Turkey says Syria on "knife-edge," may cut power

ANKARA (Reuters) - Turkey kept up pressure on its one-time allySyria Tuesday, warning President Bashar al-Assad his government was on a "knife-edge" and saying it may review its supplies of electricity to Damascus if it does not change course.

In a possible signal Turkey was readying economic sanctions against Damascus, the country's Economy Ministry also said it had established a Syria desk to monitor developments and to assist Turkish businesses doing trade in Syria.

"Nobody now expects the (Syrian) people's demands to be met. We all want the Syrian administration, which is now on a knife-edge, to turn back from the edge of the cliff," Prime Minister Tayyip Erdogan told a party meeting.

He also demanded an immediate apology following attacks on Turkey's diplomatic missions in Syria.

Non-Arab Turkey, after long courting Assad, has lost patience with its neighbor's failure to end an eight-month crackdown on protests against the president and implement promised democratic reforms.

"Right now we are supplying electricity there (Syria). If this course continues, we may have to review all of these decisions," Energy Minister Taner Yildiz told reporters.

Syria produces more electricity than it consumes and it has links with other countries such as Jordan and Lebanon so the impact of Turkey pulling the plug would probably be limited.

However, ending a supply route that began in 2006 would send a strong symbolic message about its disapproval and willingness to impose further sanctions.

Turkey is Syria's largest trading partner with bilateral trade worth $2.5 billion in 2010, and investments by Turkish firms in Syria reaching $260 million, Turkish data shows.

But Turkey now hosts and meets with the main Syrian opposition and has given refuge to defecting Syrian soldiers. It has also thrown its full support behind an Arab League decision to suspend Syria.

Underlining how much ties between the two powers have deteriorated, protesters armed with sticks and stones attacked Turkish diplomatic missions in Syria over the weekend, burning the Turkish red and white flag.

"I once again strongly condemn the attacks on Turkish officials and on the Turkish flag. We expect the Syrian administration to undertake immediately all the necessary steps to apologize and take responsibility," Erdogan said.

"Bashar, you are required to punish those who attacked the Turkish flag. We want the Syrian administration to not only respect the Turks in Turkey and the Turkish flag but also to respect their own people, we especially want this."

SANCTIONS

Syrian Foreign Minister Walid al-Moualem apologized on Monday for the attacks, which also included raids on Saudi and French missions. But Erdogan said Turkey expected a further expression of apology although he did not elaborate.

Turkish President Abdullah Gul warned of repercussions if attacks on its missions were allowed to happen again.

"It is not possible to accept these attacks on our citizens ... and diplomatic missions in Syria, we have already condemned these," Gul said at a news conference in Ankara alongside the Hungarian president.

"If they do not take the necessary measures and this happens again, our reaction will be different. Unfortunately, Syria today has entered a dead-end road. The Arab League decision is clear and we have also supported it."

Turkey's Foreign Minister Ahmet Davutoglu was expected to meet Arab foreign ministers in Rabat Wednesday.

But despite tough talk, Turkey has moved cautiously compared to its European Union and U.S. allies, which have been swift to approve sanctions against Damascus, as Ankara weighs the domestic and regional challenges involved.

For weeks, Turkey has said it is preparing sanctions that will target the Syrian government and not the people. But there have been few details on those sanctions or when they will be imposed.

Tuesday, the Economy Ministry said it was setting up a "Syria monitoring desk" and that Economy Minister Zafer Caglayan would meet Turkish firms Thursday to discuss any difficulties faced trading in Syria and to establish a "roadmap on what will be done."

Turkey has already imposed a weapons embargo on Syria and plans to jointly form a Turkish-Syrian bank have also been shelved, along with plans to increase ties between the two countries' central banks, according to Turkish media.

Yahoo News

IAF strikes tunnel, terror center in northern Gaza

The Israel Air Force struck terror targets in the northern Gaza Strip overnight Tuesday, following earlier rocket attacks on southern Israel emanating from the coastal territory, the IDF Spokesman's Office said in a statement.

IAF aircraft recorded direct hits on a terror tunnel and on an additional center of terrorist activity. All of the aircraft involved in the strike returned safely to Israel, according to the statement.

The IDF Spokesman's Office said that terrorists had planned to use the tunnel as a means to infiltrate Israel and perpetrate a terror attack against Israeli citizens and IDFsoldiers.

The IDF reiterated that attacks on Israeli citizens and IDFsoldiers will not be tolerated and Hamas will be held responsible for any such action.

Earlier on Tuesday, two Kassam rockets fired from Gaza exploded in the Sha'ar Hanegev Regional Council area in the South. One rocket slammed into a storage house adjacent to a kindergarten in a kibbutz. A structure sustained damage in the attack, but no injuries were reported. A second projectile fell in open territory.

The attack came after IDF Chief of General Staff Lt.-Gen. Benny Gantz told the Knesset Foreign Affairs and Defense Committee on Tuesday that the IDF will be forced to launch an offensive if rocket attacks from the Gaza Strip continue to be launched into southernIsrael.
Jerusalem Post

With China in mind, India tests new-generation Agni missile with high 'kill efficiency'

NEW DELHI: India on Tuesday successfully tested a new-generation Agni missile with a strike range of 3,500 km and souped-up "kill efficiency", prompting excited defence scientists to proclaim it would add "fantastic deterrence" to the country's nuclear weapons programme.

The test of the "most advanced" surface-to-surface missile called Agni-IV also launched the countdown for India to test its most ambitious strategic missile Agni-V, which will have nearICBM (intercontinental ballistic missile) capabilities with an over 5,000-km range, in December-January.

"This test has paved the way for the success of Agni-V mission, which will be launched shortly," said DRDO's chief controller (missiles and strategic systems) Avinash Chander.

Incidentally, the project director for Agni-IV is none other than Tessy Thomas, the 48-year-oldDRDO scientist who has made a mark for herself in the avowedly male bastion of strategic missiles, as reported by TOI earlier.

The Agni-IV, which failed in its earlier avtaar as "Agni-II-Prime" in December 2010, incorporates many new technologies in navigation, propulsion, avionics and other areas to represent "a quantum leap" in missile technology for India.

Having inducted the Pakistan-specific Agni-I (700-km) and Agni-II (over 2,000-km) missiles, the armed forces are now in the process of operationalising the 3,500-km Agni-III after completion of its developmental and pre-induction trials last year.

Pakistan, of course, remains slightly ahead of India in its missile arsenal, given the covert help it has got from North Korea and China for its Ghauri and Shaheen family of missiles.

The two-stage Agni-IV and three-stage Agni-V, in turn, are meant to add some much-needed credible deterrence muscle against China, which has a massive nuclear arsenal with missiles like the 11,200-km Dong Feng-31A capable of hitting any Indian city. The canister-launch Agni-V, with its high road mobility and fast-reaction ability, in particular, is being talked about as a small but sharp riposte to China.

The Agni-IV represents a significant step towards this objective. Though it was tested for a 3,000-km range from a road-mobile launcher at Wheeler's Island off the Odisha coast at 9 am on Tuesday, it can easily go up to 3,500 km.

"The missile, with a payload reduced to 800 kg from 1,000 kg, followed its trajectory, attained a height of about 900 km and reached the pre-designated target in Bay of Bengal with very high level of accuracy after a 20-minute flight," said a DRDO scientist.

"Much lighter in weight than Agni-II and Agni-III, Agni-IV is an entirely new missile with two stages of solid propulsion and a payload with re-entry heat shield. All mission objectives were fully met. All systems functioned perfectly till the end encountering re-entry temperatures of over 3,000 degree Celsius," he added.

The missile, however, will have to be tested several times before it can be ready for serial production and then induction. The Agni family of missiles, which constitute the land leg of India's quest for a fully-operational nuclear-weapon triad, have been dogged by glitches over the years.

Three launches of Agni-II variants, for instance, failed in 2009 and 2010. DRDO, however, blamed manufacturing and other problems rather than any integral design and development flaws.

Times of India

European Union debt crisis: Britain must help rescue eurozone, say Germans

The German government believes Britain should be part of a Europe-wide tax on financial transactions, the proceeds of which could help prop up the single currency.

However, David Cameron and George Osborne have blocked the tax, with the Chancellor claiming it is a “bullet aimed at the heart of London”.

Ministers have instead called on the Germans to allow the European Central Bank (ECB) effectively to print money to rescue beleaguered economies.

The Prime Minister will travel to Berlin on Friday for what are expected to be tense negotiations with Angela Merkel, the German chancellor, over the crisis.

A senior figure in the party headed by Mrs Merkel attacked Britain as relations between the two countries deteriorated in the wake of the single currency crisis.

“I can understand that the British don’t want that [the financial transaction tax] when they generate almost 30 per cent of their gross domestic product from financial-market business in the City

of London,” said Volker Kauder, the parliamentary leader of the Christian Democratic Union, said in a speech to the party congress in Leipzig.

“But Britain also carries responsibility for making Europe a success. Only being after their own benefit and refusing to contribute is not the message we’re letting the British get away with.”

EU governments are increasingly backing Germany's views, Mr Kauder said.

"Now all of a sudden, Europe is speaking German," he said. "Not as a language, but in its acceptance of the instruments for which Angela Merkel has fought so hard, and with success in the end."

In his annual foreign policy speech on Monday, Mr Cameron said the EU was out of touch and most reform or it would remain “in peril”. He called for less European integration.

However, Nick Clegg said that the European infighting should stop.

“If the whole political establishment is about to disappear into a windowless room in Brussels discussing things that no one understands, it means absolutely nothing to millions of ordinary people who are worried about their jobs, worried about economic security, worried about prospects for their children,” he said.

“The only people who will benefit are populists, chauvinists and demagogues who will exploit that lack of political leadership… At the moment, our priority is the economy, the economy, the economy.”

The row between Britain and Germany came as Barack Obama’s main economic adviser said the main threat to the American economic recovery was the euro crisis amid fears that the new Italian government will fail.

Alan Krueger, chairman of the White House Council, said the “Europeans” must urgently address the problem, in another indication that the Americans are unlikely to provide money for an international bailout. “The sovereign debt issues in Europe, the banking issues in Europe, are at the top of everybody’s list of identifiable threats,” he said.

Lawrence Summers, the former US Treasury secretary, said the rescue package approved by European leaders last month “was manifestly inadequate at the time it was reached”.

The comments were made amid growing concerns over the new Italian government. Mario Monti, the Italian prime minister, today announces the rest of his government. Mr Monti said he was “calm and convinced” Italy can overcome the crisis. However, there are signs that the new administration will not be accepted by all the political parties.

The uncertainty caused stock markets around the world to fall and the cost of Italian borrowing to rise back above seven per cent – the level which has triggered bail-outs. The cost of Spanish bonds also rose to a record high.

The Telegraph

U.S. pension insurer's deficit hits record $26 billion

WASHINGTON — The federal agency that insures pensions for 1 in 7 Americans ran the largest deficit last year in its 37-year history.

The Pension Benefit Guaranty Corp. said it ran a $26-billion imbalance for the fiscal year that ended Sept. 30.

The agency has been battered by the weak economy, which has brought more bankruptcies and failed pension plans.

Its pension obligations rose $4.5 billion. The PBGC also earned less money in the stock market, which helps to fund pension plans. Returns were $3.6 billion, half what it earned the previous year.

The agency's director said taxpayers may have to bail out the agency eventually if Congress doesn't raise companies' insurance premiums. He didn't give a time frame.

LA Times

Postal Service reports massive $5 billion loss

NEW YORK (CNNMoney) -- The U.S. Postal Service released its annual financial results on Tuesday, and they're nothing to write home about.

The agency reported an annual loss of $5.1 billion, as declining mail volumes and mounting benefit costs take their toll. The Postal Service said its losses would have been roughly $10.6 billion if not for the passage of legislation postponing a $5.5 billion payment required to fund retiree health benefits.

Revenues from First-Class Mail, the Postal Service's largest and most profitable product, declined 6% from the previous fiscal year to $32 billion. Total mail volume declined by 3 billion pieces, or 1.7%.

"The continuing and inevitable electronic migration of First-Class Mail, which provides approximately 49 percent of our revenue, underscores the need to streamline our infrastructure and make changes to our business model," Postal Service CFO Joe Corbett said in a statement accompanying the figures.

Postmaster General and CEO Patrick Donahoe said in the statement that the Postal Service must reduce its annual costs by $20 billion by the end of 2015 to return to profitability.

CNN Money

Mass bond selloff takes Europe from bad to worse

• 

The European debt crisis is rolling across the continent at alarming speed, proving that almost no country is immune to the contagion unleashed by Greece and Italy as confidence in the region’s ability to reduce its debt loadsevaporates.

Yields on the 10-year bonds of France, Belgium, Spain and Austria all soared to record euro zone highs on Tuesday in spite of fresh data showing that the German economy is still expanding and despite the tentative launch of caretaker governments in Rome and Athens with mandates for economic reform.

The mass selloff drove up the debt yields of countries that had been considered havens, including Finland and the Netherlands. “Global financial markets are facing a key pivotal point,” analysts at Barclays Capital said in a Tuesday research note. “A further escalation of the European debt crisis is putting at risk the nascent stabilization of global growth.”

Italy’s post-Silvio Berlusconi honeymoon proved exceedingly short-lived. Last week, yields on 10-year Italian bonds went to a record 7.48 per cent. They dipped after Mr. Berlusconi resigned as prime minister, then came roaring back, climbing back above 7 per cent on Tuesday, even as Mario Monti, his replacement, came close to forming a new, cross-party government. Mr. Monti is to unveil his cabinet on Wednesday in Rome.

The bond selloff hit France, whose triple-A credit rating is at risk. The French bond spread over equivalent German bonds widened by 23 basis points to 188 basis points, the most since the common currency was launched in 1999 (100 basis points equals one percentage point).

The yield on German debt – the euro zone’s last low-yield sanctuary – continues to sink as investors rush to safety. At 1.76 per cent, the yield on 10-year German bonds is now less than half of the French yield.

Spain, where the economy is on the verge of another recession and unemployment is still rising – it reached a new euro zone high of 22.6 per cent in September – saw its 10-year bond yields surge to 6.3 per cent. That took the spread over German bonds to a record 458 basis points.

The resurgence of Spain’s debt crisis was underlined by the treasury’s failure on Tuesday to reach the target sale of €3.5-billion ($4.8-billion) of 12- and 18-month bills. The yield on the 12-month securities went to 5 per cent, well above the 3.6 per cent at a similar sale only a month ago.

The rising bond yields throughout the euro zone, outside Germany, can in good part be blamed on the banks’ wholesale retreat from sovereign debt. The banks are under political pressure to keep their Greek bonds, for fear that a wave of selling would destroy what little remains of the country’s debt market. That means the banks are unloading other risky sovereign bonds, in particular Italy’s, to bring down their overall exposure.

BNP Paribas, one of the largest French banks, reduced its Italian bond holdings to €12.2-billion from €20.8-billion in the third quarter. Deutsche Bank reduced its Italian exposure by 88 per cent in the first six months of the year. Germany’s Commerzbank AG said earlier this month that it is selling sovereign bonds at a loss, and Global Sovereign Open, Japan’s biggest mutual fund, unloaded all of its Italian bonds this month, according to a Bloomberg News report.

Economists think the rush to sell sovereign bonds was triggered by several factors: a European Union agreement with the banks to write down Greek bonds by 50 per cent, creating a precedent that bond investors fear will be repeated elsewhere in the euro zone; the European Central Bank’s reluctance to buy distressed bonds; and European politicians open talk about member countries leaving the euro zone.

On Tuesday, Dutch Prime Minister Mark Rutte said it should be possible to expel members from the euro zone. The day before, German Chancellor Angela Merkel’s Christian Democratic Union party voted to allow countries to leave the euro zone. While the vote carries no legal weight, it reflects the CDU’s rising skepticism about the euro project.

The near certainty that the euro zone is about to enter another recession also spooked the bond markets.

Eurostat, the European Union’s statistics agency, reported Tuesday that the euro zone’s gross domestic product expanded by a mere 0.2 per cent in the third quarter over the previous three months. While Germany performed well (with third-quarter growth of 0.5 per cent) economists warned that 0.2 per cent was probably as good as it gets and that the next figure might be negative because of the escalating debt crisis and austerity programs.

The Globe

Mideast Turmoil Increases After Arab League Suspends Syria

* Iran blames Israel’s Mossad for massive explosion on Saturday
* Syria’s Assad sanctions mob attacks on embassies of Turkey and Qatar
* Jordan’s King Abdullah says that Assad must step down
* Furious Turkey demands apology for attacks against its embassy
* Syrian athletes will boycott Arab games in Qatar
* Spain appears next in line to be attacked in bond market
* China claims new territory in the South China Sea
* Germany shocked by a new form of Neo-Nazi terrorism

Iran blames Israel’s Mossad for massive explosion on Saturday

Iranians carry honorary coffins and pictures of Hassan Tehrani Moghaddam in a funeral procession (Reuters)

Seventeen personnel of the Islamic Revolution Guards Corps (IRGC) were killed by two huge explosions that occurred on Saturday at an IRGC munitions depot about 30 kilometers west of Tehran, as we reported two days ago. Among the victims was Major General Hassan Tehrani Moqaddam, considered to be an architect of Iran’s missile program, a man so important that the funeral was attended by the Supreme Leader, Ayatollah Ali Khamenei. Iran has officially declared that the explosions were an accident, but some investigators now believe that they were deliberate sabotage by agents of Israel, aimed at halting Iran’s missile program.Guardian

Syria’s Assad sanctions mob attacks on embassies of Turkey and Qatar

When the Arab League “suspended” Syria on Saturday, it seemed like a relatively empty gesture — they were suspending unnamed Syrian “activities,” and the suspension wouldn’t take effect until Wednesday. However, this has been the League’s most dramatic move since it expelled Egypt in 1979 for signing a peace treaty with Israel, though it was readmitted a decade later. And the new suspension is dramatic enough to be causing a great deal of turmoil among the Arab states. The regime of Syria’s president Bashar al-Assad expressed fury at the suspension by sanctioning mob attacks on the Damascus and Latakia embassies of Qatar, Saudi Arabia, Turkey and France.Day Press (Syria)

Jordan’s King Abdullah says that Assad must step down

Abdullah became Jordan’s leader when his father died, at about the same time that Bashar al-Assad became Syria’s leader when his own father died. So the two leaders have had a close relationship. So it was a surprise on Monday when Jordan’s King Abdullah told the BBC that “If Bashar has the interest of his country [at heart] he would step down.” However, Abdullah expressed concern about the stability of Syria after Assad. “If I were in his shoes, I would step down. I would step down and make sure whoever comes behind me has the ability to change the status quo that we’re seeing.” BBC

Furious Turkey demands apology for attacks against its embassy

After condemning the bloody attacks on protesters in Syria as “state terror [that] the whole world is following with feelings of hatred,” Turkey’s Deputy Prime Minister Bülent Arinç said, “Turkey is expecting a formal apology through diplomatic channels,” for the embassy attacks. The statement made Syria the third country after Israel and Armenia that Turkey is expecting an apology from over tensions in bilateral ties. However, Turkey is not planning any immediate unilateral sanctions against Syria in the absence of a U.N. Security Council resolution. Hurriyet

Syrian athletes will boycott Arab games in Qatar

In further retaliation for the Arab League suspension, the Syrian Olympic Committee announced that Syria will boycott the upcoming Arab Games, to take place in Qatar in December. The statement said that the Arab League’s decision to suspend the membership of Syria which founded and supported the organization marks a dark spot in its history, stressing that the conspiracy against Syria aims at subjugating it to the United States and undermining its unity and stability. Day Press News

Spain appears next in line to be attacked in bond market

Spain 10 year bond yield at 6.106% on 14-Nov

EU officials had hoped that new “technocrat” governments in Greece and Italy would restore investor confidence in euro, but there was little sign of that on Monday. Bond yields (interest rates) for Italy initially went down, but they rose again to unsustainable levels. And Spain appears to be next in line to be pressured in the bond market, as its 10-year bond yields also reach unsustainable levels at 6.106%. Spain’s bond yields had reached 6.3% just before the July 21 bailout of Greece, after which they fell sharply to 5%. But now they’re increasing again. Many analysts are saying that the only thing that can save Spain (and the euro) is for the European Central Bank (ECB) to “print money” and use it to purchase massive amounts of Spanish bonds. This step is under consideration, but the Germans oppose it and it apparently violates the European Union’s Lisbon Treaty. Reuters

China claims new territory in the South China Sea

China has claimed new territory less than 50 miles (80 kilometers) from a Philippine province, boosting tensions over potentially resource-rich areas of the South China Sea, but the Philippines has dismissed the claim. Beijing has been asserting its territorial claims more aggressively as its economic and diplomatic muscle has grown. Its new claims are likely to bolster Philippine resolve to seek a U.N. ruling on the long-simmering disputes, which involve China, the Philippines and four other claimants. Among the areas being contested are the Spratlys, a chain of up to 190 islands, reefs, coral outcrops and banks believed to be sitting atop large deposits of oil and natural gas, which many fear could be Asia’s next flash point for conflict. AP

Germany shocked by a new form of Neo-Nazi terrorism

36-year-old female neo-Nazi Beate Zschäpe is alleged to have set fire to her apartment building to destroy evidence (Spiegel)

German police have stumbled across evidence of a case that is unprecedented in the history of postwar Germany: a series of murders apparently committed by neo-Nazi killers, stemming from a white-hot rage against foreigners, and yet committed with such ice-cold precision that it took investigators an entire decade to finally track down the group. During the decade they murdered and injured dozens of Turks and Greeks, and funded their activities through bank robberies. There is no precedent in German postwar history for an underground right-wing combat group that funds itself through bank robberies and plans and commits deadly attacks, defying the authorities’ attempts to stop them using manhunts, informants and state-of-the-art surveillance technology. In fact, this sort of terrorism has until now only been associated with a group operating on the other side of the political spectrum, the Red Army Faction (RAF)

Big Peace

Bob Chapman: Europe may need 8 TRILLION

Italian unity fails to stem market fears over eurozone

Mario Monti secured agreement from Italy's opposition politicians to form an emergency government - but rather than pacifying European markets as expected, Italy's bond yields were pushed over 7pc while those of France, Spain, Belgium and Austria hit fresh highs.

Economists at Schroders warned that Rome's borrowing costs were "unsustainable" even with the help of the European Central Bank (ECB). "With no solution to Italy's problems in sight... we are heading for an almighty crash," they said in a note.

Britain benefited as investors bought gilts, pushing UK borrowing costs down close to record lows. But the damage of the crisis to the UK economy is expected to be made clear on Wednesday with the Bank of England drastically cutting the UK's growth forecast for this year and next year. Economists expect the Bank to use its quarterly inflation report to cut its prediction of 1.5pc growth for 2011 down to 1pc; and the 2.1pc forecast for 2012 to be as much as halved.

George Osborne also warned that the UK is not immune from the crisis. In a letter to Bank of England Governor Sir Mervyn King the Chancellor said: "The threat to the UK economy from the crisis in the eurozone is very serious. The eurozone has the financial capacity to restore stability. So the institutions and leaders of the eurozone need to act without delay."

Alan Krueger, chairman of President Barack Obama's Council of Economic Advisers also called for action. But European leaders seemed intent on digging in. Yves Mersch, a governing council member of the ECB, said that monetising government debt was "tantamount to inflation" and "not feasible", adding that the ECB should not be made the "lender of last resort for governments" but rather states should live up to own responsibilities.

But the bond markets were rapidly closing off capital market funding as an option for some of Europe's biggest economies.

The yield on Italian 10-year bonds soared above the 7pc threshold considered by economists to be unsustainable. They were hauled back in afternoon trading - possibly by ECB intervention - but soon rose again to close at 7.27pc.

Spain was also punished with the yield on 10-year bonds being pushed up 175 basis points to 6.6pc. The impact of the dire bond market sentiment was made clear as Madrid failed to raise its full targets at a scheduled bond auction. The Bank of Spain was hoping to raise €3.5bn but managed just €3.16bn of 12-month and 18-month debt. Investors demanded a yield of 5.15pc, far higher than the 3.6pc at an auction just two months ago.

The fears also hit France, Europe's second biggest economy, which saw its borrowing costs rise to 3.69pc - compared to 1.81pc for Germany and 2.17pc for the UK. David Miller, a partner at Cheviot Asset Management, said: "The weakness in bond markets is symptomatic of the lack of a credible plan in the eurozone... and until the Germans get off the fence and ask the ECB to print euros we can expect the trend to follow in all other Eurozone bond markets."

Evangelos Venizelos, Greece's finance minister, said Athens' new government "must do everything that's required" to avoid bankruptcy and enact the austerity measures agreed in Brussels last month. He said reforms were necessary to secure an €8bn injection of international aid.

In Spain, Mariano Rajoy, favouite to become prime minister after Sunday's election, made similar commitments to reform. Spain's Ibex fell 1.61pc; France's CAC was down 1.92pc; Germany's DAX slid 0.87pc. In London the FTSE 100 was almost flat down 0.03pc.

The Telegraph

A scary prediction for the collapse of paper money

• 

What should U.S. Federal Reserve chairman Ben Bernanke do next? London-based economist Detlev Schlichter says, succinctly: “Abdicate.” What should U.S. President Barack Obama do next? Mr. Schlichter says, succinctly: “Abdicate.” With Mr. Schlichter, you aren’t left with much doubt about his position. He says the world’s major currencies are destined to crash. “The dollar, the euro and the yen are locked in a race to the bottom,” he writes on his website, papermoneycollapse.com. The only question is which one crashes first.

Mr. Schlichter argues that we are only part of the way through the market meltdown – and that the worst is still to come. How much worse? Considerably worse, he says, than the Great Depression.

U.S. industrial production is 12 times higher now than it was in 1929, he says; but the amount of U.S. dollars in circulation is 200 times higher.

The U.S. net debt was 150 per cent of GDP in 1973, when then-president Richard Nixon took the country off the gold standard; yet its net debt reached a record high in 2010: 370 per cent. The United States will fall further, Mr. Schlichter insists, because it has further to fall.

Mr. Schlichter is the German-born, British-based author of a provocative and disturbing new book, Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown. An investment manager with JPMorgan, Merrill Lynch and Western Asset Management for 20 years, he quit to write his stern warning of an impending dollar doom.

From his own melancholy perspective, he thinks the crisis will come a little later on – because, he says, the central banks still imagine that they can keep the printing presses running indefinitely. The longer the presses run, Mr. Schlichter says, the more calamitous the crash. And Mr. Bernanke has hardly begun.

Mr. Schlichter recalls Mr. Bernanke’s famous assertion in 2002 that, with the world’s largest printing press, the Federal Reserve can produce “as many dollars as it wishes at essentially no cost.” Mr. Schlichter says: “Within the logic of the present system, the next step [by central banks] must involve the use of the printing press to fund further state expenditures, to fund corporate spending and, ultimately, to fund consumer spending.” In other words, the central banks won’t stop printing money until they’ve quantitatively eased people’s car loans and people’s credit cards.

Mr. Schlichter’s analysis rests on an Austrian-school interpretation of things. (“There is no means of avoiding the final collapse of a boom brought about by credit expansion,” Ludwig von Mises wrote in 1949 in Human Action. “The alternative is only whether the crisis should come sooner ... or later as a final and total catastrophe of the currency system involved.”) The essential premise of the Austrians is that paper dollars get depreciated, sooner or later, “to a dime a dozen.”

Paper Money Collapse traces the history of paper currencies that weren’t at least partly guaranteed by a fixed-quantity commodity (which, for all practical purposes, means silver or gold). The Chinese invented paper and ink in the year 1000, Mr. Schlichter notes – discoveries that led quickly to papermoney. He tracks China’s paper money through a number of dynasties. His conclusion: All of these experiments ended with worthless currencies. The Chinese abandoned paper money in 1500 (returning to it, under Western influence, in the 1800s).

Paper currency, he says, hasn’t fared any better in the West. He defines hyperinflation as a monthly rise in consumer prices of 50 per cent or more; the 20th century, he says, witnessed 29 such hyperinflations involving “elastic money.” Mr. Schlichter thinks that the collapse of U.S., European and Japanese currencies will be the worst in history. It will be a collapse “of epic proportions.”

Mr. Schlichter does not recommend an investment strategy for “the coming monetary breakdown.” And gold, he insists, should not be regarded as an investment. Gold, rather, is simply money, a medium of exchange – and the most successful form of it in history. But the cash in your pocket doesn’t pay interest or dividends and the gold in your pocket doesn’t, either.

“A collapse of paper money will be a momentous event,” he writes. “It will produce a transfer of wealth of historic proportions.” But it does not mean the end of civilization. All wealth is not illusion. And real wealth will survive.
The Globe