Food pantry's prayers violate federal rules

When are you going to wake up on what's going on....





SEYMOUR, Ind. – Food pantry volunteer Shirley Sears patiently walks a young woman through a series of questions on an application for emergency assistance. After they complete the form, Sears tells the woman she has one more question.

Shirley Sears, a volunteer with Community Provisions of Jackson County, prays with a woman who came to the Seymour, Ind., food pantry Friday for food assistance.

"Is there anything," Sears asks, "that you would like us to pray with you about?"

Yes, the woman replies without hesitation. Reaching across the small desk that separates them, Sears grasps the woman's hands and begins to pray.

That scene has been repeated thousands of times over the past 15 years inside this small, southern Indiana food pantry operated by non-profit Community Provisions of Jackson County. This month, the practice was found to be against federal policy, leaving the pantry's founder with a Solomon-like choice: Stop the prayers or give up truckloads of free food provided through the federal Emergency Food Assistance Program.

Paul Brock, who started the faith-based pantry in 1997, refused to order his volunteers to quit asking recipients whether they wanted to pray. The federal food was suspended while the sides discussed a compromise.

Prayer in public settings remains a hot topic of debate nationwide. Florida Gov. Rick Scott, a Republican, signed a bill into law Friday that allows school boards to permit student-initiated "inspirational messages" at public school assemblies — which critics see as allowing prayer. Last month, an issue arose in New York Cityover whether churches should be permitted to hold services in public school buildings. For now, an appeals court has ruled the churches can stay while the matter is sorted out in court.

"These kind of cases are popping up in a lot of places around the country," said Michael Cromartie, vice president of the Ethics and Public Policy Center in Washington. "People can be overly sensitive on both sides."

Cromartie said it is not a matter of stifling religious speech, but rather following the constitutional mandate of separation of church and state rules that come along with receiving and administering government assistance.

"If this food or money was coming from a Christian charity, there would be no problem with praying," he explained, "but the (government) money comes with attachments, and you have to follow the rules if you are going to take the money."

The food pantry issue arose after an inspection last winter by Gleaners Food Bank of Indiana, which runs the program for the Indiana Department of Health and ensures compliance with federal guidelines. Inspectors noted that pantry staff members asked recipients whether they wanted to pray. They reported that to state officials, who determined the practice was a violation of the federal rule. "The guidelines are no religious (activity) or teaching can be required for providing services," Gleaners spokeswoman Carrie Fulbright said.

Because many food pantries have ties to churches, the state suggested to faith-based operations that they offer brochures or establish a separate room for prayer while complying with regulations.

Brock bristled at the call to stop the prayers, but he worried about having enough food to feed the 300 or so people who show up each week for help. The federal aid accounts for about 15% of the food distributed by the pantry, Brock said.

Brock said the pantry workers weren't violating the rules because no one was ever required to pray. "We still give food to people," he said, "even when they say they don't want to pray."

Officials from Gleaners, the state and the U.S. Department of Agriculture have been working to find a solution that meets the requirements of the law and Brock's commitment to his faith. Brock said he "is strongly leaning toward" signing a compromise that would allow his program to again receive food items through the federal program if it made the offer to pray after recipients receive their food, instead of before.

"I think I can work with that," Brock said. "But I've still got people pushing on me from both sides." Brock said he has a Wednesday deadline to sign the agreement.

Cindy Hubert, president and CEO of Gleaners Food Bank of Indiana, said she thinks the plan addresses the concerns and needs of all the parties.

"It really wasn't a case of anyone objecting to praying," Hubert said. "It is just that it can never be a requirement to get food. It can't even be perceived that way."

Filling a grocery cart last week with fresh and canned goods, single mother Kathy Gabbard of Seymour said she has turned to the pantry several times for assistance and has been asked whether she would like to pray. On some of those visits, Gabbard said, she accepted the invitation.

"It didn't offend me whatsoever," she said. "I think this is a great program."

USA Today

Scientists develop plastic skin that BLEEDS red liquid and can even heal itself

Robots that 'bleed' like Arnold Schwarzenegger's Terminator have come one step closer to reality.

Scientists have created a plastic 'skin' that oozes red blood when cut.

It can also 'heal' itself, building tiny molecular bridges inside in response to damage.

The red 'blood' might sound like a pointless Halloween novelty - but the idea is that the 'skin' can warn engineers that a structure such as an aicraft wing has been damaged.

The material could provide self-healing surfaces for a multitude of products ranging from mobile phones and laptops to cars, say researchers.

When cut, the plastic turns from clear to red along the line of the damage, mimicking what happens to skin.

It reacts to ordinary light, or changes in temperature or acidity, by mending broken molecular ‘bridges’ to heal itself.

U.S. scientists told how they created the material at the American Chemical Society’s annual meeting in San Diego, California.

Lead researcher Professor Marek Urban, from the University of Southern Mississippi, said: ‘Mother Nature has endowed all kinds of biological systems with the ability to repair themselves.

‘Some we can see, like the skin healing and new bark forming in cuts on a tree trunk. Some are invisible, but help keep us alive and healthy, like the self-repair system that DNA uses to fix genetic damage to genes.

‘Our new plastic tries to mimic nature, issuing a red signal when damaged and then renewing itself when exposed to visible light, temperature or pH changes.’

The material could flag up damage to critical aircraft structures, said Prof Urban. A decision could then be taken whether to replace the component or ‘heal’ it with a burst of intense light.

Scratches on vehicle fenders could be repaired the same way.
Prof Urban’s team is now working on incorporating the technology into plastics that can withstand high temperatures.

Read more: http://www.dailymail.co.uk/sciencetech/article-2120657/The-man-machines-Scientists-develop-plastic-skin-BLEEDS-red-liquid--heal-itself.html#ixzz1qKWvFSR8

Time Paradoxes - Chuck Missler

State of the "Unions"

Why The Reign Of The Dollar As The World Reserve Currency Is About To Come To An End

The U.S. dollar has probably been the closest thing to a true global currency that the world has ever seen.  For decades, the use of the U.S. dollar has been absolutely dominant in international trade.  This has had tremendous benefits for the U.S. financial system and for U.S. consumers, and it has given the U.S. government tremendous power and influence around the globe.  Today, more than 60 percent of all foreign currency reserves in the world are in U.S. dollars.  But there are big changes on the horizon.  The mainstream media in the United States has been strangely silent about this, but some of the biggest economies on earth have been making agreements with each other to move away from using the U.S. dollar in international trade.  There are also some oil producing nations which have begun selling oil in currencies other than the U.S. dollar, which is a major threat to the petrodollar system which has been in place for nearly four decades.  And big international institutions such as the UN and the IMF have even been issuing official reports about the need to move away form the U.S. dollar and toward a new global reserve currency.  So the reign of the U.S. dollar as the world reserve currency is definitely being threatened, and the coming shift in international trade is going to have massive implications for the U.S. economy.

A lot of this is being fueled by China.  China has the second largest economy on the face of the earth, and the size of the Chinese economy is projected to pass the size of the U.S. economy by 2016.  In fact, one economist is even projecting that the Chinese economy will be three times larger than the U.S. economy by the year 2040.

So China is sitting there and wondering why the U.S. dollar should continue to be so preeminent if the Chinese economy is about to become the number one economy on the planet.

Over the past few years, China and other emerging powers such as Russia have been been quietly making agreements to move away from the U.S. dollar in international trade.  The supremacy of the U.S. dollar is not nearly as solid as most Americans believe that it is.

As the U.S. economy continues to fade, it is going to be really hard to argue that the U.S. dollar should continue to function as the primary reserve currency of the world.  Things are rapidly changing, and most Americans have no idea where these trends are taking us.

The following are 10 reasons why the reign of the dollar as the world reserve currency is about to come to an end....

#1 China And Japan Are Dumping the U.S. Dollar In Bilateral Trade

A few months ago, the second largest economy on earth (China) and the third largest economy on earth (Japan) struck a deal which will promote the use of their own currencies (rather than the U.S. dollar) when trading with each other.  This was an incredibly important agreement that was virtually totally ignored by the U.S. media.  The following is from a BBC report about that agreement....

China and Japan have unveiled plans to promote direct exchange of their currencies in a bid to cut costs for companies and boost bilateral trade.

The deal will allow firms to convert the Chinese and Japanese currencies directly into each other.

Currently businesses in both countries need to buy US dollars before converting them into the desired currency, adding extra costs.

#2 The BRICS (Brazil, Russia, India, China, South Africa) Plan To Start Using Their Own Currencies When Trading With Each Other

The BRICS continue to flex their muscles.  A new agreement will promote the use of their own national currencies when trading with each other rather than the U.S. dollar.  The following is from a news source in India....

The five major emerging economies of BRICS -- Brazil, Russia, India, China and South Africa -- are set to inject greater economic momentum into their grouping by signing two pacts for promoting intra-BRICS trade at the fourth summit of their leaders here Thursday.

The two agreements that will enable credit facility in local currency for businesses of BRICS countries will be signed in the presence of the leaders of the five countries, Sudhir Vyas, secretary (economic relations) in the external affairs ministry, told reporters here.

The pacts are expected to scale up intra-BRICS trade which has been growing at the rate of 28 percent over the last few years, but at $230 billion, remains much below the potential of the five economic powerhouses.

#3 The Russia/China Currency Agreement

Russia and China have been using their own national currencies when trading with each other for more than a year now.  Leaders from both Russia and China have been strongly advocating for a new global reserve currency for several years, and both nations seem determined to break the power that the U.S. dollar has over international trade.

#4 The Growing Use Of Chinese Currency In Africa

Who do you think is Africa's biggest trading partner?

It isn't the United States.

In 2009, China became Africa's biggest trading partner, and China is now aggressively seeking to expand the use of Chinese currency on that continent.

A report from Africa’s largest bank, Standard Bank, recently stated the following....

“We expect at least $100 billion (about R768 billion) in Sino-African trade – more than the total bilateral trade between China and Africa in 2010 – to be settled in the renminbi by 2015.”

China seems absolutely determined to change the way that international trade is done.  At this point, approximately 70,000 Chinese companies are using Chinese currency in cross-border transactions.

#5 The China/United Arab Emirates Deal

China and the United Arab Emirates have agreed to ditch the U.S. dollar and use their own currencies in oil transactions with each other.

The UAE is a fairly small player, but this is definitely a threat to the petrodollar system.  What will happen to the petrodollar if other oil producing countries in the Middle East follow suit?

#6 Iran

Iran has been one of the most aggressive nations when it comes to moving away from the U.S. dollar in international trade.  For example, it has been reported that India will begin to use gold to buy oil from Iran.

Tensions between the U.S. and Iran are not likely to go away any time soon, and Iran is likely to continue to do what it can to inflict pain on the United States in the financial world.

#7 The China/Saudi Arabia Relationship

Who imports the most oil from Saudi Arabia?

It is not the United States.

Rather, it is China.

As I wrote about the other day, China imported 1.39 million barrels of oil per day from Saudi Arabia in February, which was a 39 percent increase from one year earlier.

Saudi Arabia and China have teamed up to construct a massive new oil refinery in Saudi Arabia, and leaders from both nations have been working to aggressively expand trade between the two nations.

So how long is Saudi Arabia going to stick with the petrodollar if China is their most important customer?

That is a very important question.

#8 The United Nations Has Been Pushing For A New World Reserve Currency

The United Nations has been issuing reports that openly call for an alternative to the U.S. dollar as the reserve currency of the world.

In particular, one UN report envisions "a new global reserve system" in which the U.S. no longer has dominance....

"A new global reserve system could be created, one that no longer relies on the United States dollar as the single major reserve currency."

#9 The IMF Has Been Pushing For A New World Reserve Currency

The International Monetary Fund has also published a series of reportscalling for the U.S. dollar to be replaced as the reserve currency of the world.

In particular, one IMF paper entitled "Reserve Accumulation and International Monetary Stability" that was published a while back actually proposed that a future global currency be named the "Bancor" and that a future global central bank could be put in charge of issuing it....

"A global currency, bancor, issued by a global central bank (see Supplement 1, section V) would be designed as a stable store of value that is not tied exclusively to the conditions of any particular economy. As trade and finance continue to grow rapidly and global integration increases, the importance of this broader perspective is expected to continue growing."

#10 Most Of The Rest Of The World Hates The United States

Global sentiment toward the United States has dramatically shifted, and this should not be underestimated.

Decades ago, we were one of the most loved nations on earth.

Now we are one of the most hated.

If you doubt this, just do some international traveling.

Even in Europe (where we are supposed to have friends), Americans are treated like dirt.  Many American travelers have resorted to wearing Canadian pins so that they will not be treated like garbage while traveling over there.

If the rest of the world still loved us, they would probably be glad to continue using the U.S. dollar.  But because we are now so unpopular, that gives other nations even more incentive to dump the dollar in international trade.

So what will happen if the reign of the U.S. dollar as the world reserve currency comes to an end?

Well, some of the potential effects were described in a recent article by Michael Payne....

"The demise of the dollar will also bring radical changes to the American lifestyle. When this economic tsunami hits America, it will make the 2008 recession and its aftermath look like no more than a slight bump in the road. It will bring very undesirable changes to the American lifestyle through massive inflation, high interest rates on mortgages and cars, and substantial increases in the cost of food, clothing and gasoline; it will have a detrimental effect on every aspect of our lives."

Most Americans don't realize how low the price of gasoline in the United States is compared to much of the rest of the world.

There are areas in Europe where they pay about twice what we do for gasoline.  Yes, taxes have a lot to do with that, but the fact that the U.S. dollar is used for almost all oil transactions also plays a significant role.

Today, America consumes nearly a quarter of the world's oil.  Our entire economy is based upon our ability to cheaply transport goods and services over vast distances.

So what happens if the price of gasoline doubles or triples from where it is at now?

In addition, if the reign of the U.S. dollar as global reserve currency ends, the U.S. government is going to have a much harder time financing its debt.

Right now, there is a huge demand for U.S. dollars and for U.S. government debt since countries around the world have to keep huge reserves of U.S. currency lying around for the sake of international trade.

But what if that all changed?

What if the appetite for U.S. dollars and U.S. debt dried up dramatically?

That is something to think about.

At the moment, the global financial system is centered on the United States.

But that will not always be the case.

The things talked about in this article will not happen overnight, but it is important to note that these changes are picking up steam.

Under the right conditions, a shift in momentum can become a landslide or an avalanche.

Clearly, the conditions are right for a significant move away from the U.S. dollar in international trade.

So when will this major shift occur?

Only time will tell.

Economic Collapse

L. A. Marzulli with Sid Roth about The Watchers

Four Years Of Japanese Central Planning Failure Charted

Earlier today we presented an extended case by Caixin's Andy Xie, who is now confident that a massive 40% devaluation of the Yen is imminent and inevitable (with dire consequences for regional trading partners), as the opportunity cost, now that the Japanese economy is no longer competitive in the New Normal world (read trade surplus) of delaying what every other central banks has been doing so well (just observe the nominal surge in risk assets at 8 am this morning when Bernanke made it clear more realdilution is coming, as predicted here just yesterday), is the 3 decade long overdue pop in the JGB bond market. 

Yet as Xie notes, either of these two bubbles popping - the JPY or the JGB - is fraught with danger as both will confirm that three decades of central planning have failed. What is worse, Japan would then become a case study for failed central planning (yes, redundant), everywhere, but nowhere more than in the US. Which in turn, would not be a surprise to most, or at least to those who don't chase dead end momentum trends and heatmapped assets in simplistic hopes of finding a greater fool 1 millisecond into the future. 

It also would not be a surprise to anyone who sees the following chart from John Lohman which shows the gradual failure of central planning since the second global depression started in 2007 (and offset to date by $7 trillion in central bank private-to-public risk offset), during which time the BOJ has been forced to load up its balance sheet with substantially more assets than its GDP has grown by. Alas, this trend will accelerate which is why with time the exponential chart of central bank balance sheet expansion will only get more "exponential" until it finally pops, bringing with it an end to the truly last bubble. We can only hope we are somewhere far away when that happens.



If nothing else, Japan is the perfect case study of what happens when rates even dare to move higher. Remember: an epic surge
in average interest rates to a whopping 2% and Japan's interest expense
would eclipse the country's tax revenues, at which point it is game
over.

Zero Hedge

Japan Armed Forces on Alert Ahead of N.Korea Satellite Launch

Japan’s armed forces received an order to put on alert its missile interceptors ahead of a planned North Korean satellite launch in April, Japanese Defense Minister Naoki Tanaka said on Tuesday.

The Defense Ministry has been already taking preparations including deploying its Aegis-equipped destroyers and the land-based Patriot Advanced Capability-3 missile systems on the Sakishima islands.

Minister Tanaka earlier warned that he might issue orders to shoot down the rocket if it posed a danger to Japan.

Earlier in the month, North Korea announced plans to launch an earth observation to mark the 100th birthday of its late founding leader Kim Il-sung in April.

The move is seen as a violation of a UN Security Council resolution and has drawn international condemnation. The United States and other countries suspect that the launch is a thinly veiled ballistic missile test.

RIA Novosti

Corzine Directly Ordered Transfer of Stolen Customer Funds: Gerald Celente

What If the National Debt Were Your Debt?

Top 5 Banks Hold 95.7%, Or $221 Trillion, Of Derivatives

Every quarter the Office of the Currency Comptroller releases its report on Bank Derivative Activities, and every quarter we find that the Too Big To Fail get Too Bigger To Fail. To wit: in Q4 2011, of the total $230.8 trillion in US outstanding derivatives, the Top 5 banks (JPM, BofA, Morgan Stanley, Goldman and HSBC) accounted for 95.7% of all Derivatives.

In some respects this is good news: in Q2, the Top 5 banks held 95.9% of the $250 trillion in derivatives. Unfortunately it is also bad news, because $220 trillion is more than enough for the world to collapse in a daisy chained failure of bilateral netting (which not even all the central banks in the world can offset). What is the worst news, is that the just released report indicates that in addition to everything else, we have now hit peak delusion, as banks now report to the OCC that a record high 92.2% of gross credit exposure is "bilaterally netted."

While we won't spend much time on this issue now, it is safe to say that bilateral netting is the biggest lie in modern finance (read How US Banks Are Lying About Their European Exposure; Or How Bilateral Netting Ends With A Bang, Not A Whimper for an explanation of this fraud which was exposed completely in the AIG collapse). And just to put this in global perspective, according to the BIS in the first half of 2011, global derivative gross exposure increased by $107 trillion to a record $707 trillion.

It will be quite interesting to get the full year report to see if this acceleration in gross exposure has increased. Because if it has, we will now know that in 2011 European banks were forced up to load up on several hundred trillion in mostly interest rate swap exposure. Which can only mean one thing: when and if central banks lose control of government bond curves, an rates start moving wider again, the global margin call will be unprecedented. Until then we can just delude ourselves that central planners have everything under control, have everything under control, have everything under control.

Top 5 bank derivative exposure:

Exposure by bank:

And the delusion that everyone is somehow hedged. To the tune of $230 trillion!

Zero Hedge

Russia is No.1 Geopolitical Enemy for U.S. - Mitt Romney

Mitt Romney, a U.S. presidential candidate from the Republican Party, said Russia is “number one geopolitical foe” for the United States, CNN reported on Tuesday.

In an interview with CNN Romney said that Russia “lines up with the world's worst actors” including Syria and Iran.

“Russia continues to support Syria. It supports Iran, has - has fought us with the crippling sanctions we wanted to have the world put in place against Iran. Russia is not a friendly character on the world stage,” Romney was quoted as saying.

He also blasted recent talks of U.S. President Barack Obama with his Russian counterpart Dmitry Medvedev at the nuclear security summit in Seoul on Monday.

“The actions he's taken so far, which he says are to reset relations with Russia have not worked out at all,” Romney said adding that Obama’s words to Medvedev about flexibility are “alarming and troubling.”

CNN reported that President Obama was caught on an open mike saying to Medevedev “This is my last election. After my election, I have more flexibility.”

“Russia is the geopolitical foe… and the idea that our president… is planning on doing something with them that he's not willing to tell the American people before the election is something I find very, very alarming,” Romney said.

The election is scheduled for November 2012 and the inauguration of the new president will be in January 2013. According to the latest poll results, President Obama holds the edge and is the favorite to win.

Obama described the meeting with Medvedev in Seoul as highly productive, noting achievements in the last three years including the strategic nuclear arms reduction treaty with Russia. He also accepted an invitation from Medvedev to visit Russia after the U.S. presidential elections.

RIA Novosti

Pending Homes Sales Fall, Raising Questions About Recovery

Pending home sales edged lower in February, according to a report Monday from the National Association of Realtors, raising questions about the housing market recovery.

The pending home sales index slipped by 0.5 percent to 96.5 in February from 97.0 the previous month, but it was up 9.2 percent from the year-earlier period.

Economists polled by Reuters had expected signed contracts, which lead existing home sales by a month or two, to advance 1 percent, after a previously reported 2.0 percent rise.

“The spring homebuying season looks bright because of an elevated level of contract offers so far this year,” said Lawrence Yun, NAR chief economist, said we’re seeing the continuation of an uneven but higher sales pattern. “If activity is sustained near present levels, existing-home sales will see their best performance in five years.”

Pending sales were strongest in the Midwest, where they jumped 6.5 percent — a 19 percent increase from February 2011.

The weakest region for sales was in the South, where they fell 3 percent. In the West, pending sales dropped 2.6 percent in February to 99.3, while in the Northeast they were down 0.6 percent.

Dying for the Glory of Banksters!

The Age of the Shadow Bank Run

I RECENTLY asked a group of colleagues — and myself — to identify the single most important development to emerge from America’s financial crisis. Most of us had a common answer: The age of the bank run has returned.

Since the end of World War II, economists have generally thought that runs on banks were dead, at least as a phenomenon in advanced nations. In the United States, for example, bank deposits are insured by the Federal Deposit Insurance Corporation, and, as a last resort, the Federal Reserve can back deposits by printing money.

The new complication is that bank deposits are no longer the dominant form of modern short-term finance. The modern bank run means a rush to withdraw from money market funds, the disappearance of reliable collateral for overnight loans between banks or the sudden pulling of short-term credit to a troubled financial institution. But these new versions are in some ways still similar to the old: both reflect the desire to pull money out of an endeavor — and to be the first out the door. And both can set off a crash.

These newer forms occur in the so-called shadow banking system, involving short-term financial credit not guaranteed by the deposit insurance umbrella. According to the Federal Reserve Bank of New York, shadow banking accounts for about $15 trillion in assets — more than the traditional banking system. But as recently as 1990, the shadow-banking total was much lower, at less than $4 trillion. The core problem is that the growth of short-term credit has been outracing our ability to protect it, and since 2008 most investors have realized that these shadow-banking transactions are not risk-free.

On top of this problem is the market for derivatives. The quantity of open derivatives amounts to trillions, and these positions are another source of short-term credit risk. So a need for sudden payouts could also prompt a run on a financial institution.

It now seems that the 21st century will resemble the 19th and early 20th centuries, with periodic panics and runs on financial institutions, perhaps followed by deflationary collapses. In the euro zone, these problems have plagued banks and entire countries, like Greece and Portugal. The “country as bank” is a new and not entirely reassuring catch phrase, and it shows that the problem goes beyond the private sector.

If a central bank is deft enough, it can avoid deflation by using loans and monetary policy to guarantee the liabilities of run-prone institutions. That worked reasonably well in 2008, but in the long term such a policy sets up the system for even more danger, by subsidizing bank risk-taking and precarious financial structures.

Another problem is that ending those central bank guarantees isn’t always easy. The European Central Bank has stemmed a financial collapse for now, but only by lending large amounts to banks at 1 percent for a three-year window. And yet the euro zone has entered a recession, so it’s unclear when troubled European banks can return to private capital markets. The central bank may end up taking over much of the allocation of capital.

The arrangement also assumes that economic growth will pick up fairly quickly in the euro zone — hardly a certainty. And there is little market discipline to force European banks to clean up their balance sheets or to exercise caution for the future. So the system remains extremely vulnerable.

Another feature of this new order is that more and more financial transactions will be collateralized with the safest securities possible: United States Treasuries. Demand for them will remain high, and low borrowing costs will ease our fiscal problems. Still, the resulting low rates of return serve as a tax on safe savings, encourage a risky quest for yield and redistribute resources to government borrowing and spending. It isn’t healthy for the private sector when investors are so obsessed with holding wealth in the form of safe governmental guarantees.

THIS entire package of problems seems to be part of “the new normal” — it’s not going away anytime soon.

Some economists, like Ricardo J. Caballero of the Massachusetts Institute of Technology , have called for extending governmental guarantees well beyond traditional bank deposits. That would check the problem, but at what cost? In a larger financial crisis based on insolvency, our government would face intolerable financial burdens, as happened in Ireland when its government guaranteed bank debts.

A broader government guarantee would also spread the moral-hazard problem to an even larger class of financial transactions, raising the odds that the guarantee will someday have to be paid out. In any case, bailouts for creditors are already politically unpopular, and are unlikely to be expanded.

In short, no promising financial path is before us. It’s good that the American economy seems to be recovering, and this may shove some problems into the future. But banking and finance remain a mess at their core. Welcome to the 21st century.


NY Times

Japanese Bond Bubble Is Ready To Burst, Anticipates 40% Yen Devaluation

It is a fact that when it comes to the oddly resilient Japanese hyperlevered economic model, the bodies of those screaming for the end of the JGB bubble litter the sides of central planning's tungsten brick road. Yet in the aftermath of last month's stunning surge in the country's trade deficit, this, and much more may soon be finally ending. Because as Caixin's Andy Xie writes "The day of reckoning for the yen is not distant. Japanese companies are struggling with profitability. It only gets worse from here. 

When a major company goes bankrupt, this may change the prevailing psychology. A weak yen consensus will emerge then." As for the bubble pop, it will be a sudden pop, not the 30 year deflationary whimper Mrs. Watanabe has gotten so used to: "Yen devaluation is likely to unfold quickly. A financial bubble doesn't burst slowly. When it occurs, it just pops. The odds are that yen devaluation will occur over days. Only a large and sudden devaluation can keep the JGB yield low. Otherwise, the devaluation expectation will trigger a sharp rise in the JGB yield. The resulting worries over the government's solvency could lead to a collapse of the JGB market." It gets worse: "Of course, the government will collapse with the JGB market." And once Japan falls, the rest of the world follows, says Xie, which is why he is now actively encouraging China, and all other Japanese trade partners of the world's rapidly declining 3rd largest economy to take precautions for when this day comes... soon. Oh, and this: " If the bond yield rises to 2 percent, theinterest expense would surpass the total expected tax revenue of 42.3 trillion yen."

Why has Japan been able to sustain its deflationary collapse for over 3 decades? Simply - an ever rising currency.

A strong yen, deflation and rising government debt form a short-term equilibrium that lasts as long as the market believes it is sustainable. The yen has seen a relentless upward trend since it depegged from the dollar in 1971, up to 83.4 from 360 again to the dollar. When wages and asset prices rise, a strong currency can be justified. When wages and asset prices fall, a strong currency is suicide. Japan's nominal GDP peaked in 1997 and its nominal wages did too. Its property prices have declined every year since. The Nikkei rose in only four out of the last fifteen years and is still close to a three-decade low.

Japanese policymakers, businesses, academics, currency traders and the average Mrs. Watanabe all believe in a strong yen. This belief is wrong but self-fulfilling. It has lasted so long because the Japanese government adopts policies to offset the destabilizing effects of deflation due to a strong yen. Hence, Japan's national debt has marched upwards along with the value of yen. It is expected to top yen 1,000 trillion in 2012, 215 percent of GDP, 7.8 million yen (or roughly US$ 94,000) per person, and about half of net household wealth per capita.

The sustainability of Japan's deflationary path depends on the market's confidence in Japan's debt market. As Japanese institutions and households hold almost all of the government's debts, their faith in the government's creditworthiness is the mojo for Japan's seemingly harmless deflationary spiral.

There's that. And also that it is nothing but a ponzi. In Xie's words.

The justification for the low JGB yield is deflation. The real interest rate (the nominal rate plus deflation) is comparable to that in other countries. This rationale requires deflation to persist. But, deflation shrinks the nominal GDP or tax base. How could the government pay back its escalating debt by taxing a shrinking economy? It can only sustain its debt by borrowing more. This fits the definition of a particular type of Ponzi scheme.

Deflation is ok, if in addition to collapsing GDP, it is paralleled by declining wages.

The JGB bubble explains the seeming lack of pain in Japanese society. A strong yen and deflation haven't led to an employment crisis because the government deficit is pumping up aggregate demand. As long as wages decline in line with prices, one doesn't feel the pain. Japan's household debt is only half of GDP, about half of the level in the United States. Deflation doesn't cause much balance sheet trouble.

Unfortunately this is unsustainable by definition, as the divergence is a finite series at which point it become self-destructive. And yet the strong Yen is the glue that ties the rickety house of cards together... for now.

Despite the fact Japan has had a bad economy for so long, the yen has remained strong. It reinforces the Japanese psyche on the issue. The strong yen has become a cult.

The international financial market believes in a weak yen from time to time. In 1998, the short-selling by foreigners briefly caused the yen to touch 140 against the U.S. dollar. But, as the Japanese hold all of the yen, if they believe in the yen, foreign short-sellers get punished eventually. Over time, yen bears are all weeded out of the market. The remaining yen traders are all believers in a strong yen.

So far so good: any cult can exist in its own bubble if left to its own devices. However, as much as it is trying to avoid it, Japan's secular role in international society is changing, and very soon the habitual self-delusion of its citizens, politicians, and FX traders will do nothing to offset the advent of reality.

While the Japanese can always take care of business within, they cannot control the outside world. The country's Achilles heel is losing trade competitiveness due to the destructive impact of deflation on business confidence and the strong currency itself. When a trade deficit emerges, it signals the beginning of the end.

Japan has lost competitiveness in a swath of industries that it used to dominate. Its automobile industry is losing out to Germany, South Korea and the United States. Japan's automobile industry used to be competitive in cost and far superior in quality to its global competitors. But the world has changed. The yen has dropped below 110 from as high as 160 against the euro. The South Korean won was about ten against the yen and is now 13. Cost-cutting cannot offset such a big change in exchange rates. The U.S. auto industry cut its labor costs and debt burden through the government bailout. It is now more competitive than Japan's.

The automobile industry is the pillar of Japan's economy. Its decline leaves Japan's economy nowhere to turn. Indeed, if the auto industry leaves Japan, it will become a poor country.

Japan's electronics industry, still significant to its economy, is losing out big time to its Asian competitors. Nothing hot in electronics is made in Japan now. U.S. companies like Apple leverage China's manufacturing sector to turn out hot products. South Korea is embracing the vertically integrated model and churning out competitive products like Japan used to.

Nothing symbolizes Japan's decline like its electronics industry. It was the envy of the world and had all the ingredients to take the industry into the mobile internet era. Instead, it embraced insulation and made products just for the Japanese market. Now it is almost irrelevant to the outside world.

Japan isn't just facing macro troubles. Its micro competitiveness is rotting away. It is just bizarre to see that the whole world believes in a strong yen when Japan is failing on such a grand scale.

This is especially true in the aftermath of the Fukushima disaster, when one of the primary drivers of economic growth - energy creation, has collapsed, and as of Today Tepco has shut down its last reactor. Thus an energy crisis imminent. It will also accelerate the transition of Japan from a trade surplus to deficit econoy. In this case the trend is certainly not Japan's friend.

Japan's trade balance may swing into surplus from time to time, but the negative trend is irreversible. Japan will face rising trade deficits. That makes foreigners' views important because Japan would need foreign money to fund its deficit. When foreigners change their views, which they surely will, the yen will crash.

There is only one controlled way out for Japan: take the pain now, or let a veritable epic econoic collapse sweep everything that Japanese society stands for. Recent overtures by the BOJ show it understands what has to be done. It is, alas, not doing it fast enough.

Japan has only one way out – a massive devaluation. If the stable national debt is 120 percent of GDP, the yen needs to be devalued by 40 percent because devaluation is ultimately equal to the nominal GDP increase. The devaluation is likely to sustain 2 percent to 3 percent of nominal GDP growth for Japan beyond the repricing induced increase, which is necessary to restore Japan's tax revenue. Deflation has caused Japan's tax revenue to decline as a share of GDP. It can be only reversed through restoring nominal GDP. A devaluation of 40 percent can restore Japan's competitiveness against Germany and South Korea, which will lay the foundation for Japan's industrial recovery.

The Bank of Japan is trying to weaken the yen through expanding its balance sheet. It has an asset purchase program of 65 trillion yen and a lending program of 5.5 trillion yen. The two are equivalent to 15 percent of GDP, comparable to what the Fed or European Central Bank have done. The effectiveness is limited so far. Because Japanese businesses, households and investors believe in a strong yen, the printed yen largely stays in the country and just slows down money velocity. The U.S. dollar has risen 10 percent against the yen from last year's bottom. This is probably due to the financial market upgrading its view of the U.S. economy rather than the BoJ's action.

To Andy Xie, the day of reckoning has never been nearer. And to those who have grown disenchanted with the Kyle Bass view of an epic JGB bubble pop, it may be time to refresh your lost cost hedge. Because a devaluation, to be truly effective, will not be visible from a mile away: it will be sudden, and very, very shocking, unless the government opts for the worse of to evils - a bond market collapse.

Yen devaluation is likely to unfold quickly. A financial bubble doesn't burst slowly. When it occurs, it just pops. The odds are that yen devaluation will occur over days.Only a large and sudden devaluation can keep the JGB yield low. Otherwise, the devaluation expectation will trigger a sharp rise in the JGB yield. The resulting worries over the government's solvency could lead to a collapse of the JGB market. Of course, the government will collapse with the JGB market.

The day of reckoning for the yen is not distant. Japanese companies are struggling with profitability. It only gets worse from here.When a major company goes bankrupt, this may change the prevailing psychology. A weak yen consensus will emerge then.

Finally, no matter how it's spun, the outcome, whether a 40% JPY deval, or a JGB bubble pop, will have devastating consequences on both the regional, and global economy.

A yen collapse will impact China and South Korea most, just like in 1998. It will trigger substantial weakness in their industries. If a banking system succumbs, the shock can bring down an entire economy, as South Korea's experience in 1998 demonstrates.

Both China and South Korea have weak banking systems. South Korea's banking system is one of the most leveraged in the world due to high level of household loans. In 1998, a similar shock sank its banking system that was overleveraged with industrial loans. Now it is overleveraged with household loans. A shock could sink it again.

Overinvestment and a property bubble make China's banking system very vulnerable to such a shock. Unless China substantially increases the capital in its banking system, a big yen devaluation could cause China's banking system to sink. China suffers from overinvestment and a property bubble, as Southeast Asia and South Korea did in 1997. In terms of the magnitude of leverage, China's situation is much worse. Hence, a yen devaluation could wreak havoc to China's economy.

Perhaps there is a reason why the global market (not US stock futures of course - those only care what comes out of the Chairman's mouth) is so very concerned with what is happening in China right now: perhaps the Chinese hard landing (which will come, no doubt about it) is not so much an underlying cause of the Chinese malady but a symptom of the Japanese deflationary unwind, which like a tsunami will drag first the Koreas, then China, then Southeast Asia, and finally the world underwater. And this time no amount of trivial Greece-like headline posturing ad headlines will have any impact whatsoever.

Yet following all that, we fully expect nothing to change, because the entire world is now hypnotically rushing toward the cliff, very likely bringing Dow 36,000 with it, if only for one instant, because with nothing getting fixed, the moment of global euphoria will be truly transitory. It will be then followed by an all out deflationary collapse... or much more likely since in this day and age printing a trillion, quadrillion or quintillion, is only a CTRL+P keystroke away, hyperinflationary.

And just to show the sensitivity of the world's most indebted nation to interest rates, here again is Andy:

Even though the yield on 10-year Japanese Government Bonds (JGB) is only 1 percent, the interest expense is expected to top 22.3 trillion yen in the fiscal year that begins next month. This is one-quarter of the general account budget. If the bond yield rises to 2 percent, the interest expense would surpass the total expected tax revenue of 42.3 trillion yen.

Yup: a mere "surge" in interest rates to a whopping 2.00% will destroy the Japanese economy.

Good luck.