Germany’s economy minister, Rainer Bruderle, took a nice swipe at Bernanke the other day when he said that the European Union cannot “throw money from helicopters.” Huge tensions are building in Europe and I’m not sure people understand how close the EU is to falling apart.

Ireland may seem like small fry and I’ve been amazed at the market’s resilience in the last few weeks as Irish bonds imploded, but we must remember that European banks have US$650 Billion exposure to Ireland as reported in the New York Times:

Source: New York Times

The UK has nearly a quarter of the overall exposure with $42 billion of their exposure in the form of lending to Ireland’s battered banking sector.

Are you starting to understand why the rest of Europe is putting so much pressure on Ireland to accept a bailout by the EU or the IMF?

It may seem strange that Ireland is fighting so hard to stop a bailout from occurring but when you dig a little deeper it all makes perfect sense.

The bailout is not for Ireland, but for the European and American banks that have exposure to Ireland If Ireland were to accept an offer from the IMF then they would hand over control of their finances to the IMF also In effect the people of Ireland would be forced into austerity measures in an effort to bailout the US and European banks.

In retrospect the decision by the Irish government to guarantee their banks at the height of the crisis in 2008 will have to go down in history as the most ruinous and stupid decision ever made In effect it forced other governments to do the same and now we are in a situation where whole nations are on the verge of bankruptcy due to the insolvency of their banking systems.

The people have been hung out to dry in an effort to keep insolvent banks alive

I was always under the impression that capitalism was based on survival of the fittest An economy would stay strong because the insolvent businesses would fail and their assets would be picked up by the stronger.

An automatic stabilising mechanism would be at work ensuring that the overall organism would survive.

I am always amused when I hear people say that our current problems prove that capitalism has failed Nothing could be further from the truth We no longer live in a capitalist society We live in a Corpratocracy The survival of current business interests drives government decision making

From the money printing madness of Ben Bernanke to the guarantees of Irish banks, the decisions made can only make sense when looked at through the prism of protecting big money interests.

The people of Germany are starting to fight back They rightly ask why they should foot the bill for the years of largesse and immense borrowing made by the weaker members of the European Union The UK telegraph has reported that “Austria is refusing to contribute to the next tranche of bailout money for Greece, citing the country’s failure to meet conditions.”

The tensions are growing and may explode at any moment Does Ireland and Portugal get ejected from the EU in an effort to stop the contagion spreading to Spain and Italy?

Does Germany tell the EU to get stuffed and go it alone? Highly unlikely, but anything is possible from here on in.

There is no way that the EU can bailout Spain If Italy falls over then the EU is finished The cornerstone of the whole thing is the web of debt between European countries This picture from the Wall Street Journal in May says it all and is worth having a look at to understand what is really going on:

Source: Wall Street Journal

Who should pay for the bad decisions made by banks during the boom? Should you pay for them? If banks didn’t give you any money during the good times why should you pay for their losses? Has the world gone completely insane or is everyone asleep?

The old line that keeps getting trotted out that keeping the banks alive is good for the people and therefore the people should continually bailout every bad decision made by any bank around the world forever is wearing very thin.

How much longer can they keep the wool pulled over everyone’s eyes?

The parties over and someone needs to clean up the mess but no one wants to help out They are all passed out in the garden.

Ireland is the next cab off the rank after Greece There is a clear progression going on and as each day passes Portugal gets closer to being in the markets sights The politicians know that they have an angry constituency that will “throw the bums out” if they keep ignoring their wishes and continue to write blank checks.

Investors are slowly losing faith in the powers that be and their ability to stop the contagion

It is not just Europe suffering from this loss of credibility.

The Fed is starting to look incredibly foolish as bond yields continue to rise in the face of Bernanke’s claims that QE11 was a success. US municipal bonds are crashing and we have seen a year’s worth of gains wiped out in the last couple of weeks.

China is overheating and the Shanghai Stock Exchange A share index has crashed 10% in the last three days in response to the threat of an interest rate rise.

The euphoria that the markets have been in for the past few months is slowly changing into a realisation that all is not well in the world.

Buyers are still holding up the stock market in the foolish hope that Bernanke’s money printing is the panacea for all problems while Bernanke comes under increasing pressure from Congress and the rest of the world to halt his ruinous policies.

If you want a good laugh and would like to learn a bit about what Quantitative Easing really means then watch this video Over 1.2 million people have now watched this video and I hope that many millions more watch it in the future It is well worth a look:

Source: Extranormal

The next few weeks are shaping up as very important ones for the future direction of the market I have been a bear in the face of this huge squeeze higher in the markets and I have been pushed to the very limits of my comfort levels, but this last week’s price action is telling me to stay the course and to continue telling all who will listen that buying the stock market at these levels is incredibly high risk.

The issues in Ireland are far bigger than Ireland itself and need close watching.

Regards,

Murray Dawes
Editor, Slipstream Trader

But before we get on to today’s Money Morning, a brief announcement…

The guys and gals at the Melbourne Adam Smith Club have been crazy enough to invite your editor to be the guest speaker at their May dinner function.

You can download an invitation to the event by clicking here. So, if you’re in Melbourne and you’ve got $45 to spend on a curry dinner and listening to your editor waffling on for half an hour or so then feel free to sign up for it.

We’ll look forward to seeing you there.

But for today, this…

“Greece on the edge of abyss as riots turn deadly”

So says today’s The Age newspaper. Perhaps now the mainstream commentators and finance professionals might start taking things seriously.

For weeks we’ve seen “experts” telling us that Greece will be an isolated event. That it could have an impact elsewhere in Europe, but it shouldn’t have any bearing on the US or Australia (Australia’s different you see).

Then at the start of this week talk of contagion started to do the rounds. But again, maybe Europe and the UK will go pear-shaped, but that’s all. We’ll be fine. Our lovely banks don’t have any Greek exposure.

But now today we’ve got “abyss” being used.

That’s hardly surprising considering the deep mess Greece and the European Union is in. And quite frankly it’s something that should be taken seriously.

We’re not talking about common-all-garden riots here. We’re not talking about World Economic Forum style riots with a few bags of flour being thrown and the odd urine water bomb splashing across the old bill.

It’s not the type of riot where the participants turn up for a bit of copper baiting and argy-bargy, fully expecting to return to their day job in the call centre on Monday morning. From what we can see it’s yer proper lootin’ and a killin’ civil unrest.

But we’ll see. You never know, it could all blow over before you know it. However, we’d want pretty decent odds if we were going to place a bet on it.

So who’s to blame for the Greek mess? Are the Greeks behaving like spoilt brats? Do they deserve the punishment that’s being dealt to them? Haven’t they received all the benefits of government largesse?

It won’t surprise you to learn that we firmly place the blame on the government. Sure, the Greek public aren’t completely innocent, thinking they could have something for nothing. But when it comes down to it, the prime reason for the current mess is the politicians and their insatiable appetite for power.

I’m afraid it’s the nature of the political beast. And it’s why we believe in a minimalist government.

The more powers that politicians are granted, the more they’ll want. The more they get to control things, the more they’ll want to control other things.

Eventually it reaches a tipping point. The government ends up having its fingers in so many pies its actions have the biggest impact on the fortunes of the economy. You can see that in Greece, and you can see that in, er, Australia…

Just look at what the Fairy Ruddfather has done to the markets this week. The impact has only been this big due to the excessive influence of government.

And it adds further evidence to support our claim that Australia does not operate a truly free market. In a free market with limited government, the government would not have this kind of power and could therefore not make these decisions.

As we’ve pointed out all along, it is the excesses of government that is the overwhelming negative influence on the economy, not free enterprise.

The front page of today’s Australian Financial Review (AFR) has political hack Laura Tingle leading with:

“The war of words over the resource super profits tax has overshadowed how the Henry review has presented the government with a new fiscal policy lever to control the economy. The lever is a new tax which, as a macro-economic policy, could reweight the way the economy works.”

To free-marketeers that kind of statement is enough to make you drop your copy of The Wealth of Nations into your bowl of cornflakes of a morning.

We love the last part especially; it “could reweight the way the economy works.”

See what I mean about the obsession for hapless bureaucrats and politicians to control things? They just can’t help themselves.

The idea that the Resource Super Profits Tax is a new lever to control the economy is just plain madness. But again, it’s the overconfidence of bureaucrats who believe they saved the Australian economy from disaster.

We’d love to hear from Ms. Tingle her explanation of how economies work. Our guess is that she believes it involves politicians and bureaucrats pulling and pushing levers like an old signalman.

Clearly Ms. Tingle and other government and tax lovers have some bizarre idea that economies can be directed at the whim of bureaucrats just as a child can control a toy train set.

In fact, in a Money Morning exclusive, below is a photo we secretly took this morning of a government bureaucrat in action – not surprisingly he’s sitting down on the job (probably an occupational health and safety thing):

Obviously the lever that’s been pulled right forward is the Australian housing market! “Full steam ahead Gordon…”

Anyway, the Keynesian hordes are still blindly pushing on with their crazy ideas. Not content with getting the global economy into the current mess they are determined to press ahead with even crazier ideas.

Page 71 of today’s AFR has John Freebairn writing:

“The RSPT could be much higher, close to 100 per cent without deterring the investment.”

What is he going on about? Can he seriously suggest that if you impose a 99% tax on something that investors will still pile in?

Apparently Mr. Freebairn holds the Ritchie Chair in Economics at the University of Melbourne. Based on his attitude to taxes we can only assume it must be the Ritchie Benaud chair, because whatever this Ritchie is, he or she can’t have anything to do with economics.

But at least he’s man enough to admit to the charge we levelled earlier this week. That the Super Profits Tax was nothing more than a backdoor to nationalisation:

“The RSPT plus corporate income tax collected will rise with booms, when capacity to pay is greater, and fall in slumps, when capacity to pay is reduced. In effect, government, on behalf of the citizens who own the basic resources, becomes a shareholder in the mining industry.”

The mistake the prof (if he is a prof) makes is that there will be boom times to begin with.

Who in their right mind will invest capital when they know the government is snatching a load of the profits, and where there’s no guarantee the government won’t take a bigger cut when it feels like it.

Companies and entrepreneurs will only invest capital if they believe the return will justify the reward.

All businessmen and women embark on a business in the full belief they have the nous to make money from it (unless it’s property investing of course, where the idea is to lose as much money as possible). Now, that isn’t to say that all will make money. Some will fail spectacularly. But the point is, they have the belief from day one that in the long run they can earn a buck from the venture.

And obviously some business ventures have more risk than others.

It’s pretty unarguable that opening a little coffee shop on Fitzroy Street here in St Kilda requires less capital investment, less risk and lower returns than someone exploring for gold or iron ore in the Australian outback.

But according to Mr. Freebairn, the return on a coffee shop in Fitzroy Street and a gold mine in Western Australia would be virtually the same, if as he suggests, miners’ Super Profits were taxed at “close to 100 per cent”.

Anyone with an ounce of grey matter can tell you that if the returns are the same or similar, it’s only natural that an investor will opt for the investment with the lowest risk of failure.

But aside from all this, there’s potentially an even bigger concern on the horizon. And that’s the impact government meddling will have on your retirement savings. But that reader, we’ll have to leave for tomorrow…

Cheers,
Kris.

Tasman Metals Ltd. Mr Mark Saxon, President and CEO, provides an update on developments regarding the Company’s 100% owned Norra Karr Rare Earth Element (REE) project. The drill program currently underway is nearing its conclusion with approximately 80 per cent of the program completed. In addition, a collaborative research project has been initiated, under [...]