Where Is the Global Economy? - The Upcoming Crash and General Mayhem

Since there is continued discussion of a "Summer of Recovery" (Green Shoots Two) and continued optimism in various market based indexes, let's do a quick look at just where the global economy stands right now. First we go to Europe the catalyst for the Great Depression of the 30's -

With the assumptions and conditions for the stress test pulled straight out of CEBS' collective bottom, it is no surprise that a mere 7 banks for a total $246 billion in affected assets end up being defined as undercapitalized. But what happens when instead of using a 6% Tier 1 capital threshold, a Basel III 8% Tier 1 is used? Something log scale worse.

As Austrian Der Standart journalist Lukas Sustala points out, and as demonstrated on his chart below, the failure rate goes up exponentially: instead of 7 banks failing, 39 of Europe's biggest banks would be undercapitalized, and the impaired assets would amount to a whopping E2.6 trillion, requiring at least E30 billion in incremental equity capital, on top of the hundreds of billions already infused by European governments.

Since governments routinely lie, cajole and misrepresent economic data in order to facilitate a given agenda, we shall do the prudent thing and assume the worst case scenario listed. This results in 2,6 trillion euro in assets failing, bankrupting 39 of Europe's largest banks. If we once again use history as a guide, we can rest assured that bailouts will once again be front and center as Europe attempts to rescue these institutions. Following the Real Effect triple government inefficiency rule, the minimum 30 billion bailout becomes a bailout of 100 billion euros. Certainly not chump change and certainly not a recovery.

From here we move to the United States manufacturing -

Case in point: the Dallas Fed Manufacturing index of General Business Activity was just released, and it is a stunner: after coming in at -4 in June, and expectations were for a gradual improvement in July to -2.5, the actual released number was -21!

New home sales -

The Census Bureau reports New Home Sales in June were at a seasonally adjusted annual rate (SAAR) of 330 thousand. This is an increase from the record low of 267 thousand in May (revised from 300 thousand).

The Real Effect
Is there any doubt that we as a country are in the economic doghouse? And yet we continue the same idiotic policies that brought us to this end in the first place. Look for continued talk of corporate welfare handouts bailouts as more institutions crash and burn. But ask yourself, where does the money go?

Goldman Sachs sent $4.3 billion in federal tax money to 32 entities, including many overseas banks, hedge funds and pensions, according to information made public Friday night.

Goldman Sachs (GS) received $5.55 billion from the government in fall of 2008 as payment for then-worthless securities it held in AIG. Goldman had already hedged its risk that the securities would go bad. It had entered into agreements to spread the risk with the 32 entities named in Friday's report.

Overall, Goldman Sachs received a $12.9 billion payout from the government's bailout of AIG, which was at one time the world's largest insurance company.

Goldman Sachs also revealed to the Senate Finance Committee that it would have received $2.3 billion if AIG had gone under. Other large financial institutions, such as Citibank, JPMorgan Chase and Morgan Stanley, sold Goldman Sachs protection in the case of AIG's collapse. Those institutions did not have to pay Goldman Sachs after the government stepped in with tax money.