E.I.R.STRATEGIC ALERT WEEKLY NEWSLETTER

 E.I.R.STRATEGIC ALERT WEEKLY NEWSLETTER
Volume 30, No. 7 - February 18, 2016
Warnings Proliferate of Financial Crash  in Trans-Atlantic System For banks and stock markets in Europe, the U.S. and Japan, the second week of February proved to be the worst of an exceedingly bad 2016. The collapse is accelerating, in spite of the desperate attempts by the central banks to bring it under control. Reassuring promises, quantitative easing, negative interest rates, – none of the usual instruments has worked, as the pile of worthless debts continues to grow and grow (cf. below). While this comes as no surprise to our newsletter, as we had forecast just such a development, a number of so-called experts are suddenly waking up to the danger, as if they had slept through the past years’ frenetic feeding of the speculative bubbles. The warnings from London over the past week have been particularly striking: * The Financial Times , the “authoritative” mouthpiece of the City of London, chose to headline its Feb. 8 article by Dave Shellock, “Growth Fears Stalk European and Wall Street Stock Indices.” The author goes through the “darkening outlook for global growth spreading across global markets.” * Allister Heath, deputy editor of the Daily Telegraph , wrote in the daily’s Feb. 11 edition: “The world can’t afford another financial crash -- it could destroy capitalism as we know it.” And further, that “no developed nation today could possibly tolerate another wholesale banking crisis and proper, blood and guts recession.” A new bailout, he fears, would trigger a “cataclysmic, uncontrollable backlash” among the population, leading to “a war on the City”. * The economics editor of the Guardian , Larry Elliott, reviews the free fall in bank shares over the past weeks, noting that confidence in the central banks’ ability to deal with the crisis is disappearing (cf. below). To that effect, he quotes Steen Jakobsen, the chief economist at Saxo Bank, who said: “This week may go down in financial history as the week when Central Bank planning died -- the 2016 version of the fall of the Berlin Wall.” Meanwhile, in yet another transparent attempt to calm the markets, the heads of the French and German central banks -- François Villeroy de Galhau of the Banque de France and Jens Weidmann of the Bundesbank – published a joint call on Feb. 8 for the creation of a single Finance Ministry for the Eurozone, as the “most straightforward solution to restoring confidence in the euro area.” Their proposal for a “comprehensive sharing of sovereignty and powers at the European level” would really
just consolidate the dictatorship of the banks in Europe, as well as the monetarist policy which has led to the current crisis. The despair on the markets and among decision-makers is justified, as we have written repeatedly. From within the “casino economy” now in place, there is no solution to the crisis, it must be shut down. Similar to the highly successful approach taken by U.S. President Franklin Roosevelt during the crisis in 1933, the United States and Europe need to introduce a twotier banking system (Glass-Steagall), write off the toxic waste among the current debts, set up committees to investigate the crimes of the bankers such as the “Pecora Commission” at the time, and create national credit systems to finance investments in the real economy. Bank Shares Collapse: The Crisis Is Systemic Yesterday, it was the Italian banks, today Deutsche Bank and Crédit Suisse, tomorrow the Société Générale, and next, the U.S. banks: the pattern of bank shares collapsing in the range of 30-40% of their value since January excludes any isolated explanation and points to the systemic nature of the crash, similar to but worse than that of 2007-2008. As we have reported, the trigger for it is the bursting of the oil and commodity bubble, which is playing the role the sub-prime bubble played in the first global crash. Most of the banks hit by the selloff of shares are massively exposed to oil and commodity loans. That is certainly the case of the three megabanks cited above, which all have astronomic leverage ratios and derivatives exposures. Take Deutsche Bank, whose shares have plunged by 40% since the beginning of the year. On Feb. 11, they were down to EU14, which makes a capital of ca. 20 billion. That gives a leverage ratio of less than 2% on a balance sheet of 1.7 trillion. On top of that, the notional value of the DeBa’s derivative bets is over 54 trillion. Crédit Suisse shares have dropped by 43%. At current share value, the capital of the Swiss-based megabank is EU21,7 billion, against a balance sheet of 836 billion, which makes a leverage ratio of slightly more than 2.5%. More important though, are the bank’s 45 trillion in derivative bets (notional value). This means that if one-half of a thousandth fraction of that value goes bust, the entire capital of Credit Suisse is wiped out. Both Deutsche Bank and Crédit Suisse have a large exposure to high-risk energy bonds and loans. So does the Société Générale, the French bank whose stocks plunged 14% in one day
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last week, and by 36% since January. Whereas Deutsche Bank does not give precise data, it is known that SocGen’s exposure in that sector is around 24 billion and CS’ around 8.3 billion. On the other side of the Atlantic, the Markit financial data firm reports that 26% of all “high-yield” bonds held by U.S.based banks are now classed as distressed debt, i.e., they have yields more than 10% higher than U.S. Treasuries. That is 26% of approximately $2 trillion, or about $500 billion in distressed debt, in addition to 11% of “bad loans,” amounting to about $225 billion. The “distressed” share, by the way, was only 7% one year ago. The major Wall Street banks each have $15-20 billion of high-yield debt assets, except for Citibank, which has about $50 billion. But their loan-loss reserves are only in the hundreds of millions. That would cover between 5% and 7%, although 11% of the assets are already non-performing. Munich Security Conference Dominated  by “New Cold War” Ambiance There was something truly absurd about the Munich Security Conference this year, or at least in the media coverage in Europe of the discussions. One would think that the one and only problem for the Western world today is Russia -- and more specifically Vladimir Putin. Nothing was said about the fundamental security threat posed by the imminent collapse of the trans-Atlantic financial system. Manuel Valls did raise the acute danger of major terrorist attacks in Europe, but coverage of his warnings was basically non existent, while no one from the “West” mentioned the fact that the U.S. and the UK, and their Saudi and Turkish allies in particular, had created and promoted the radical jihadi movements in South-West Asia and beyond. The Syrian conflict and the refugee crisis were addressed by Westerners, but only to pin the blame on Russia. There is, of course, a big gap between the heavy rhetoric of many of the speeches and the now-growing recognition that Russia is a major power without which the international crises cannot be solved. As Lyndon LaRouche commented, “It’s a bluff. They can’t win, so they are bluffing,” with their attacks on Putin. In any case, the Chairman of the Munich Security Conference Wolfgang Ischinger set the tone, when opening the event on Feb. 12: “The global strategic environment is bleak. The international order in my view is in its worst shape since the end of the cold war.” NATO Secretary General Jens Stoltenberg devoted his intervention to attacks on Russia, which he accused of being “more assertive” and of “destabilizing the European security order”. Russian Prime Minister Dmitri Medvedev undoubtedly got the most coverage with his remarks that NATO’s policy with regard to Russia is “unfriendly and opaque”. Speaking bluntly, “we have slid back to a new Cold War. Russia has been presented as well-nigh the biggest threat to NATO, or to Europe, America and other countries.... Sometimes I wonder if it is 2016 we live in or 1962.” German Foreign Minister Frank-Walter Steinmeier observed that “The question of war and peace has returned to the European Continent, a condition we thought we had overcome, at least in Europe,” although he did go on to make a plea for dialogue with Russia. John Kerry, the U.S. Secretary of State, also delivered the now-standard attacks on Russia, despite the diplomatic initiatives he has been feverishly involved in together with his Russian counterpart Sergei Lavrov. In fact, on Feb. 13, the two
men met to discuss implementation of the new agreement on Syria (cf. below), talks he later described to reporters as “excellent”. As it was later announced, Barack Obama called Vladimir Putin on the same day to discuss cooperation, and both agreed to intensify the delivery of humanitarian aid to Syria and the implementation of the ceasefire. Nonetheless, behind the speeches is the reality of the decisions taken by NATO Defense Ministers at their meeting in Brussels on Feb. 11. They agreed to significantly increase the alliance’s presence in Eastern European countries, in line with the U.S. decision to quadruple its military spending for the forces in those same countries, so as to “deter” Russian “aggression” in the region. Just who is being aggressive here? Ceasefire Agreement on Syria Is Key  to Breaking the Drive toward World War A potentially major step toward ending the five years of civil war which have ravaged Syria is the “cessation of hostilities” agreement, negotiated by Foreign Ministers Sergei Lavrov and John Kerry, together with the representatives of 17 other countries on Feb. 12 in Munich, to enter into force on Feb. 19. The ceasefire does not apply to the combat against the radical jihadi groups ISIS and al Nusra. Whether the initiative will succeed remains very much up in the air. Certainly, the Russia-bashing that went on at the Munich Security Conference (cf. above) over the next three days did not bode well for the outcome, even though that was largely a matter of posturing. There can be no doubt that Russia’s military intervention, by breaking the deadlock, created the opening for a diplomatic solution. They provided the air cover and intelligence needed for the Syrian Army to reverse the situation and begin to roll back ISIS and other radical jihadist groups. Otherwise, as General Harald Kujat, the former chairman of the NATO military committee, has underscored, those barbaric forces would have gone on to take over Syria, then moved on to Lebanon, and from there to Israel. Moreover, without the recent attacks in Aleppo, it would not have been possible to cut off the supply lines to the ISIS and al Nusra forces hiding among the civilian population in that city. Now, it remains to be seen how Saudi Arabia and Turkey, both of which are aggressively supporting jihadi groups financially and logistically, will react. Riyadh has offered to deploy ground troops in Syria, which was welcomed by US Defense Secretary Ashton Carter, and Saudi fighter jets have already been deployed to Incirlik airbase in southern Turkey, as confirmed by Riyadh’s Defense Ministry. And just shortly after the Russian and American brokered agreement, Saudi Foreign Minister Adel al-Jubeir, in Munich, again called for the removal from power of Bashar al-Assad as a precondition. Since then, Turkish artillery has bombed positions of the Syrian Kurdish forces of the YPG in Syria north of Aleppo that they had recently taken back from the ISIS. The YPG, which is supported by the United States, has been coordinating the operation with the Syrian government and the Russian forces. Indications are that Ankara is also preparing a ground intervention into northern Syria, to defeat the same Kurdish forces. In that context, they would do well to heed the warnings of Russian Prime Minister Medvedev before and during the Munich conference. He has stressed that the deployment of grounds troops in Syria -- be it by the Americans, NATO, or their Saudi and Turk “allies” -- would immediately lead to an escalation toward world war.
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A Way out of the Crisis for Europe In an overview analysis written Feb. 12, Helga Zepp-LaRouche welcomed the “cessation of hostilities” agreement reached by the International Syria Support Group in Munich on the same day. However, she noted that whether or not the ceasefire will hold, and lead to a lasting ceasefire in Syria and in the entire region, will depend very much on whether an overall solution is adopted that addresses all aspects of the problem. For that to happen, Zepp-LaRouche stressed, it is essential to bring the United States and Russia to work together toward that goal – and Europe has the means to pressure them to do -- and to get the United States to end its confrontational stance with Russia and China. Secondly, an economic development program for the entire region has to be put into place, which includes rebuilding the countries ravaged by war – Syria, Irak, Libya, Yemen, Afghanistan – and ensuring the industrial and agricultural development of all of South-West Asia and Africa. The only “realistic perspective” for accomplishing such a program, in Zepp-LaRouche’s view, is China’s New Silk Road policy, an approach that has been promoted for decades now by the Schiller Institute. “It was concretely put on the table during Chinese President Xi’s recent visit to Saudi Arabia, Iran and Egypt. Were Germany, France, Italy and other European countries to now announce their intention to cooperate with Russia and China in the economic development of South-West Asia and Africa, that would not only overcome the double dangers of war and terrorism, but would also offer a solution to the refugee crisis, by developing the economies of those countries from which those people are now fleeing from hunger and war, and ensuring them a viable future.” At the same time, continued Zepp-LaRouche, such a humanist solution “offers the only way for Europe to escape its current, dramatic economic decline. The unpayable debts must be written off, however one chooses to call it -- a jubilee, a debt conference such as the London 1953 conference, or GlassSteagall -- and a credit policy has to be reestablished to finance the real economy, as it was successfully done in the post-war period to realize the German ‘economic miracle’. That is the only way out of the crisis.” However, we have a very limited window of opportunity, Zepp-LaRouche warned, during which we can opt for the solution of a truly new paradigm in the interests of all peoples. “The governments of Europe will be judged by whether they act as lackeys to the banks and are thus responsible for the destruction of all, or whether they realize a vision for the future of mankind.” Rome vs. Brussels  in Brawl over EU Bail-in Rules The confrontation between Italy and the European Union on the banks is escalating to the point that it could bring down the whole EU house of cards, as Jeremy Warner warned in the Daily Telegraph of Feb. 13. To recapitulate, the European Union will not allow Italy to use state aid to bail out its banks, but it offers no other means of rescue, which means that Italy is to be used as a test-case for the bail-in rules (cf. SAS 5/16, 52/15). This is unacceptable, and Italian institutions and the Parliament have drawn a red line. Indeed, a bail-in, i.e. confiscation of bank deposits, would incinerate a large section of small depositors’ savings. On Feb. 15, the Chamber of Deputies discussed several proposals to suspend or review the bail-in rules. Whereas some groups, such as M5S, characterized the bail-in as anti-consti
tutional, the majority parties just called for an early review of the rules. In particular, the Democratic Party motion was drafted by the head of that group in the Finance Committee, Michele Pelillo, who is very close to Prime Minister Matteo Renzi. According to Huffington Post Italy , Pelillo drafted his motion in consultation with Finance Minister Gian Carlo Padoan (cf. below). Previously, both Padoan and Bank of Italy head Ignazio Visco had called for a review of bail-in rules. Apparently this has infuriated Eurogroup head Jerome Dijesselbloem, who stated that “a return to the past would be the worst thing”. Italian Finance Minister Declares His Support for Banking Separation In a surprise development, Italian Finance Minister Gian Carlo Padoan went on record in the Italian Parliament on Feb. 4, saying that his government is in favor of banking separation, but that other EU member states are not. His statement was made in reply to a question by Senator Laura Bottici of M5S, who had asked whether “the government does not think it is fundamental to proceed, in the quickest way possible, towards a clear separation between investment and commercial banks, even by anticipating the EU regulations currently being discussed under guideline 43, 2014.” Such a separation, Bottici explained, would prevent “systemic contagion” and “protect citizens’ savings”. Padoan replied: “At the European level, as the questioner raised in her question, a separation between investment banks and commercial banks is being discussed -- which in some form has been introduced in other countries outside of the Eurozone. I must however say that a short-term solution looks problematic because each member state tends to defend national specificities which are often difficult to reconcile. “In this context, Italy is in favor of a distinction of roles in the [banking] sector”. In other words, the Italian Finance Minister said that the Rome government would support a banking separation regime, but it would never go through on the EU level. Since the difference between separation and no separation is the difference between survival and suicide, the implications of Padoan’s statement dictate a clear path of action for Italy: it should leave the Eurozone. “Anything Could Happen”  in the U.S. Presidential Race The unfolding of the U.S. Presidential campaign, which most Europeans find bewildering to say the least, now also has a large plurality of Americans scratching their heads, and pleading, “Don’t we have any other choices?” The Republican debate on Feb. 13 is a case in point. The “front-runner”, Donald Trump, engaged in a two-hour shouting match with Ted Cruz, Marco Rubio and Jeb Bush, in which the most frequently used word by all of them was “liar.” The lack of civility was only outdone by the failure of any of them to present a plan for the future. When the smoke cleared, the media hacks who cover these events were left somewhat speechless, trying to do “fact checks” to determine if anyone had told the truth, even while they were marveling over how acrimonious, yet compelling, the campaign has become! Two days earlier, the Democratic candidates, Hillary Clinton and Bernie Sanders, spent the final segment of their debate arguing which of them is the better ally of President Obama, and could best continue his work -- after they had spent the previous ninety minutes lamenting the shattered state of the
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economy, with its staggering level of “income inequality” -- which has been caused by Obama’s policies! With the world plunging dangerously toward war, and with the Trans-Atlantic financial system headed for an implosion, how is it that none of the candidates are addressing this interconnected crisis? And why is it that no one in the mainstream media is insisting that they do so? However, the subservience of Americans to the “powers that be”, epitomized by impotent declarations that you must choose the “lesser evil,” may be cracking. Polls show more and more “undecided” voters, while more are calling themselves “independents”, rather than affiliating with either party.  In commenting on this election campaign fiasco, Lyndon LaRouche stated that nothing is “settled”, because the U.S. “is on the immediate edge of a total breakdown of the U.S. economy.” There is no “fixed option”, as Wall Street, accustomed to controlling things, is bankrupt and cannot “fix” things, to paper over the crisis until after the election. The more the candidates speak, the more clear it is that they have no solutions to offer, and that they are merely puppets of the British Empire and its Wall Street allies, as Obama has been for the last seven-plus years. LaRouche concluded that the acceleration of the crisis itself may provoke a change in the behavior of the electorate, and that any of the candidates presently favored in the polls, could be swept aside. If that were to happen, there would be few tears shed over the broken ambitions of such candidates eager to act on behalf of Wall Street. Reviving the Original Vision of NASA  Is Essential for Survival of the U.S. Kesha Rogers, a former Democratic Party Congressional nominee in Texas and a leader of LaRouchePAC, has launched a campaign for a return to the original vision of the space pioneers, a vision that was embraced by President John F. Kennedy, when he launched the Apollo program. The goal was not simply defined by a successful landing on the Moon, although that was one of the first steps of the mission undertaken by NASA under Kennedy. But the vision was for the transformation of human society, by challenging the conception of man as having certain fixed capabilities, as determined by man’s biological nature. Rogers, in a webcast on Feb. 10, referred in particular to the work of Krafft Ehricke, who was one of those space pioneers. For him, the conquering of space required a mobilization of human creativity, based on the idea that there are no limits to what man can accomplish. His first fundamental law, quoted by Rogers, was: “Nobody and nothing under the natural laws of this universe can impose any limitations on man, except man himself.” This view predominated in NASA under Kennedy, as scientists and engineers were driven by the concept that their mission was to make new discoveries, to learn things from space exploration which were not just applicable to the development of new technologies for all, but to inspire people to seek such new discoveries as part of their nature, as human beings! Rogers counterposed Ehricke’s optimistic view of the unlimited potential of human creativity, to the prevailing view today, which asserts that there are strict limits to growth, and that humankind has no option but to reject the commitment to scientific and technological progress, which resulted from Kennedy’s NASA orientation. A society which rejects that scientific optimism, Rogers said, is one which will submit to the arbitrary authority of an oligarchy, which is committed to the massive reduction of human beings.
This offensive directed by Rogers coincided with the release of Obama’s 2016-17 NASA budget which, among other things, cancels the remaining program for a Moon landing (Orion), and imposes across the board cuts for most everything else. In concluding a webcast on Feb. 12, Rogers said that Obama’s cuts in NASA occur as he is engaged in an escalation toward war, placing “a clear dividing line in front of us” -- either we turn our backs on the great past discoveries of man, including those of the space program, and accept a world veering toward the extinction of man, or we mobilize our fellow citizens to fight for “a new direction for mankind,” in which new discoveries will occur with increasing frequency. China’s EAST Tokamak Moves Closer  to Reaching Fusion Power On the same day as the Max Planck Institute in Griefswald in Germany successfully carried out an experiment to produce hydrogen plasma at 80 million degrees Celsius for a quarter of a second, in the framework of the research on achieving fusion power, (cf. SAS 6/16), another piece of exciting news on that front came from China’s Institute of Plasma Physics in Hefei. Scientists there reported that experiments on their EAST superconducting tokamak had successfully created a sustained hydrogen plasma for a record 102 seconds. The scientists’ goal is to get the plasma in the EAST (Experimental Advanced Superconducting Tokamak) to reach 100 million degrees and operate for 1,000 seconds (nearly 17 minutes). The experiment, according to the Institute, required that the team solve a number of scientific and engineering problems, such as the precise alignment of the magnets, and keeping the plasma particles and heat from escaping from the tokamak. Instabilities in the plasma and the “leaking” of the ionized gas have plagued all fusion researchers, and prevented the longlived confinement of the plasma. The scientists worked “day and night,” the institute says, to achieve their results. The plasma measured a temperature of 50 million degrees, which is about half of what will be required for deuteriumtritium fusion, which the researchers say will still take some time for EAST to achieve. Reaching the 100 mn degree mark is a crucial step towards an eventual steady-state operation, which will be required for commercial power production. Although higher-than 50-million-degree plasma temperatures have been achieved before (for example, by Princeton, in the late 1970s) containment of the plasma has been in only the tens of seconds. These recent experimental results and all of the progress on EAST will be applied to the international ITER project, which is now being constructed near Cadarache in France. The 35 countries participating in that project now carry out specific experiments in their own national laboratories and reactors on the processes that will later be incorporated into the ITER, which is scheduled to begin producing fusion power in 2027.
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