Posted on Forbes-By ADDISON WIGGIN-On June 1, 2011:

“There is definitely going to be another financial crisis around the corner,” says hedge fund legend Mark Mobius, “because we haven’t solved any of the things that caused the previous crisis.”

We’re raising our alert status for the next financial crisis. We already raised it last week after spreads on U.S. credit default swaps started blowing out.  We raised it again after seeing the remarks of Mr. Mobius, chief of the $50 billion emerging markets desk at Templeton Asset Management.

Speaking in Tokyo, he pointed to derivatives, the financial hairball of futures, options, and swaps in which nearly all the world’s major banks are tangled up.

Estimates on the amount of derivatives out there worldwide vary. An oft-heard estimate is $600 trillion. That squares with Mobius’ guess of 10 times the world’s annual GDP. “Are the derivatives regulated?” asks Mobius. “No. Are you still getting growth in derivatives? Yes.”

In other words, something along the lines of securitized mortgages is lurking out there, ready to trigger another crisis as in 2007-08.

What could it be? We’ll offer up a good guess, one the market is discounting.

Seldom does a stock index rise so much, for so little reason, as the Dow did on the open Tuesday morning: 115 Dow points on a rumor that Greece is going to get a second bailout.

Let’s step back for a moment: The Greek crisis is first and foremost about the German and French banks that were foolish enough to lend money to Greece in the first place. What sort of derivative contracts tied to Greek debt are they sitting on? What worldwide mayhem would ensue if Greece didn’t pay back 100 centimes on the euro?

That’s a rhetorical question, since the balance sheets of European banks are even more opaque than American ones. Whatever the actual answer, it’s scary enough that the European Central Bank has refused to entertain any talk about the holders of Greek sovereign debt taking a haircut, even in the form of Greece stretching out its payments.

That was the preferred solution among German leaders. But it seems the ECB is about to get its way. Greece will likely get another bailout – 30 billion euros on top of the 110 billion euro bailout it got a year ago.

It will accomplish nothing. Going deeper into hock is never a good way to get out of debt. And at some point, this exercise in kicking the can has to stop. When it does, you get your next financial crisis.

And what of the derivatives sitting on the balance sheet of the Federal Reserve? Here’s another factor behind our heightened state of alert.

“Through quantitative easing efforts alone,” says Euro Pacific Capital’s Michael Pento, “Ben Bernanke has added $1.8 trillion of longer-term GSE debt and mortgage-backed securities (MBS).”

Think about that for a moment. The Fed’s entire balance sheet totaled around $800 billion before the 2008 crash, nearly all of it Treasuries. Now the Fed holds more than double that amount in mortgage derivatives alone, junk that the banks needed to clear off their own balance sheets.

“As the size of the Fed’s balance sheet ballooned,” continues Mr. Pento, “the dollar amount of capital held at the Fed has remained fairly constant. Today, the Fed has $52.5 billion of capital backing a $2.7 trillion balance sheet.

“Prior to the bursting of the credit bubble, the public was shocked to learn that our biggest investment banks were levered 30-to-1. When asset values fell, those banks were quickly wiped out.

But now the Fed is holding many of the same types of assets and is levered 51-to-1! If the value of their portfolio were to fall by just 2%, the Fed itself would be wiped out.”

Mr. Pento’s and Mr. Mobius’ views line up with our own, which we laid out during interviews on our trip to China this month.

An Eye on the Next Financial Crisis by Addison Wiggin originally appeared in the Daily Reckoning.”

Source:

http://blogs.forbes.com/greatspeculations/2011/06/01/the-next-financial-crisis-will-be-hellish-and-its-on-its-way/

Note: The following articles and/or blog posts and videos relate to this disturbing issue-You Decide:

I.  After Two Years Of Keynesian Stimulus, The Growth Deficit!-Posted on Forbes.com-By Charles Kadlec, COMMUNITY OF LIBERTY-ON June 6, 2011:

After two years of Keynesian and monetarist stimulus on steroids, the anemic recovery from the 2008-09 recession is giving way to a slow-growth economy. No economist in 2009 warned that an $800 billion in federal stimulus spending and a tripling of the Fed’s balance sheet through two rounds of quantitative easing would lead to an unemployment rate that still hovers above 9%.  Yet, that is exactly where things stand.

This growth deficit constitutes a real world repudiation of government spending, extended unemployment benefits, targeted tax credits, temporary tax cuts and easy money by the Fed as ways to stimulate economic activity and job creation. Moreover, the growth deficit represents a clear and present danger to all efforts to reduce the federal budget deficit in the year – and years – ahead.

The May jobs report underlines the cost of this policy failure on American families. Total non-farm employment increased by only 54,000, leading to an uptick in the unemployment rate to 9.1%. The outlook for jobs growth also weakened, with the employment of temporary workers and the average workweek remaining unchanged, suggesting no pressing need to add to the jobs rolls.  As federal “stimulus funds” run out, growth deficit induced budgetary pressures on state and local governments is also likely to lead to continued reduction in government payrolls.

The May Purchasing Managers Index for manufacturing (PMI) also points to a downshift in the economy’s already meager growth rate.  The index fell a staggering 6.9 points to 53.5, a level narrowly above 50, the demarcation between a growing and contracting manufacturing sector.  The two components that dropped the most were New Orders and Backlog of Orders, suggesting more weakness ahead.

Not surprisingly, greater uncertainty associated with a slow growth economy also dampened retail sales, which were up a weaker than expected 4.9%, while car sales fell 3.7% from their year ago levels.  No doubt, overall car sales were hurt by the disruption in supplies of Japanese cars, with sales of Toyotas falling 33%.  But, only Chrysler and Hyundai showed sales gains.

While those who advocated the Obama Administration’s stimulus plan have started to call for yet more spending and monetary ease, there is little support for fiscal policies, which have so clearly have failed.  Although the Fed may on its own go for another round of quantitative easing, higher commodity prices are beginning to flow through into growth-choking price increases in gasoline, autos, and other consumer goods.

The danger now is that with the progressive big government policies discredited, conservatives will embrace the growth deficit, instead of growth policies, out of their ambition to defeat President Barack Obama in the 2012 election.

The debate between the growth and austerity wings of the conservative movement can be seen on the pages of National Review Online.  First, NRO Editor Rich Lowry wrote a column, “The Party That Forgot Jobs,” Republicans for forgetting “the absolute pride of place (Ronald Reagan) gave to economic growth.”  He noted that an economic growth agenda is not only vital to winning elections, but a necessary component of any effort to balance the budget.

But then, in a column entitled “Hope is Not a Policy,” NRO Deputy Managing Editor Kevin Williamson criticized  Forbes columnist Ralph Benko and CNBC’s Larry Kudlow for emphasizing the need to pursue policies that could lead to 5% growth, calling such efforts “magic unicorns.” Instead, he advised, we should be comfortable with a 2% per year growth rate, pointing out such a growth path would lead to a doubling of GDP in the next 35 years.  What he fails to explain is why the American people should be satisfied with anything less than the 3.2% average rate of growth since 1950 – which includes all of the recessions and periods of sub-par growth through 2010.

More than rhetoric and the next election are at stake.  Economic growth is the most important part of the effort to restore balance to the federal budget.  The growth deficit has already added more than $100 billion a year to the current federal deficit, which in budget speak, totals to more than $1 trillion of lost revenue over the next 10 years.

In case you think that number improbable, here is how the calculation works. Since the economy’s second quarter of 2009 bottom, it has expanded 4.9%.  That is only half the average 7-quarter expansion during the four worst recessions since 1950.   Had the rebound been average, the nation’s GDP today would be $675 billion larger. Assuming the long-term average of 18.1% of GDP, receipts this year would have been $122 billion higher, 74% above the projected revenue from raising income tax rates on families with incomes above $250,000.  State and local tax revenue, which averages 9% of GDP, would be $60 billion higher, bringing much needed relief, and fewer layoffs, to state and local governments.

While the difference between Mr. Williamson’s 2% growth and the average of 3.2% may seem trivial, the consequences of even this small difference are monumental.  Two percent growth implies high unemployment rates as far as the eye can see, and continued political pressure to expand the welfare state to provide a safety net for those being left jobless or under-employed and in despair.  By contrast, 3.2% growth implies at least modest, though still unacceptably slow, reductions in the unemployment rate and some increase in living standards.

And, for all of you deficit hawks, consider this:  Over ten years, the slightly higher growth compounds to an economy that is nearly $3 trillion larger, and a cumulative federal deficit that is more than $4 trillion smaller than an economy growing only 2% a year.

Thus, a vital, but apparently missing component of negotiations over increasing the debt limit, is a pro-growth set of policies that will close the growth deficit.

Reducing government spending will itself free up resources and lead to higher growth. But, solving the long-term fiscal imbalance also requires more revenues.  And, the surest way to increase revenues at the federal, state and local level is to expand the tax base by implementing policies that will lead to more jobs and higher incomes and profits.

The House Republican plan for “Job Creators” should be as important as spending reductions in reaching an agreement to increase the debt ceiling.  Adding such a win-win component to the negotiations could produce a breakthrough that would be welcomed by all.”

Source:

http://blogs.forbes.com/charleskadlec/2011/06/06/after-two-years-of-keynesian-stimulus-the-growth-deficit/

II. U.S. funding for future promises lags by trillions!-Posted on USAToday-By Dennis Cauchon, USA TODAY-On June 7, 2011:

http://www.usatoday.com/news/washington/2011-06-06-us-owes-62-trillion-in-debt_n.htm?loc=interstitialskip

III. Video: Lib Talker Calls on Obama to Starve People In Red States to Stop The GOP on Debt Ceiling!-Posted on Conservative Byte-On June 7, 2011:

http://conservativebyte.com/2011/06/lib-talker-call-on-obama-to-starve-people-in-red-states-to-stop-the-gop-on-debt-ceiling/

IV. Video: Obama Is Just Wrong on Debt Ceiling!-Posted on ExposeObama.com-On June 6, 2011:

http://www.exposeobama.com/2011/06/06/video-obama-is-just-wrong-on-debt-ceiling/?utm_source=Expose+Obama&utm_campaign=775052fe25-EO_06_06_20116_6_2011&utm_medium=email

V. The Raw Job Market Numbers Are Downright Scary!-Posted on Pajamas Media-On June 6, 2011:

http://pajamasmedia.com/blog/the-job-market-far-worse-than-it-appears/

VI. True Cost of Fannie, Freddie Bailouts: $317 Billion, CBO Says-Posted on CNSNews.com-By Matt Cover-On June 6, 2011:

http://www.cnsnews.com/news/article/true-cost-fannie-freddie-bailouts-317-bi

VII. USDA Spending $10 Million to Promote Farmers' Markets in Michelle Obama's 'Food Deserts'-Posted on CNSNews-By Susan Jones-On June 6, 2011:

http://www.cnsnews.com/news/article/usda-spending-10-million-promote-farmers

VIII. 1,400 Health Care Waivers Raise Suspicion of Political Favoritism-Posted on CNSNews.com-By RICARDO ALONSO-ZALDIVAR, Associated Press-On June 6, 2011:

http://www.cnsnews.com/news/article/health-care-law-waivers-stir-suspicion-f

IX.  How Free Is America?-Posted on Pajamas Media-By Matt Patterson-On June 3, 2011:

http://pajamasmedia.com/blog/how-free-is-america/?singlepage=true

X.  Obama’s High Disapproval Ratings For His Handling of The Economy!-Posted on Hotline On Call-By Steven Shepard-On June 7, 2011:

http://hotlineoncall.nationaljournal.com/archives/2011/06/bin-laden-bump.php

XI.  ABC’s Amanpour Chafes Over Focus on Debt, Pushes for ‘Another Stimulus’ Big Spending Bill-Posted on The Media Research Center-By Brent Baker-On June 6, 2011:

http://www.mrc.org/biasalert/2011/20110606043025.aspx

XII. The Judas Media-Posted on Floyd Reports-Guest Writer-On April 27, 2011:

http://floydreports.com/the-judas-media/?utm_source=Expose+Obama&utm_campaign=43b350b9f6-EO_04_27_20114_27_2011&utm_medium=email

Note:  My following blog posts contain numerous articles and/or blog posts and videos that relate to this disturbing issue-You Decide:

Is the Fed’s concept of buying $600 billion of Treasuries just a smokescreen?

http://weroinnm.wordpress.com/2010/11/03/is-the-fed’s-concept-of-buying-600-billion-of-treasuries-just-a-smokescreen/

The Obama Fiscal Responsibility Farce Continues!

http://weroinnm.wordpress.com/2010/04/27/the-obama-fiscal-responsibility-farce-continues/

Is it important to understand the Marxist assault on the foundations of our system?

http://weroinnm.wordpress.com/2011/01/27/is-it-important-to-understand-the-marxist-assault-on-the-foundations-of-our-system/

Obamanites Get Violent in Support of the Agenda!

http://weroinnm.wordpress.com/2010/04/05/obamanites-get-violent-in-support-of-the-agenda/

Note: If you have a problem viewing any of the listed blog posts, please copy web site and paste it on your browser.  Sure seems like any subject matter that may be considered controversial is being censored-what happened to free speech?-You Decide.

“Food For Thought”

“God Bless & Keep Our USA Safe”

Semper Fi!

Jake

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