Lose Liberty and You Will Lose Your Civilization – Big Brother is Here

We recently quoted H.L. Mencken's famous saying on 'practical politics' in the context of the euro area's crisis and what we think the plans of the political elite were all along (namely to use a future crisis to drive the political centralization of Europe forward against the will of the citizenry):


The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary.”


As we noted, although it should be well known that politics works this way, 'the rubes fall for it every time'. Indeed, how else could legal monstrosities like the PATRIOT Act, the Military Commissions Act and the National Defense Authorization Act  – all of which are little more than variations on the theme of Hitler's 'Enabling Act' of 1933 –  ever have seen the light of day?



A bunch of bearded reactionary medieval throwbacks in a cave in the Hindu Kush managed to get the most powerful nation on earth to shred the very legal foundations that made it great in the first place? How nutty is that? 

Today this trend has taken over the entire West. Governments are now snooping on their citizens without court orders in both the US and Europe to an extent previously unimaginable. The NSA is building the biggest snooping and data collection facility in all of history in the desert of Utah. As Wired magazine reported, its purpose is:

“To intercept, decipher, analyze, and store vast swaths of the world’s communications as they zap down from satellites and zip through the underground and undersea cables of international, foreign, and domestic networks. The heavily fortified $2 billion center should be up and running in September 2013. Flowing through its servers and routers and stored in near-bottomless databases will be all forms of communication, including the complete contents of private emails, cell phone calls, and Google searches, as well as all sorts of personal data trails—parking receipts, travel itineraries, bookstore purchases, and other digital “pocket litter.” It is, in some measure, the realization of the “total information awareness” program created during the first term of the Bush administration—an effort that was killed by Congress in 2003 after it caused an outcry over its potential for invading Americans’ privacy.


 (emphasis added)

It is noteworthy that the title of the Wired article contains the following admonishment in parentheses : “Watch What You Say”.

This snooping by faceless bureaucrats, worthy of the GDR's infamous STASI, stifles individual initiative and the free spread and exchange of ideas. It will eventually sap Western civilization of what remains of its strength. Apparently governments are oblivious to the fact that the sources of our prosperity and progress are individual liberty and property rights. Suppress one or both and you can eventually wave your civilization good-bye.


Financial Repression In Italy

Nowadays the snooping and repression is increasingly shifting from the 'security' sphere to the financial sphere. 'Financial repression' – a term originally coined be Ken Rogoff and Carmen Reinhardt to describe the tendency of governments to try and 'inflate away' their debts – is taking on ever more sinister shapes.

In Italy, the Monti government has begun to control the spending habits of its citizens to a never before seen extent (hat tip to 'Das Gelbe Forum' in Germany). Its crackdown on alleged tax evaders has so far produced 23 suicides by people who were either utterly ruined by the State's demands for back taxes owed or otherwise fell victim to the economic crisis.

Now there is the so-called 'spesometro', whereby the government creates a map of all consumer spending in Italy, correlating it in seconds with tax payer information. If anyone buys more than he should be able to buy according to his tax return, the 'agenzia delle entrate' soon shows up and asks him to explain how he was able to indulge in such spending.  Savers must be able to provide a time-line of several years detailing how and and how much they saved when and why. Anyone who has not been overly fastidious with keeping records of every detail of his financial life is thus in danger of being fined if he buys 'too much'. Given that Italy has a very high private savings rate, a great many perfectly innocent citizens will probably be ensnared by the 'spesometro'. 

The crack troops of the finance ministry in Rome meanwhile are raiding entire villages, meticulously controlling small businesses and farms for violations of rules and regulations and possible tax evasion. A few weeks ago eight mechanics businesses that repaired bicycles and agricultural machinery in a small town were closed down and their assets confiscated due to 'their papers not being in order' (whatever that means). Fines between €6,000 to €35,000 were handed out according to the businessmen concerned. One business owner was fined because his son was in the repair shop helping out. His crime: 'exploitation of a minor'. To this one must point out that it has been a tradition since practically forever in Italy that children occasionally help out in the businesses of their parents that will one day be their own. Since there is no apprenticeship for artisan jobs, this is how young people learn the trade. Note by the way that in Southern Italy youth unemployment stands above 50%.

Monti's troopers are now also controlling the fields and forests to catch 'illegal tree pruners', work which mostly retired farmers engage in to slightly improve their meager incomes. Note that the social security pension of a farmer amounts to only about €400/month. By helping to prune olive trees, these people can occasionally earn €100 in a day. Now they are working by night, using flood lights to escape the controls. This is understandable, as the €400 pension is simply not enough for them to survive on. A new saying is now making the rounds in rural Italy: 'Se lavori sei un ladro!' – 'If you work, you are a thief'.

Apparently Monti's bureaucrats will only be satisfied when the youth turn to a life of crime and the old people starve.

Monti is a kind of modern-day Diocletian, especially with regards to how excessive the punishments for even small indiscretions have become. For example, as gasoline has become extremely expensive in Italy on account of the egregious taxes levied on it, many Italians have taken to getting gasoline from across the border. Anyone caught with a spare canister  containing more than 10 liters of gas upon entering Italy will be fined a minimum of €7,750 , their vehicle will be impounded and auctioned off and on top of all this they will face a jail term of between six to 36 months (source: German press report).

As the Italian tax payer's association noted in a recent press release: 'Monti's reform has consisted of introducing new taxes and nothing else'.

This is precisely the criticism we leveled at the Italian 'austerity budget' when it was revealed: 'austerity' means only austerity for citizens, who are going to be plundered like never before. There is no 'austerity' for the State itself. Its share of the economic pie will not shrink, it will actually grow.

The whole climate in Italy has become poisoned by the government's money grab. On TV there are now spots like for instance one where a bureaucrat in the finance ministry receives a phone call from a 'concerned citizen' who says: “The baker right below my flat almost never hands over a sales slip. I've lived above him for 24 year, we know each other since school, so I know for sure….”, or he says “the hairdresser I have gone to for the past ten years has never issued a receipt to me”, and so forth.

In various villages people have spotted posters that show a man with an attache case wearing a black suit and black shades and sporting the bloodied teeth of a vampire. The poster explains that he depicts the “tax evader who is sucking the blood from honest people” and who “must be ostracized and hunted down”. The guilty parties are soon identified: it is for instance the owner of a small repair shop who doesn't hand over a sales slip for three euros he charged for a bicycle repair and others like him. Denunciation of alleged offenders has become a popular sport. The opportunity for abuse is obviosuly vast.

Not surprisingly, Italy's economy is now in free-fall. You can not pressure small businesses with Gestapo tactics and hope for a revival of business at the same time.



Via Scott Barber of Reuters: Italy's industrial production and real GDP growth – click chart for better resolution.



Meanwhile in Greece, the government can now snoop into all banking and credit card activities of its citizens without a court order. The latest development on this front is that the government can actually simply confiscate funds it deems to be the fruits of tax evasion, with the trials to happen afterward. So the citizens concerned can challenge the confiscation of their savings if they still have enough money left to pay for a lawyer. Mish has just posted an update on this  that has all the details. As he rightly concludes, this should accelerate capital flight from Greece substantially. Here is also a link to the original story at Ekathimerini.

Greece's economy remains pretty much in free-fall as well.


Industrial production and GDP in Greece, via Scott Barber of Reuters – click chart for better resolution.


We could go on, but you probably get the drift by now. Many governments in Europe are putting pressure on their citizens like never before in order to get hold of more money. Liberty is dying in the process. One feels reminded of the emperors in the final stages of the Roman Empire, who also attempted to 'rescue' a failed welfare/warfare state by means of inflation, price controls and financial repression. This only hastened the Empire's demise and it won't be any different with the modern-day version of this policy.


And how has it come to this?

It can ultimately be traced back to the decision of a handful of morons in power to replace a burst bubble with an even bigger bubble. When the new bubble inevitably burst as well, their successors predictably decided that bailing out a bunch of banks that had made bad investments was the way to go forward. The idea of hewing to the principles of free market capitalism and letting the market handle the problem was not considered feasible.

President Bush at the time told CNN „I've abandoned free market principles to save the free market system“. It didn't seem to occur to him that this was the functional equivalent of a famous quote by an unnamed US officer during the Vietnam war after the leveling of Ben Tre: „It became necessary to destroy the town in order to save it.“.

As a result of these decisions, the worst stewards of capital remained in charge and governments all over the West are now strapped for funds. Naturally, the only 'solutions' they could think of were to inflate the money supply and increase financial repression.



Misery in Europe, via Scott Barber. The Green line below adds unemployment and inflation to obtain the so-called 'misery index' – which has just hit a new high in euro-land – click chart for better resolution.


Spain: Santander's CEO Thinks We're All Stupid

Everybody has been wondering about the still very low level of mortgage defaults in Spain. As the CEO of Santander Alfredo Saenz revealed to Bloomberg, worrying about the state of mortgage credit in Spain is 'stupid':

JPMorgan Chase & Co. (JPM), the world’s largest bond underwriter, predicts that Spanish mortgage arrears will surge as unemployment rises. That’s also the view from the international debt market, which has driven up yields on Spain’s bonds in a bet the country will have to bail out banks.

In Spain, Banco Santander SA (SAN) Chief Executive Officer Alfredo Saenz said yesterday that’s nonsense. “Mortgages get paid in good times and in bad,” he said in a news conference at the bank’s headquarters outside Madrid. “Anyone raising this problem as one of the issues for the Spanish financial system is saying something stupid.”


(emphasis added)

Yeah, sure. It's totally stupid to suspect that the bursting of one of the biggest housing and mortgage credit bubbles in all of history could lead to major trouble for the mortgage lenders. As one observer remarked:

“There does seem to be a strange contrast between the high level of unemployment and the surprisingly low level of delinquencies on mortgages,” said Georg Grodzki, who helps oversee $515 billion as head of credit research at Legal & General Plc in London. “This raises the issue of whether loans have been amended to make them look current when in fact they are distressed.”


(emphasis added) 

You bet that this is the issue raised by the 'strange contrast'. The newly unemployed in Spain are all current on their second home mortgages incurred at bubble prices? It's totally credible! We think Saenz is putting a massive amount of lipstick on a pig here. As we have frequently pointed out, everybody knows by now that Spain's banks are past masters at hiding their problems with a plethora of accounting tricks.

This is further buttressed by the revelation that yet another sub rosa bank bailout has apparently been initiated by the ECB via an explosion in its ELA ('emergency liquidity assistance') lending. As a reminder: if a bank uses the ELA, it means it no longer has any eligible securities it can pledge with the central bank. Instead it simply issues an 'IOU' and the national central bank then prints up the money to give to the bank after getting the nod from the ECB's governing council. In Ireland's banking system there are still some €50 billion or so in ELA funding floating about. In Greece the ELA has also been used quite liberally (€70 billion at the peak).

According to the FT:

[…] in its weekly financial report, just released, the ECB reveals a €121bn increase in claims on eurozone banks which is says was the result of putting all ELA use under one heading.

By definition, this must be the minimum amount of ELA being provided by the “eurosystem,” the network of eurozone national central banks. As such, it is much higher — maybe €10bn or more — than would be accounted for by use in Ireland and Greece alone. So somewhere else in the eurozone, ELA is also being provided in significant quantities.


You have one guess as to where this 'somewhere else' probably is. Very likely it's the country which only 'stupid people' would suspect of facing a growing  risk of mortgage delinquencies. 

Here by the way is a long term chart of Santander, which the stupid people trading in the stock market are apparently selling with both hands – although it is obviously still doing a lot better than many of the smaller and more domestically focused banks in Spain:



Santander's share price is busy probing the lows of the 2002 bear market. This is what is known as 'going nowhere in interesting ways'. In real terms, its shareholders are sitting on a vast loss now. – click chart for better resolution.



Meanwhile, deposit flight has lately accelerated in Spain, as the chart below shows:



Via CLSA: growth in Spain's private sector bank deposits has turned negative – click chart for better resolution.



Saenz explains the extraordinarily good performance of Spanish mortgages as follows:

“Saenz said Spanish culture is part of the reason why default rates remain low.

Spaniards tend to keep up their mortgage loans because borrowers respond with all their assets and not just their property if they default, Lorena Mullor, manager of the Spanish mortgage association, said in an interview. Many treat the purchase of their home as a valuable asset that will help fund their retirement and can rely on the support of their families to help them keep up payments if they lose their jobs, she said.

“It’s a sociological thing and that’s how it is,” said Saenz.

Santander had 59.4 billion euros of loans made to Spanish households to buy homes at the end of 2011 out of a total loan book in Spain of about 200 billion euros. The default ratio was 2.6 percent in March, down from 2.7 percent at the end of 2011, the bank said.

“The data is good so let’s not start debating the quality of the information,” said Saenz. “Mortgage arrears are not a problem and are not going to be a problem”


(emphasis added)

Yes, let's not under any circumstances debate the quality of the information. After all, it's a 'sociological thing' and that's that.

To this we would note that mortgages are usually not paid back with culture, but with money.

Here is a little case study from a recent NYT article (which inter alia quotes Edward Hugh who notes that the real mortgage delinquency rate is probably in double digits, far from the officially reported 2.6%):

“But lenders are now depending on people like Marta Afuera Pons, who is juggling two mortgages — one on her house, another on an investment property that went sour — and is about 350,000 euros in debt.

In late 2010, Ms. Afuera Pons, who had just lost her job as a social security administrator, stopped making payments on the mortgage of 132,000 euros that she and the man she lived with had taken out for their home in Tordera, near Barcelona.

Separately, they still owe 185,000 euros to the same bank after receiving further financing in 2007 to buy a house that was never built, because the developer went bankrupt a year later.

Like many Spaniards, Ms. Afuera Pons is hitting the two-year limit for receiving unemployment benefits. This month, she will receive her last 1,100-euro unemployment check.

Finding no buyers for her Tordera house, Ms. Afuera Pons says she is trying to persuade her lender, the savings banks BMN, to take back the mortgage and the property.”


(emphasis added)

Almost needless to say, Spain is probably littered with similar cases. We think Mr. Saenz will eventually have to eat crow. And yes, we should most definitely 'debate the quality of the information'. After all, every time there's a bank merger in Spain, the write-offs suddenly balloon to multiples of what was previously admitted to as constituting dubious assets.

Addendum: US Bank Earnings

Speaking of  banks, we would like to briefly quote from John Hussman's most recent weekly update on US bank earnings (we have mentioned all these things in the past, but it is worth repeating them , especially as a new wrinkle has entered the proceedings):

“Banks continue to report seemingly pleasant earnings, as long as one doesn't look under the hood at the drivers of those reports. Two drivers have been particularly important this quarter. One is the further reduction of reserves against future loan losses, which shows up as a positive contribution to bank earnings. For example, a decline in loan loss reserves was the source of about one-third of the earnings reported by Citigroup. The other driver is something called a "debt valuation adjustment" or DVA. You might recall that as a result of European credit strains last year, investors sold off the bonds of major banks. In the world of bank accounting, the debt was therefore cheaper to retire, so – I am not making this up – the decline in the value of the bonds was booked as earnings. Of course, the value of bank debt has recovered somewhat since then, as investors have set aside concerns about Europe (which we doubt is a good idea). One might expect that since banks booked DVA as a contribution to earnings last year, we would see the opposite effect this quarter. But one would be wrong.

As Peter Tchir noted last week, "Morgan Stanley no longer includes DVA in its 'continuing operations' headline number. It was a loss of $2 billion this quarter. With 2 billion shares outstanding, that would have wiped out the gain. What bothers me, is that in Q3, when it was a gain of $3 billion, it was part of continuing ops." It was the same story at Bank of America, prompting one analyst to observe "one-time items are to be ignored when negative, and praised when providing a 'one-time benefit.'"


(emphasis added)

We have often mentioned the lowering of loan loss reserves and the above discussed 'DVA' as sources of a great deal of the reported bank earnings. To this it should be noted that the loan loss reserves issue is not the fault of the banks. There is actually an SEC rule to the effect that such reserves must be lowered when loan delinquencies improve. However, the selective use of 'DVA' – include it when it is advantageous and exclude it when it's not – that is an entirely new trick as far as we're aware.




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12 Responses to “Financial Repression in Italy and Spain’s Curiously Low Mortgage Delinquency Rates”

  • Amazing the amount of accounting fraud they let the banks employ. And, the same people are monitoring everything we do? The amount of reduction in the value of debt against a bank should only be allowed to the extent the bank actually buys the debt off the market at the reduced price. It is clear to me the purpose of QE is to hide the insolvency in the banking system and allow some of them to retire debts they could not possibly otherwise retire. The losses will fall on the depositors, who possess the only owned credit in the system.

  • Andyc:

    Powerful article.

    “Anyone caught with a spare canister containing more than 10 liters of gas upon entering Italy will be fined a minimum of €7,750 , their vehicle will be impounded and auctioned off and on top of all this they will face a jail term of between six to 36 months”

    Wow talk about piling it on!

    That fine for 10 liters of gas is, I’m guessing, approximately equivalent as for a bank getting caught earning 10 million in profits on laundering 200 million in money.

    The again banks have a lot of “overhead” and bonuses to pay…so maybe its fair.

    : )

    • worldend666:

      I don’t really understand this as so long as you carry in goods which you intend to consume yourself there should be no legal limit under EU rules.

  • White eagle:

    Can you be more specific?I have experience from long stays in India and Africa and my close friend has long experience from Indochina region.As a white person you are automatically target for predatory individuals – demands for bribery,thefts,lies,burglaries,conman,conwomen,higher consumer prices asked even when you show them you know local info….White women have additional problems.There is crazy cliché that white man are rich and white women are easy.All that is just for living there,if you try to do some serious business-industry than you are prime target.I am not saying people are bad in those places.I am only saying that as a white man you attract bad individuals among them and sometimes colonialist backlash even if you are not from the nation that oppressed them.
    On optimistic side:my ancestors fought and all survived.Half of them were deported into Nazi camps,property confiscated only because they were Slavs,some were in guerrilla,some were even taken out from camps and into German army and sent to Russian front after Germans lost too much troops and desperately needed replacements-if they were to desert the remaining family members would have been transfered to Death camps,after the war they came back home to utter poverty…In WW1 it was similar and they all survived as well,went through terrible battles,famine…And yet,today nobody in my family has nothing against Germans.
    What is depressing in my post?For Liberty you have to fight or somebody else must fight and give you Liberty as my ancestors gave it to me.After a while forces of oppression regroup and you have to fight to keep the Liberty.Study historical data and you will see those old Greeks were not dumb.

    • worldend666:

      Hi Again White Eagle

      What I found depressing was the suggestion that it’s sensible to stay and go with the flow in Western Europe as it descends into some perverted hybrid of socialism and fascism. Going with the flow is exactly what will guarantee oppression and guarantee you will be the oppressed. It’s better to run away to fight another day than stay until it’s too late when fighting will bring nothing anyway (except martyrdom).

      I haven’t lived in the 3rd world but I have spent 15 years in something in between having lived in many parts of East Europe since the early years after communism. Being a Slav, that probably won’t impress you but it’s pretty alien for a Brit :) I’ll definitely agree it is easier to be a foreigner here than in India or China, but if you were to live in those places you would probably put your assets somewhere like Singapore or Hong Kong. At least if you had much worth stealing.

      Another reason I was a bit moody after your post is because Bulgaria where I now live, has had some of the harsh laws mentioned in the above article for some time. I am thinking about what to do about it. I went to Poland and the Czech Republic to get away from the EU and it followed me there, so then I came here. Now the EU has followed me here. It’s like a cancer spreading throughout a healthy organism. Why don’t I like the EU? Every place I have lived was much more pleasant and freer without it. The citizens were not focussed as much on money and life was interesting. You didn’t go to jail for speeding on the highway, you could smoke weed (if that was your thing), and you didn’t go to jail for up to 8 years for faking a road tax document which costs 70 euro a year (yes that law has just been passed!). People spent more time drinking cheap coffee and didn’t care to bother earning the money to drink the premium stuff. Now everyone spends their fee time in shopping malls…

      Time to move on again? I think so.

  • I am just back from a quick visit to the Torino area in Italy. Cash is very short amongst the population.

    In order to withdraw 1000 Euro from your bank account, you are requested to fill out a three page form detailing how you intend to spend the money and with whom.

    Banca Intesa Sanpaolo now requires 48hours notice if you want to withdraw 1500 Euro.

    The now decades old practice of finding an “escamotage”, a way around paying taxes, has currently reached dramatic new levels. Where once the practice of finding fiscal loop holes was done more for personal satisfaction and bragging rights, as of the 80s this art form has gradually become more of a survival skill. Today, as the TVA (Value Added Tax) has reached 21%, when lumped-in with all other levies and when including your income tax, the share of the state is a stifling large portion of the purchasing power of all individuals with very little in the form of benefit for society.

    • All over Europe vast ‘shadow economies’ have developed because taxes are so high and regulations have made doing business so prohibitively expensive for many small to medium sized businesses that there is simply no other choice: either you get ‘creative’, or you simply go bankrupt. However, the career bureaucrats and politicians do not understand this. They never had real jobs, so they don’t know what their edicts have wrought. Now they want to ‘close the loopholes’, but if they are successful, they will simply shutter 30% of the economy.

  • Jonas:

    It’s unbelievable how these banks do everything to cover up their losses and go unpunished when it’s discovered. Here in Belgium Dexia is in big trouble again for the third time (surprise!) Deloitte discovered that practically all the numbers are worse than the company made public. Meanwhile the regulator says that Dexia should loose its banking license, but they say they close their eyes for now! That’s news from a couple of weeks ago and nobody seems to care. When asked yesterday the head of the “liberal” party said the government will help Dexia when needed.
    They are destroying my country before my own eyes! But in august or november I should get my permanent Brazilian residency and then I can watch it all fall apart from a distance.


    • Many thanks for pointing this out – I will look into the latest Dexia developments and comment on occasion. The Dexia situation has kind of disappeared down the memory hole in recent months, but perhaps we can rescue it a bit from there. From he beginning of its bankruptcy the international press has been curiously silent about what actually happened at Dexia. As you may recall, Dexia was deemed the best capitalized bank in euro-land after the EBA’s first and second stress tests!
      The Belgian press then reported on a huge interest rate swap trade that had gone wrong (they were essentially betting on rising German rates to hedge their exposure elsewhere, so both legs of their trade went against them; if true, then it was without a doubt one of the most stupid trades of the decade). No other media outlets picked up on that story. The reason WHY exactly Dexia went under was shrouded in mystery. And now the financial press is not following up – it’s considered yesterday’s news, but if I understand this correctly, it has now become a kind of bottomless pit.

  • ab initio:

    We live in a modern Orwellian world. Unfortunately the general population across the globe will continue to be apathetic and get sheared. It will be too late when they react to financial and political repression. It will by then be a totalitarian state and “examples” will be made of those that resist.

    Maybe it’s time to get off the grid and move to some remote third world outpost with good weather and some arable land and water!

    I continue to believe that one of these days the bond and currency markets will start to react negatively to more money printing. The gig will be up then.

    • White eagle:

      Price for Liberty is blood.That is historical and natural law.If you run away from statist oppression,you will still have to fight for your liberty and property in some remote place.This time against local predatory individuals and beasts.I did my share of traveling in such romantic places and came back to Europe grateful for same order and security.There is nowhere to run.As old Greek philosophers said:life is a constant struggle/war and everything is in constant change.Just be patient and don’t make yourself an early martyr,wait until masses start moving.Right now,people are in the ˝don’t rock the boat˝ mode.Usually masses start thinking when they are hungry.No revolution came out of the blue.

      • worldend666:

        What does that mean White Eagle? I have been living in such places the last 15 years without any problems whatsoever.

        My ancestors ran from oppression and that’s why I am here. Their family stayed and went to the gas chambers. Your post is one of the most depressing I have seen in a long time.

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