InvestMacro Forex News

4 major types of Forex brokers are distinguished: market operators, market makers, small brokers and kitchens. Let’s examine them. The criteria of their difference are the total turnover they make, the amount of transaction and the sum of bills.

• Market operators

This is the most trustworthy group which consists of big commercial banks controlled by bank laws and rules. But in order to trade with such banks it is necessary to have bills for trading currencies for large sums of money. For example, the minimal lot is supposed to be about $1 000 000.

• Market makers

Market makers are financial enterprises working with smaller broker companies and providing hypothetical prospects of Forex trading to dealers whose trading capitals is more than $50,000. Their advantage is that they offer lower cost of Forex market trading and as a rule have more trustworthy financial support. However, the minimal size of the bill for $50,000 keeps them off from the main Forex market traders.

• Small brokers

These are little broker’s enterprises working with individuals’ small capital which can vary from hundreds up to several thousand dollars. If the client’s market inquiry or the deal is successful, the client gains gross profit from Forex market trading with the deduction of spreads and commission fee. The broker company also gets its own profit on Forex deal with their market-maker which is the same as net profit that they will pay to the client in addition to their own commission and, maybe, little spread. The one who lost in this deal is the market-maker which has made money, but has lost profit gross from the deal on the whole (the gross profit is received by the broker company).

It’s important to remember that some broker companies present bigger spreads to their clients than they receive from a market-maker themselves, and that’s one more way of getting benefit in addition to their commission. Definitely, they’ll never confess it. The spread can be twice as big. Of course, if the client’s case fails, the broker company suffers big loss from the client’s bill and will have to pay a market-maker the pure loss after drawing on its broker expenses and commission fee. Anyway, the broker company still receives the commission and a little spread.

• Kitchens

The scheme of “kitchen” is a fraudulent plan existing in forex market. The scheme usually works the following way. There appears a company offering people to teach them the intricacies of Forex market trading (note, for free!).

“Trainers” convince that this is the quick path to riches and that making unbelievable profit is very easy. These “trainers” are actually either non-professional Forex market traders or even the people who have never traded in Forex market by themselves. After just a couple of hours the “training” is over. Sometimes the clients are trained by means of computer “simulators” where any trader is “getting profit” approximately 1000 % a week. The major part of these “students” bear losses from the very beginning, and each time they’re confident that was a good lesson which will improve and hone their trading techniques. Most of these clients’ deposits end quickly and they go away from the market, while more obstinate ones “put in” more money to their bills to get one more chance and finally to make profit. They behave like gamblers and reckless players in this case. At last they suffer great losses (lose all they have, in fact). It’s the moment of triumph for these companies since this is exactly what these companies are devised for. They earn on people’s losses of such transactions, and many firms besides profit from spreads or commission fees which they require for them.

The scheme of “kitchen” works if some market trader doesn’t start to win all the time. Their founders know that many clients simply lose their money. And the income of “kitchen” is these clients’ losses. Then “kitchen” is closed with the remainder of clients’ money and appear under another name in a couple of months. Thus, a novice trader wishing to enter the forex market needs to be very careful and even cautious in order not to be hooked by the “kitchen”.

Before starting actually to trade on Forex, it is very important to learn how to do this. Since Forex offers a lot of opportunities to profit, sometimes there is a temptation to get down to it as soon as possible. However, it’s better to slow down and to invest some time and efforts (sometimes it may take quite a substantial period of time) in becoming proficient in the concepts and terms of Forex, getting the hang of Forex trading techniques and accumulating information about this market. One should remember that trading on Forex can be a rather risky business, since your own money is at stake. Sometimes it can be a reasonable decision to hire a professional forex broker who will guide the fresh trader through the details and subtleties of the forex trading process.

London Gold Market Report
from Ben Traynor
BullionVault
Friday 15 June 2012, 08:30 EDT

SPOT MARKET prices for gold bullion traded above $1620 an ounce during Friday morning’s London session – a gain of nearly 4% for the month so far.

Stock markets and major government bonds rallied, with analysts speculating on the prospects for further monetary stimulus, including a possible third round of quantitative easing (QE3) from the Federal Reserve, whose policymakers meet next week.

Silver bullion meantime hovered around $28.70 per ounce – 3.6% up in June so far, but only 1.1% for this week – while broad commodities gained, with oil edging higher despite Opec’s decision Thursday not to lower its production ceiling.

Heading into the weekend, gold bullion looked set for a weekly gain of 2.2% by Friday lunchtime in London.

Some gold traders in Asia however have reported “sluggish” demand for physical bullion this week.

“Our recent call suggesting that gold prices had room to rally,” says a note from French investment bank Natixis, “was predicated more upon the prospect of further US easing…it is likely [though] that some of the current weakness in US economic data is linked in part to the ongoing deterioration in the European outlook.”

“Not many [traders] will dare take on fresh long [positions] ahead of the weekend,” reckons Andrey Kryuchenkov, analyst at VTB Capital in London, citing gold’s “peculiar behavior recently”.

“We should stall near this week’s highs below $1630, with all attention on Greece, and then the G20 summit next week.”

“The next big event in the gold world is likely to be the Greek election,” agrees a note from HSBC.
“Gold may be caught between the election and US monetary expectations.”

Greek voters go to the ballot box this Sunday, with Syriza, which has said it rejects the conditions attached to Greece’s bailout, neck-and-neck with New Democracy according to the most recent opinion polls.

“Whatever the outcome in Europe, it will likely be supportive for gold,” says Neil Gregson, who manages JPMorgan Asset Management’s Natural Resources Fund.

“We’ve still got the possibility of QE3 in the US, which would be good for gold.”

Here in London, Britain’s chancellor George Osborne and Bank of England governor Mervyn King last night announced £100 billion of stimulus measures, including a “funding for lending” program aimed at cutting banks’ borrowing costs in return for promises to lend to the non-financial sector.

“It is very hard to argue that monetary policy, in all its forms, has run out of road,” Osborne told an audience of financial services professionals at the City of London’s Mansion House.

“The government, with the help of the Bank of England, will not stand on the sidelines and do nothing as the storm gathers.”

“Businesses and households are battening down the hatches to prepare for the storms ahead,” added King, speaking later at the same event.

“The result is that lower spending leads to lower incomes and a self-reinforcing weaker picture for growth.”

“It is clear from Governor King’s speech,” says Barclays economist Simon Hayes, “that he has become more gravely concerned about the economic outlook, even over just the past few weeks…[implying] a much increased likelihood that the [Monetary Policy Committee] will sanction more quantitative easing.”

While the “funding for lending” scheme should help lower borrowing costs, “the core problem remains” says Graeme Leach, chief economist of the Institute of Directors.

“Companies alarmed by the Euro crisis will not be eager to borrow, regardless of the cost.”

King also stated in his speech that “the big picture was, and remains the need to generate recovery while balancing our economy, supported by a loose monetary policy and a large depreciation of Sterling…and a gradual but steady reduction in the [government’s] structural budget deficit.”

Since the onset of the crisis in August 2007, the Pound has fallen nearly 25% against the Dollar. Sterling gold prices meantime have risen more than 200%.

Over in Frankfurt, European Central Bank president Mario Draghi said Friday the ECB “will continue to supply liquidity to solvent banks where needed”.

Hours earlier, King said that the Bank of England “will provide banks with whatever liquidity they require given the prospect of turbulence ahead”.

Japan’s prime minister meantime said Friday that recent gains in the Yen do not reflect Japan’s fundamentals, adding that he will relay his worries about currencies and the Eurozone crisis at next week’s G20 meeting.

“[European] growth is slumping,” says Friday’s note from Standard Bank currency analyst Steve Barrow in London.

“Inflation is falling and there’s a possible need to react to the disintegrating European Monetary Union…the Fed, the ECB, the Bank of England, the Bank of Japan and China’s [central bank] should all ease policy – and pretty soon.”

Elsewhere in London, Hong Kong Exchanges and Clearing Ltd has said it will buy the London Metals Exchange for $2.15 billion.

“The deal will make Hong Kong Exchanges one of the major metal exchanges in the world,” says Charles Li, chief executive at Hong Kong Exchanges.

The volume of gold bullion held to back shares in the SPDR Gold Trust (GLD), the world’s largest gold ETF, rose by just over three tonnes Thursday, hitting its highest level this month at 1277.4 tonnes, though it remains around 3% off the all-time record set two years ago.

The tonnage of silver bullion in the iShares Silver Trust (SLV), the world’s biggest Silver ETF, remained static Thursday at just over 9696 tonnes.

British pawnbroker Albermarle & Bond meantime have citing falling gold prices as contributing to a profits warning issued today, with fewer people opting to pawn or sell scrap gold bullion such a jewelry.

Ben Traynor
BullionVault

Gold value calculator   |   Buy gold online at live prices

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

By Central Bank News
    United States, Europe and Japan are on track to have all standardized over-the-counter (OTC) derivative contracts traded on exchanges and cleared through central counter parties by end-2012, meeting a deadline set by Group of 20 leaders, the Financial Stability Board said.
    The global financial crises revealed that OTC derivatives had contributed to a build-up of systemic risk, triggering fears of contagion due to the close ties between market participants and a lack of transparency of their relationships.


    G20 leaders have repeatedly committed themselves to improve the transparency and regulatory oversight of OTC derivatives and asked the FSB – which coordinates international financial regulation – to keep track of the reform efforts to make sure there are no loopholes and overlapping regulations.
    In its third progress report, the FSB said encouraging progress had been made in setting international standards and implementing the reforms,, with the largest OTC derivative markets expected to have frameworks in place by end-2012 and that practical implementation was well underway.
    Other jurisdictions, however, are less advanced in their reform efforts, partially because they are waiting for  elements of the regulatory frameworks in the EU, Japan and the US to be finalised before putting their own legislation in place, so their rules are consistent with the top markets, the FSB said.


    “Full and consistent implementation by all FSB members is important to reduce systemic risk and the risk of regulatory arbitrage that could arise if there are significant gaps in implementation,” FSB said, calling on all jurisdictions, including Hong Kong, Korea, South Africa, Australia, Mexico, Singapore and Switzerland to put in place needed legislation and regulation.
    “The OTC derivatives markets are already global markets, in which market participants can easily redirect their activities to other jurisdictions to take advantage of regulatory arbitrage if jurisdictions have not fully and consistently implemented the measures,” it added.
    Click to read the full report.


www.CentralBankNews.info

By Central Bank News
    The Bank of Japan said there is a high degree of uncertainty surrounding the global economy, both in Europe, the United States and in emerging markets, but it would do its utmost to ensure stability in Japan’s financial system.
     Speaking after the BoJ held interest rates unchanged at around 0 to 0.1 percent, the monetary board said in a statement:
    “There remains a high degree of uncertainty about the global economy, including the prospects for the European debt problem, the momentum toward recovery for the U.S. economy, and the likelihood of emerging and commodity-exporting economies simultaneously achieving price stability and economic growth.”
      “The Bank will also do its utmost to ensure the stability of Japan’s financial system, while giving particular attention to developments in global financial markets,” the BoJ said.


www.CentralBankNews.info

By Central Bank News
    The European Central Bank will continue to provide funds to healthy banks during the current turmoil in the euro area, ECB President Mario Draghi said.
    “As you are all aware, the ECB has the crucial role of providing liquidity to sound bank counterparties in return for adequate collateral. This is what we have done throughout the crisis, faithful to our mandate of maintaining price stability over the medium term – and this is what we will continue to do. The Eurosystem will continue to supply liquidity to solvent banks where needed,” Draghi said in a speech in Frankfurt.
    Draghi’s remarks come ahead of this weekend’s election in Greece that could decide whether the country remains in the 17-nation euro area, a decision that has financial markets on tenterhooks.
    Click here for Draghi’s speech.


www.CentralBankNews.info

Video courtesy of ForexCT – A leading Australian forex broker, liscensed by the Australian Securities & Investments Commission, offers the MetaTrader4 and PROfit Platform to retail traders. Other services include Segregated Accounts, Trading workshops, Tutorials, and Commodities trading.

Source: ForexYard

The euro failed to make significant movements in trading yesterday, despite rising Spanish and Italian bond yields which many analysts had predicted would bring the common-currency lower vs. its main rivals. As we close out the week, euro traders will want to pay attention to announcements out of Greece which may give some clues as to what political parties will emerge victorious in elections on Sunday. Any signs that the anti-austerity parties could win may result in fears that Greece will leave the euro-zone, which may result in the common-currency tumbling.

Economic News

USD – Dollar Continues to Fall against JPY

Negative US economic indicators, including a higher than expected weekly Unemployment Claims figure, resulted in the USD tumbling against the yen throughout the day yesterday. The USD/JPY fell as low as 79.15 during the mid-day session, down over 30 pips for the day. Eventually the pair was able to stage a slight recovery to stabilize at the 79.25 level. The dollar also saw some bearish movement against the Swiss franc. The USD/CHF fell close to 50 pips during European trading, eventually reaching as low as 0.9524.

Turning to today, dollar traders will want to pay attention to the Prelim UoM Consumer Sentiment figure, scheduled to be released at 13:55 GMT. Should the figure come in above the forecasted 77.5, the dollar could see a slight recovery against the yen before markets close for the week. That being said, if today’s indicator comes in below the expected level, the dollar may continue to slide against currencies like the yen and CHF.

EUR – Italian Bond Auction may Signal Further Euro-Zone Troubles

Following yesterday’s Italian bond auction, investors remained fearful that the euro-zone debt crisis could be spreading beyond Greece and Spain. Rising Italian bond yields were taken as a sign that the country may have to request a bailout in the near future to avoid defaulting on its debt. While analysts had predicted that bad news out of Italy would have weighed down on the euro, the common-currency managed to trade steadily over the course of the day. Investors remained reluctant to go short on the euro before the results of Greek elections on Sunday are known.

Turning to today, traders will want to continue monitoring new developments out of the euro-zone. In addition to any fresh polls detailing who could win in the Greek elections on Sunday, announcements regarding the current economic situation in Italy have the potential to generate euro volatility. Analysts are warning that even if Greece elects a pro-austerity government, the possibility of the euro-zone debt crisis spreading to Italy could keep the euro bearish for the foreseeable future.

Gold – Global Economic Uncertainty Helps Boost Gold

The price of gold moved up as high as $1627.75 during trading yesterday, as financial troubles in the euro-zone combined with a stalling economic recovery in the US helped boost the precious metal. Investors have been turning to gold as a safe-haven asset recently amid fears of a slow-down in the global economy.

Today, traders will want to pay attention to any news out of the euro-zone and US, as it may help determine what direction gold takes. Any negative data, particularly with regards to the current economic situation in Italy, could cause gold to extend its current bullish trend.

Crude Oil – Crude Oil Sees Little Movement before Greek Elections

The price of crude oil remained steady throughout the day yesterday, as investors anxiously awaited the results of Greek elections on Sunday. In addition, with crude stockpiles in the US at an 18-month high, investors saw no reason to open long oil positions. As a result, crude spent most of the day trading around the $82.60 level.

As we close out the week, crude oil traders will want to pay attention to the US Prelim UoM Consumer Sentiment figure at 13:55 GMT. Should the figure come in below expectations, the price of crude may drop, as it could be taken as a sign that demand in the US will continue to go down. On the other hand, any better than expected news out of the US may help turn the price of oil bullish.

Technical News

EUR/USD

While the Bollinger Bands on the daily chart are narrowing, indicating that a price shift could occur in the near future, most other technical indicators show this pair trading in neutral territory. Taking a wait and see approach may be the best option for traders.

GBP/USD

A bullish cross on the weekly chart’s Slow Stochastic indicates that this pair could see an upward correction in the coming days. In addition, the Williams Percent Range on the same chart is currently close to dropping into oversold territory. Traders will want to pay attention to this indicator. If it falls below -80, it may be a good time to open long positions.

USD/JPY

The daily chart’s Slow Stochastic has formed a bearish cross, indicating that downward movement could occur in the near future. This theory is supported by the Williams Percent Range on the same chart, which has crossed into overbought territory. Opening short positions may be the wise choice for this pair.

USD/CHF

While a bearish cross has formed on the weekly chart’s Slow Stochastic, most other technical indicators show this pair range-trading, meaning that no defined trend can be predicted at this time. Taking a wait and see approach may be the best choice for this pair, as a clearer picture could present itself in the near future.

The Wild Card

GBP/NZD

The Relative Strength Index on the daily chart is approaching the oversold zone, indicating that an upward correction could occur in the near future. Furthermore, a bullish cross has formed on the same chart’s Slow Stochastic. This may be a good time for forex traders to open bullish positions ahead of a possible upward correction.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

Source: ForexYard

The euro saw moderate gains in overnight trading against its main currency rivals, but investors remained cautious about boosting the common-currency too much ahead of elections in Greece on Sunday. Disappointing US news has led to speculation that the Fed may initiate a new round of economic stimulus. As a result, the price of crude oil has gone up over $2 since yesterday afternoon and is currently trading around the $84.55 level. Following the Japanese Monetary Policy Statement last night, the USD/JPY fell over 60 pips and is currently trading around 78.90.

Main News for Today

US Prelim UoM Consumer Sentiment-13:55 GMT

• The indicator is predicted to come in at 77.5, which would be below last month’s figure
• Should the figure come in below expectations, the dollar could extend its bearish momentum vs. the yen

Greek Elections-Sunday

• Major volatility is expected to occur when markets open on Sunday night
• If anti-austerity political parties win in the election, the euro could see heavy downward movement as a result

Read more forex news on our forex blog

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

By MoneyMorning.com.au

David Wolman has written a book called The End of Money.

In the book, Wolman asks:

‘Yet how different is Kim Jong Il’s counterfeiting, really, from the decision to spend $700 billion in borrowed money to kick-start economic growth, from creating more than $1 trillion out of thin air to help clean up the housing bubble crisis?’

It’s a fair question, and we’ve asked similar questions during the past four years.

But right now, those who control the printing presses don’t see their actions as counterfeiting. They call it stimulus, support and monetary policy.

They even create fancy names to disguise what they’re really doing. They call it ‘quantitative easing’.

But they can call it what they like. It all means the same thing, devaluation and destruction of wealth…

We haven’t read Wolman’s book in full, so we can’t recommend it. But from the excerpts we’ve read it appears to be a combination of an historical look at the history of money and some thoughts on the next logical step for money.

In an interview with the BBC, Wolman says:

‘We don’t transact using anything of real value – food, electricity, blankets. I give you this worthless slip of paper and you give me dinner or you educate my children or you provide me with healthcare. Or I give you a digital version of this useless thing and it somehow works. The money supply is already driven by the return key so the cat is out of the bag on that one.’

The Cat is Out of the Bag for Central Banks

Central banks now openly practice what they had previously done in secret. They have – if you like – come out of the closet: ‘Yes, we are money-printers and proud of it!’

Let’s call it ‘Bankers Pride’.

They even have their own bankers-only events. Any non-bankers trying to get in are seen as a potential trouble-maker. Guards will turn them away at the door.

For many people it’s easy to spot a central banker just by looking at him or her. It’s like having a built-in ‘Bankdar’ (that’s a contraction of banker and radar, in case you’re wondering).

But comparing central banking to homosexuality isn’t fair to gay people. Any private behaviour between consenting adults is clearly different to the fraud forced on the public by central bankers.

Central bankers have become a private cartel of unelected counterfeiters. They force their decisions on millions of unsuspecting civilians without their consent.

This used to be a well-disguised secret. The kind of secret you keep when you’re afraid that the truth will ruin you.

But now the bankers are out of the closet and proudly proclaiming their fraud in public. Emboldened by the public’s indifference, they’re prepared to ramp the action up further.

The Difference Between Legal and Illegal Counterfeiters

Last night, Bank of England governor Mervyn King gave his annual speech to the Lord Mayor’s Banquet for Bankers and Merchants of the City of London.

In the speech he said:

‘The view that further monetary stimulus is, in present conditions, simply ‘pushing on a string’ is, in my view, too pessimistic. The creation of money by the Bank of England has helped offset what would otherwise have been an extremely damaging contraction of the money supply…

‘There is a widespread misunderstanding that the impact of an expansion of the broad money supply is limited to the first round effects of gilt purchases. But the private sector which sells gilts to us then uses the money thereby created to purchase other assets, including private sector paper.’

You can take two things from this small extract. First, get ready for the Bank of England (BoE) to print more money. As a percentage of GDP, the BoE has now printed more money than the US Federal Reserve, as the following chart shows:

Second, it shows Mr. King doesn’t understand the impact of money-printing on bond traders. Sure, many bond traders have used the proceeds from selling bonds to the BoE to buy private sector debt.

But private sector debt is inherently risky. A private company could go bust. A sovereign country that prints its own money typically won’t go bust.

So rather than buying private debt, bond traders have simply taken their money from the BoE and then bought more UK government bonds…banking on the odds of the BoE printing more money to buy more bonds. Hence UK bond yields near record lows.

But Mr. King made another interesting comment. Opening his speech, he said:

‘Five years ago, at this same dinner and just before the crisis began, I quoted a banker who had said to me, ‘I cannot recall a time when credit was more easily available.’ Today, the sentiment is exactly the opposite.’

To satisfy our curiosity, we checked out Mr. King’s speech from five years ago. And indeed he did quote the banker marvelling at the easiness of credit.

But, that wasn’t all he said in the speech. He said something much more interesting…

Can You Trust Central Bank Money?

And it would be worth Mr. King’s while to reflect on it before he unleashes the printing presses once more.

Here’s what he said on Wednesday, 20 June 2007:

‘Behind the design of our monetary institutions is a simple principle. I described it last October in a lecture at Kirkcaldy. It is that the value of paper money depends on trust. Trust that it will hold its value. Trust that others will accept it as a means of payment.

‘In particular, our banknotes must be trusted by the public – cash still accounts for over 60% of the number of transactions…

‘Imagine my concern, therefore, when, after 3½ years as Governor, I read the following report from the Wolverhampton Crown Court. ‘A judge demanded to know why police failed for three and a half years to arrest a wanted Birmingham man – when all the time he was living at home… Adam Smith, suspected of passing forged £20 notes, had a fixed address in Edgbaston and was picking up benefits.’

Mr. King’s 2007 speech was all about the sanctity of trusting paper money. How the bank had developed new security features for £20 pound notes that would deter counterfeiters and ensure complete faith and trust in paper money.

In last night’s speech – to use Mr. King’s own phrase – ‘the sentiment is exactly the opposite.’

The Bank of England, like all other central bankers no longer feels the need to use words like ‘trust’ when it comes to the money supply.

The cat is out of the bag. The bankers are loud and proud that when the economy starts to falter they can simply print more money.

And if you needed more evidence, what can explain the rally in US stocks overnight? This report from Bloomberg News should explain things:

‘Speculation grew that the Federal Reserve will discuss stimulus efforts at its meeting next week after reports showed jobless claims unexpectedly climbed by 6,000 to 386,000 last week and the cost of living fell by the most in more than three years.’

In other words, the market is priming itself for more money-printing.

All up, David Wolman is right, we are approaching the end of money. The end of paper money, that is. But that’s not to say replacing worthless paper money with worthless electronic money will be any better. Because it won’t be.

The only genuine solution is to end the paper money and central banking experiment and return to real money – gold.

Cheer,
Kris.

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Central Bankers Come Out of the Closet

By MoneyMorning.com.au

First off, last weekend’s 100 billion euro Spanish bailout has staved off the inevitable for now.

What most people don’t realize, though, is that it actually spells disaster for the euro – there simply isn’t enough liquidity in the system and never has been. 100 billion euros is chump change.

A trillion euros is more like it. Probably more, to be quite candid.

Let me lay out the math that European politicians, whose skill set apparently consists of saying “present,” rather than developing real solutions, can’t be bothered to do.

According to the latest data, the European Stability Mechanism (ESM) and the European Financial Stability Fund (EFSF) have a combined lending capacity of 700 billion euros. If Spain requests the full 100 billion euros it approved last Saturday, this leaves 386.7 billion euros in excess capacity. The EFSF has already committed 213.3 billion euros. (700b euros minus 213.3b euros minus 100b euros equals 386.7 billion euros).

If you’re doing this math in your head, you’ll quickly realize that’s 233 billion euros more than the total bailout mechanisms now in existence.

Oops.

How Would a Spanish Bailout Be Any Different?

Call me crazy, but under the circumstances I don’t understand how European leaders can pursue the same course of sorry-assed lending in the Spanish bailout that they did in Greece and expect different results. It’s simply irrational.

Don’t get me wrong, I understand why they are trying to pull the wool over everyone’s eyes. But in reality, who’s kidding who?!

The markets know the politicos can do nothing to stem the tide of money flowing out of Spain’s economy any more than they could stop money from leaving Ireland, Italy and Greece.

The only practical consideration is preventing an all-out bank run through the front door – never mind that it’s already well underway out the back door.

Frankly, I think they’ve failed on both counts. Deposits in German banks are up 4.4% year over year to 2.17 trillion euros as of April 30th, while deposits in Greece, Ireland and Spain fell 6.5% over the same time frame.

Swiss bank sight deposits have reached five-month highs of 252 billion francs as of June 1, according to the Swiss National Bank. CNBC is reporting that up to 800 million euros ($1 billion) a day is being pulled out of Greek banks alone. Data from Spanish banks related to withdrawals is being closely guarded, but I can’t imagine it’s that much different.

No wonder the world’s traders recognize the Spailout for what it is – a colossal mistake.

Why the Bailout in Spain is Insane

I’d tell you what I think, but the legendary Jim Rogers put it so succinctly I don’t believe I can do any better. Speaking in an interview on CNBC recently, Rogers noted that the Spanish bailout is “the most insane thing I’ve ever heard.”

I agree.

Financial systems function because of an incentive to succeed that by its very definition includes the possibility of failure. You can’t have one without the other.

Rogers noted this as well, saying that this is “the way the system is supposed to work – when you fail you fail – competent people come in and take over the assets.”

As he put it to me a few years ago during a conversation we had in Singapore just prior to our bailout here (and I am paraphrasing), “history is littered with the bones of failed financial institutions. Why should this be any different?”

The problem in Spain’s economy is the same as it was in Greece. They’re effectively handing over the reins and 100 billion euros to the same incompetent, incapable people who helped caused this mess in the first place.

The Spanish Bailout – A Euro-Comedy of Errors

Want proof? Look no further than how the 100 billion euros in “aid” is supposed to be disbursed.

The bailout cash is supposed to be put into the Fund for Orderly Bank Restructuring (who comes up with these names??!!) which has been created specifically to fund insolvent banks. Apparently the word insolvent doesn’t bother them one bit.

But that’s not the half of it.

This aid – and it’s a stretch to call it that without turning into a drooling idiot – potentially adds another 10% to Spain’s debt and takes it up to 80% at the end of this year. Factor in Spain’s national and European debt and total debt to GDP exceeds 140%, according to Lance Roberts of Streettalk Live.

In other words, the Spailout just threw that nation into the ditch they’ve dug for themselves.

I can only shake my head and recall the Australian comedic duo of Clark and Dawes who impeccably summed this up, asking, “How can broke economies lend money to other broke economies who haven’t got any money because they can’t pay back the money that the broke economy loaned to the other broke economy and shouldn’t have lent it to them in the first place because the broke economy can’t pay it back?”

I believe that the EU ministers have acted, once again, in knee-jerk fashion and without a complete understanding of the facts. Or worse – in deliberate omission of the facts.

Nobody knows how much money will ultimately be required. We won’t even have an inkling until June 21st. That’s when Roland Berger and Oliver Wyman are scheduled to turn in the results of their Spanish bank stress-test audits.

There is hope for a more complete picture, including audits of 14 of the largest Spanish financial institutions, but that data isn’t going to be ready until the end of July…at the earliest.

In closing, I realize that what I’ve shared with you today may be scary…downright terrifying even. Do yourself a favor and take it with a grain of salt.

Despite that European politicians can’t seem to understand the reality closing in on them like a gigantic anaconda, there are still companies busy building the future.

And those are the ones you want to buy no matter how bad it “gets.”

Keith Fitz-Gerald
Contributing Editor, Money Morning

Publisher’s Note: This is an edited version of an article that originally appeared in Money Morning (USA)

From the Archives…

Why You Should Wish For a Falling Market
2012-06-08 – Greg Canavan

Why the U.S. Dollar is Really Rising
2012-06-07 – Keith Fitz-Gerald

How This Bear Market Could Last Another 18 Years… Just Like Japan’s
2012-06-06 – Kris Sayce

The Banking Plan That Could Be A Game-Changer for Gold
2012-06-05 – Dr. Alex Cowie

Best Investment Strategies For the Times Ahead
2012-06-04 – Nick Hubble

The Problem With the Spanish Bailout