office workers. They are completely ignorant of what all this crisis is about let alone who are really the perpetrators. The UK will feed them some more football, tennis or rugby to watch with plenty of We've Got Talent shows to numb their feeble minds. No need for a blue pill !!!

The upper (pocket filling) white collar class will tax the middle class into oblivion while retaining a buffer to ensure the blue collar class remains focussed on the middle class who have while they have-not. The middle class who will desparately hang on to what they are left with, will eventually wisen-up and start murdering and assassinating bankers, financial and politicians.

These white collar, monopoly addicted greedy swines will become public enemy no.1 and the police state will kick-in to protect them against the middle class revolutionaries. (i use the term Swines since PIIGS is reserved for those spendthrift nations doomed to fail and either leave the Eurozone or be kicked out of the EU altogether).

This will be the story for at least 50 years, or until the debt has been reduced to manageable proportions. A few less banks and a lot less bankers may also help if the culling is successful.

My advice to depositors is spend all your money now on things that will give provide renewable sustenance or that will help keep you self sufficient. A small patch of arable farm land to till, an egg laying shed of hens, cockerels and chickens, a fish and shrimp farm or dairy livestock. But do not deposit savings of fiat money in any bank and never ever, ever, ever invest in anything unless you actually have the stock or other collateral in escrow or better still in your hands. If you have some gold or silver hang on to it. The value will sky rocket within a very short time after the ultimate banking collapse.

We do not need banks. We never have. Money is invented by greedy people addicted to financially control others and economically corrupt you into believing you can be a millionaire while it is they who crave this. Literally and insanely crave this ......Like King Midas.

They cannot survive unless we are willing to purchase their debt (i.e. borrow their fiat money,) by surrendering to them our collateral as a loan security. The biggest confidence trick ever pulled on humanity.

The collapse of the system will be of biblical proportions. This is why nobody is seeing it coming.


Careful reader
30 Oct 11, 15:00
Wrong country

Sir,

The country you've referred to in your article as "Czech Republic" is actually the Slovak Republic.


Art Pfeifer
10 Nov 11, 23:26
Savers Protect Your Deposits From Bankruptin​g Banks

Hi Oracle,

This statement, copied from your text below, is very hard to grasp : :: The reality is that virtually ALL of the European banks would fail the PIIGS defaulting and triggering haircuts of 40-60% of sovereign debt holdings which means the bank stress tests were pure political propaganda with no basis in reality:::

Are you saying with all the investment possibilities and all the countries available to invest in that all banks in Europe emptied their coffers to invest in the PIIGS ???

Pleas comment and clarify.


Nadeem_Walayat
10 Nov 11, 23:35
Bankrupting Banks

Most banks have tier 1 capital of less than 4% assets, and even the ones deemed to be the safest are barely above 6%.

Thats not much of a buffer from becoming insolvent as we saw recently with Dexia.

If PIIGS debt holders suffer a 60% loss, well thats your 4% gone for many French and German banks we are talking about the biggest banks in the world such as Deutche.

and if any of the big banks go down then so soon would they ALL as a consquence of counterparty risks, i.e. all of the OTC derivatives deals are in default


Jarek
19 Nov 11, 05:36
a couple of questions

Hello Nadeem

I have a few key questions about your view regarding the macro economic picture:

1. As we all know the British government guarantees our money to the tune of 85000 per account, what happens if the British government at the end defaults on its debt (due to foreign banks not having enough capital to cover their losses on various EU governments defaulting on their debts, British banks not having enough capital to cover their losses on other UE governments defaults, I suspect in the and even the German government will default on its debt, as domino effect will not spare anyone), what happens then to all those bank deposit guarantees,how the government could honor them if they default on their debts which also were supposed to be guarateed but the government?

2. If British gov defaults on its debts do you expect inflation or a deflation scenario (inflation as the Bank of England will be trying desperately to print money to inflate the debt away and do not allow deflation to set in, or a deflation as the BoE would just simply give up on printing seeing printing and inflation as a greater danger to the future of the country than lets say a few years or even a decade of deflation)?

Thanks

Jarek


Nadeem_Walayat
19 Nov 11, 11:07
Inflation

Hi

1. The goverment will honour only in domestic currency - sterling. Remember governments can CHANGE the rules.

2. Hyperinflation.

I will write this weekend at length on inflation.

Best

NW


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