"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Thursday, September 30, 2010

"Major IMF Reforms" Forthcoming

According to South Korea's The Chosen Ilbo:

'Major IMF Reforms' to Be Announced at G20 Summit

The International Monetary Fund expects major changes within the fund to be announced at the G20 Summit in Seoul next month. "I won't say that we're close to an agreement, but we're not very far," IMF Managing Director Dominique Strauss-Kahn said, and a deal could be reached by November.

The comments came amid mounting tensions between the U.S. and Europe countries over the need for major changes to the IMF.

In a press conference Tuesday at IMF headquarters in Washington D.C., Strauss-Kahn told reporters that some European countries should relinquish their board seats at the fund to make way for emerging economies. "Giving seats to countries such as Turkey or South Korea -- whose G20 economies surpass those of the Netherlands or Belgium, both of which have IMF board members -- would likely have to come at some European nations' expense," he added.

Conflict is growing between the U.S. and Europe over changes at the fund ahead of the IMF's annual general meeting in Washington on Oct. 8-10.

Meanwhile, Strauss-Kahn said there is little chance of a "currency war" with individual countries devaluing their currencies against the U.S. dollar triggered by Japanese intervention in the foreign exchange market earlier this month for the first time in six years. "Currency intervention is unlikely to be successful. Too small an intervention doesn't have any effect... and too large a move can trigger retaliation by trading partners. It's clearly not a global solution," he said.
This could be a significant development but keep in mind the person saying this, Dominique Strauss-Khan, the current IMF Managing Director, is also not acknowledging the existing currency war.  In my opinion, this currency war is very real, albeit still in the beginning stages.  If one looks at the current trade and debt imbalances, currency devaluation is the only option.  And this time, we are not looking at a 1980s Latin American crisis or a 1990s Asian crisis.  This crisis invloves the largest countries and regions - the US, the EU, and by association, China and Japan. 

It's one thing when a small nation or a small group of nations experience a currency crisis while the world economy is booming and money is organically flowing.  It's another when nations with major currencies experience severe balance sheet recessions while the global economy falters, and money needs to be "prodded" and printed by central banks to keep the system running because the major commercial banks are effectively undercapitalized.

This November's G20 meeting in South Korea is an extremely important affair in the current global financial crisis.  It will tell us:

1) How relevant and powerful the US remains - watch the US in terms of the Chinese yuan, and on retaining its veto.

2) This will also be a big test for the EU.  Will it give in to emerging countries by losing seats?  At what cost?  Will it be able to make the US also give something up in return?  Is the EU geopolitically relevant?  See this post: Pre - G20 Meeting between France, Germany, and Russia - What's Cooking? ...

3) How will China act?  It looks to me that China has been acting agressive lately (Fishing Captain incident, rare earths issue, protectionist measures against the US) as a pre-emptive method of setting the tone for the upcoming IMF meeting.  China is flexing its muscles to make sure everyone knows at the G20 that it is no longer an emerging country, but an emerging global power.

The world changed with the fall of the Berlin Wall, the USSR, and Tianamen Square.  But guess what?  It is changing again.  The hubris exhibited by the US post USSR,  "The end of history," days are over.  Something new is being born.  Watch gold.... watch the dollar.  and watch how this multilateral world reacts before and during the IMF meeting in South Korea this November.

Very interesting times indeed.

Wednesday, September 29, 2010

The PIIGS Have More than Debt to Fear.... Peak Oil and the PIIGS

The PIIGS (the debt troubled nations of the EU: Portugal, Ireland, Italy, Greece, and Spain) seem to have an additional threat to their economies to worry about...  Peak Oil.  Now even for those that dispute peak oil, one can't ignore the fact that a nation's economy is heavily reliant on energy.  (Please see this prior post) And if the cost of that energy, predominately oil, increases, there are negative consequences to the economy.

From the European Tribune via The Oil Drum:

PIIGS are the most affected
 
One of the groups in the OECD that will suffer most with the contraction of available oil is the one formed by those more dependent of this energy in their mix, underlines Luís de Sousa. "A detail must be noted - those countries in greater difficulties will precisely be those called the PIIGS, that have an oil dependence over 45%, highlighting Greece with 58%, Portugal and Ireland with 55%, Spain with 48% and Italy with 46%, contrasting with the European Union average of 37%. Adding the four countries with oil dependence above the european average, but below 45%, we get a complete map of the zone where the 'undulating plateau' will have the greater impact, adding to the PIIGS are Austria (44%), Holland (42%), Belgium (41%) and Denmark (39%)."
 
The weakest point of the five more vulnerable countries of the euro-zone (Portugal, Ireland, Italy, Greece and Spain) is the transport sector, particularly when road-based, "deriving from geographic location, inappropriate urban and national planning or both" says Luís de Sousa. The promotion of  maritime and railway modes is underlined by this specialist, not sufficing the modernization of the  electrical infrastructure or the promotion of other sources of energy.
It's also interesting to note where the EU gets most of its oil.  From the European Commission's Energy website:



And for the American readers out there, just to give you a frame of reference of what gasoline costs here in Greece, I did the math.  Costs vary through out the country, but where I live, it is about 1.60 Euros a liter.  That's about $2.18 a liter, and there are 3.8 liters to a gallon, so a gallon of gasoline here costs $8.28!!!!   Surprisingly, I see a lot of SUVs and pickup trucks here on the island.  Granted, they don't drive as far to commute, and there is a large amount of motorcycles here as well.

Nonetheless, the cost of oil is one thing the EU can't ignore when it comes to the PIIGS.  If they want the PIIGS to have a somewhat realistic chance of adhering to Maastricht guidelines (yeah, right) without destroying their economies...  oil needs to stay cheap.  The question is, will it?

Who "Wins" a Currency War?



I want to elaborate on my post below: Currency War On! The first finance official to state the obvious: "a trade war and an exchange rate war".

Inevitably, the question arises: Who wins a currency and trade war and how?  That question in my opinion, is the wrong question.  A currency war is merely a symptom of a breakdown in global trade, in other words, the allocation of the world's resources and the imbalances of surpluses and deficts.  A currency war is a natural evolution of fiat money.  Money needs to be devalued in order to manage the growing debt in an economy. 

But there comes a point when the debt has so outgrown an economy's ability to pay, that the devaluation needs to accelerate, or else the system collapses.  But acceleration can easily become a runaway train when everyone else is doing it.  Some may need to devalue to pay off debts.  Others need to devalue to maintain their export based economy.  Others need to devalue for both.

As this develops, no one wins.  In a currency "race to the bottom" their is no finish line.  Only systemic breakdown.  Watch the price of gold, that is what it is telling us.

There is no historical lesson we can draw from concerning this currency war. Never in the history of global trade has the entire world gone on free floating irredeemable fiat money. Never.

Central Banking, as we know it today, is barely 40 years old. Historically speaking, it is a mere experiment - a blip in mankind's thousands of years of global trade.  And we also can't ignore the fact that the world, through technological advances such as the internet and computers, has attained an extremely high level of complexity. Complexity comes at the expense of resiliency and robustness, IMO.

There is no historical precedent for what we are experiencing, in my opinion.

There will be no winners thru devaluation.  Only a systemic breakdown ends the race.  But eventually, there will be a "winner" so to speak.
The winner will ultimately emerge thru war.

That's the closest historical precedent I can come up with.




Sovereigns store and/or accumulate weapons and gold for a reason....  for future deployment.



Tuesday, September 28, 2010

Currency War On! The first finance official to state the obvious: "a trade war and an exchange rate war"

From the Wall Street Journal:
Brazil Warns of Global Trade War

The world is involved in "a trade war and an exchange rate war" as countries seek trade advantages by manipulating their currencies, and Brazil must take steps to defend itself, including the possibility of new taxes, Brazil Finance Minister Guido Mantega said in Sao Paulo on Monday.

Governments in several countries, including the U.S. and Japan, are allowing their currencies to devalue to gain market share in economies that are faring well, such as Brazil, the minister said, adding that Brazil needs to tighten up its antidumping laws to ward off this unfair competition.

So what does a finance minister do when such a circumstance arises? 
In addition, Brazil's authorities will buy more dollars through the spot market to help stem the currency's gains, Mr. Mantega said.

The government has already stepped up its dollar purchases, and its international reserves have grown to about $270 billion, not counting reserves also held by the treasury, which has also been buying dollars, he said.
Nothing really surprising here.  The imbalances accrued through global trade, and the government deficit spending spree of the past three decades pretty much created this obvious outcome.  In the end, there will be a rebalancing of global trade.  The question is, how will it occur?  I fear chaos and conflict is inevitable.

 

China - US Currency conflict escalates... former adviser to the PBoC says US Dollar "One Step Closer" to a Crisis

From Bloomberg:
Dollar Is `One Step Nearer' to Crisis on Burgeoning Debt Burden, Yu Says

The U.S. dollar is “one step nearer” to a crisis as debt levels in the world’s largest economy increase, said Yu Yongding, a former adviser to China’s central bank.

Any appreciation of the dollar is “really temporary” and a devaluation of the currency is inevitable as U.S. debt rises, Yu said in a speech in Singapore today.

“Such a huge amount of debt is terrible,” Yu said. “The situation will be worsening day by day. I think we are one step nearer to a U.S.-dollar crisis.”

Yu also said China is worried about the safety of its foreign-exchange reserves including those invested in U.S. Treasuries as the U.S. currency weakens, reiterating his earlier views on the dollar assets. The U.S. will record a $1.3 trillion budget deficit for the fiscal year ending Sept. 30, the Congressional Budget Office said Aug. 19.
Article continues:
Reduced U.S. Holdings
China, the biggest foreign investor in U.S. government bonds, cut its holdings by about 10 percent to $846.7 billion in the 12 months ended July, according to the Treasury Department
.
U.S. Treasuries fail to provide safety or liquidity in managing China’s $2.45 trillion foreign-exchange reserves, Yu said in an e-mail in August. To help cool demand for the securities, China needs to curb the growth of its foreign reserves by intervening less in the currency market, he said.

China should reduce its holdings of U.S.-dollar assets to diversify risks of “sharp depreciation,” Yu said in July. The nation should convert some holdings in U.S. dollars into assets denominated in other currencies, commodities and direct investments overseas, he wrote in a commentary in the China Securities Journal.
My view:

China's purchases of US Treasuries do not fund the US.   Sounds crazy?  It's true.  China DOES NOT FUND THE US.  The US, unlike individual countries in the European Union, controls the issuance of its own currency, and issues debt in its own currency.  What that means is that the US can print as much money as it wants to pay off that "debt."

But that's where the problem lies.  Modern fiat money relies on the myth that nations that issue their debt in their own free floating currency they control, still have to abide by "budgetary constraints."  They don't.  But, if they do flaunt budgetary constraints, and print at will, and allow debt to gdp figures to go through the roof, then they face other issues.

What do they face?  They face the wrath of currency traders, of trading partners, and the wrath of the sovereign bond market participants that actually erroneously believe that the US has a funding problem.  Kind of ironic, is it not?  The myth of fiat money becomes its downfall.

In the end, the US national government will never face a budgetary crisis, unless Congress decides to avoid paying its bills.  Rather, the US faces a currency credibility issue.  Yes, the US can do whatever it wants with its currency.  But that doesn't mean the rest of the world will abide by that.  No one likes a free rider.  And when a fiat money system no longer "looks sustainable" that's when issues arise.  That is, the myth of fiat still needs to resemble a real, sustainable system.  That's why we use terms such as "credit" and "full faith", etc...

In another post, I will describe how the US ended up like this in terms of, trade and budget deficits.  The bottom line is, the US hosts the world reserve currency, the US Dollar.  Hence, it must constantly run deficits in order to facilitate the growing global economy for the rest of the world.  It's called the Triffin Dilemma.  As I said, I will discuss in another post... to be continued...

Monday, September 27, 2010

Pre - G20 Meeting between France, Germany, and Russia - What's Cooking?

From the English version of China's Xinhua:
Sarkozy, Medvedev and Merkel to meet in French port Deauville

PARIS, Sept. 27 (Xinhua) -- French President Nicolas Sarkozy, Russian President Dmitri Medvedev and German Chancellor Angela Merkel will meet during Oct. 18-19 in Deauville, a port in northwest France, Sarkozy's office said Monday.

"The meeting will be an occasion for the three countries to have the exchanges deepened in our partnerships in all areas and talk about our common security issues," it said in a statement.

The meeting, which is to take place several weeks before the G20 summit in Seoul, South Korea, will partiularly address the issues concerning the G20 and the G8 in 2011. Sarkozy is expected to share his perspectives with the other two leaders over the two international platforms, the statement added.

The Seoul summit, scheduled for Dec. 11-12, is expected to focus on reforms of supervision of international financial systems, among others.

France is to take over the G20 presidency from December following the summit, and to assume G8 presidency early next year.
Curious development here, especially for those old enough to recall the days of the Cold War between the US and the USSR.  France and Germany were merely satellites of the US.  They were powerful countries, yes, but they were always reliant on the "nod" of the big brother across the Atlantic - the USA.

It's also interesting to note that Jim Rickards recently described a potential situation where the Euro region was split in two - the Northern tier, and the currently troubled Periphery.  He also said that there is the possibility that Germany (and possible other Northern European countries) would join with resource rich Russia in forming an economic block.  Here is the blog entry on KWN:   What G20 will not discuss this weekend (but probably should) [note, this referred to the last G20 meeting that took place last June in Toronto.

Jim Willie on Financial Sense New Hour also discussed a similar possibility:

SDR Strawman & Gold-Backed Euro
The two new Euro initiatives serve as systemic threats, delivered from outside the power center, as attacks to the crippled fiat flanks. The mere split of the Euro into two tiers, a seemingly sensible maneuver, avoids difficult decisions like bank-held bond writedowns, bank shutdowns, the whiplash effect of a fast rising new currency, and much more. Germany and France are examining a Two-Tier Euro currency structure. The intermediate stage of the new Northern Euro currency is in progress. The motive is to create a firewall of protection from the Southern imploding PIGS nations. German and French finance ministers are attempting to design a Two-Tier Euro currency system to separate stronger Northern European countries, protecting them from being dragged down by the weaker insolvent Southern states. A collectivist Southern solution protects banks exposed to sovereign debt, rather than a single nation being expelled. However, they will tend to sink together rather than alone. The UK Daily Telegraph is the intrepid source for the dramatic option. See the article (CLICK HERE).
Meanwhile, Tim Geithner is lonely in battling the Yuan at the upcoming G20 meeting in South Korea this November.  See:  U.S. set to be a posse of one on China yuan at G20.

This November's G20 meeting in South Korea promises to be very interesting...

Fears of Irish Default Intensify

From the Financial Times:

Markets fear Ireland is another Greece

So soon after Greece’s economic crisis erupted earlier this year, one cannot but help getting a déjà vu. Markets have begun to ask questions about Ireland’s solvency, but European policymakers appear to be in the same sort of denial as were their Greek counterparts. This denial may be the prelude to the same sort of grave policy mistakes that characterised last May’s Greek bail-out package from the International Monetary Fund and European Union...

The most important point made by the article (emphasis mine):

But the elephant in the room being glossed over by European policymakers is how extraordinarily difficult it is to make large budget adjustments within the straitjacket of eurozone membership, since that straitjacket precludes the possibility of currency devaluation to boost exports as an offset to fiscal tightening.

article ends with:

If Greece’s bail-out earlier this year offers any guide, one must expect that European policymakers will try to paper over Ireland’s solvency problems with a heavy dose of IMF-EU financing. This might buy useful breathing room for a European banking system overexposed to its periphery. But it would hardly be in Ireland’s best interest since, in the absence of debt restructuring and of a euro exit, IMF-imposed austerity runs the real risk of plunging Ireland deeper into depression and deflation.

If it is indeed inevitable that, in the end, Ireland will be forced to renege on its government’s debt obligations and to exit the euro, from an Irish perspective it is better that it be done quickly without pointlessly prolonging pain and saddling the country with a mountain of official debt. For at least that route might offer Ireland some prospect of recovering from its present economic depression.
My view:

As I have written before, Austerity will not be the path to national solvency.  If anything, I believe that austerity measures in the medium term, will worsen the economic situation of the EU Periphery countries.  As I have said before, Greece is going through a severe debt deflation period.  Businesses are closing, people are spending less and being taxed more (rightfully so, but the timing isn't convenient), and Greece is not alone.  The issue is not one of efficient government - that is, Ireland's government is more efficient than's Greece's so Ireland should be fine.  The issue is debt levels - how much, and who holds the debt.

Ireland has the highest external debt to gdp of any other nation - bar none.  And here's the issue with that:  external debt is like a vacuum - it sucks up money out of the national economy because payment is made to creditors abroad.  The stats below are from year end 2009:




(click on image to enlarge  - source of image and good article)

A further issue the EU is facing is the currency race to the bottom.  Looks like Bernanke was able to spook the markets better than the EU could regarding future monetary printing.  The US Dollar has fallen a lot in value against the Euro and gold recently.  In terms of trade, the US benefits.  The EU Periphery, could use some Euro debasement right now.  (And I'm sure Germany would be happy too.)

But in the end, it won't matter.  Bad enough the debts are too cumbersome, the EU is making it more difficult for the periphery to manage those debts.  As Michael Hudson has said:  "debts that can't be paid, won't be paid."

Sunday, September 26, 2010

China, Chickens, the US Congress and the Yuan

A recurring assertion of this blog is that globally accepted monetary systems are the product of the strength of a dominant Sovereign, not the product of multilateral cooperation.  The other assertion I make is that the US Dollar, due to fiscal mismanagement, the inherent terminal end of a debt based monetary system, and the dimishing rate of returns of being a global power, will ultimately be replaced as the global medium of exchange.  That is, it will lose its reserve currency status. 

The question then becomes, will a new fiat replaced it?  Or has the world reached a point of distrust that the next global medium of exchange will be based on something that sovereigns have less manipulation over?  A more historic, universally accepted medium of exchange that nations already have stored for such an event: gold?

Thus I will continue to chronicle major developments in "geopoliticaleconomics," developments impacted by global trade, economics, and geopolitics.  A multidisclipinary approach is important, in my view.  Merely looking at sterile monetary theory in a "vacuum" misses a lot of other extremely important factors.  And so:

US Congress moves to punish China on currency

From AFP:

The US Congress moved Friday to open the way for retaliation against China over its currency, warning that it has lost patience with quiet efforts to press Beijing to let its yuan appreciate.

One day after President Barack Obama pressed Chinese Premier Wen Jiabao on currency in a meeting in New York, Obama's allies in Congress approved a measure that accuses Beijing of killing US manufacturing jobs with its yuan.

The House Ways and Means Committee, which writes tax laws, voted to expand the powers of the Commerce Department to allow it to impose tariffs when another nation is found to be manipulating its currency's value...
Now, anyone that understands the mechanics of lawmaking in the US knows that although this is an important first step, it is far from becoming policy.  Sometimes it is merely a dog's bark, with no bite.  But sure enough, it looks like China is more than willing to play this game of chicken (pun intended):

China to Levy Anti-Dumping Duty on U.S. Poultry, Ministry of Commerce Says

From Bloomberg:
China will impose an anti-dumping duty as high as 105.4 percent on U.S. broiler chicken products, effective tomorrow, the Ministry of Commerce said today.

China found that the U.S. industry dumped such products on the Chinese market, hurting domestic production, the ministry said. The tax rate will be 50.3 percent to 53.4 percent for those U.S. producers who cooperated with the investigation and 105.4 percent for those who didn’t, it said.

“The final ruling is that the there is a causal relationship between the U.S. dumping of broiler products and the losses suffered by the Chinese industry,” the ministry said in Beijing.
Now this is not barking...  it's real, and this law is effective as of... now.  A little perspective, from the article:
China consumed almost 800,000 metric tons of U.S. chicken products in 2008, valued at $722 million, according to the USA Poultry & Egg Export Council.
This is not anything to sneeze at.  This is where we are going, where we are heading...  the current architecture of global trade and finance broke in the Autumn of 2008.  What is holding it up right now is massive, never before seen in history, monetary printing done as a lame attempt at holding up the massive global imbalances of deficits and surpluses created by a fictitous and easily manipulated monetary system. 

But trade wars not only impact where products go, if they are sold at all, but also by association, trade wars impact global monetary flows.  Monetary flows of debt, investments, and commercial exchange.  Interrupt these flows, or radically change them, and the system starts to crack again.

Friday, September 24, 2010

And Now for Something Completely Different

Happy Weekend

A Threat to the US Dollar - potential Banking Armageddon Part II

The US Banking Crisis is far from over.  The crisis that intensified in the Autmumn of 2008 has only been delayed, not resolved.  Tough decisions will likely be made in the future regarding the housing market, and its effects on bank capitalization and US Municipal budgets.  Eric King, of King World News interviewed Christopher Whalen (bio and interview link) recently.  Some of the points made by Whalen in the interview:

1) He mentions Lori Goodman of Amherst Securities and a recent presentation where she estimated that one in five residential properties in the US could go into foreclosure.  Whalen then mentions that over half of the banking industry's portfolio is real estate exposure, and even higher if you include the off balance sheet securitization.  Thus, if the one in five foreclosure figure materializes, then as Whalen puts it: "We're talking about gutting the banking industry's capital, and that's a very serious issue."

2) Holding companies should have been put into bankruptcy and restucterd with the government and FDIC as parties.  But the Administration - Summers and Geithner, didn't want to do this, so now we're "muddling along, we have no credit for the economy, and we have three perhaps, four big banks, that have serious problems."

3) This real estate driven bank balance sheet crisis will likely be the cause of the next big banking crisis.

4) Ultimately, the government will get involved again and will restructure these banks, basically, what they're doing in Europe, in a year or two year's time.

5) "What we're facing now, is an order of magnitude bigger than what we went thru in the 1990s, which almost swamped some of the best."

Other topics covered:  The Washington-Wall Street relationship, Housing vs. Manufacturing as an engine of future growth, the securitization/imperfect recordation nightmare, and effects on the revenues of cities and other local governments.  In the US, local governments raise revenue by taxing real estate.  As more homes fall into foreclosure, and others get abandoned by some lenders, municipal tax revenues plummet.

Link to Interview

My view:

So how is this a threat to the US Dollar?  It all depends on how the crisis is resolved.  Will the Federal Government proceed with debt monetization, i.e. the same strategy it has been pursuing?  Will the Federal Reserve start quatitative easing again?  Or will the government get involved as it did in the Savings and Loan Crisis of the early 1990s as Chris Whalen suggests?

Either way, what does this mean to the US Dollar?  There are additonal crisis that arise from a banking and foreclosure crisis.  Will the US Federal Government bail out bankrupt municipalities?  What happens to Pension Funds and other bondholders that may ultimately lose a significant amount of their investments?

I fear a chain reaction of predictable and unpredictable consequences is unavoidable.  The end result will be damage to the US Dollar with severe implications to the global economy.

Thursday, September 23, 2010

China, Rare Earths, and a Fishing Boat

Foreign Policy  magazine has an interesting take on China and rare earths, an issue that is extremely important for not only world trade, but for the national security of many nations.  Here's the article:

Is China overplaying its hand?

Beijing is denying that it has pushed its fishing boat spat with Japan to the limits. It has not, Beijing says, attempted to cripple the pinnacle of global commerce, Japan's auto industry, because a fisherman is sitting in a Japanese jail after ramming two Japanese patrol boats.

That's the wise course. Because if China truly has cut off rare-earth metal supplies in an effort to show who is boss of Asia, it will create serious ripples around the world.

Paul Kennedy is the main teacher in this sphere. In his seminal The Rise and Fall of Great Powers, Kennedy argues that, when a country gets too big for its boots, smaller nations gang up, Lilliputian-style, and give it a comeuppance. As of now, the prevailing thinking that the United States is in the boots, and China is the Lilliputian.

But one could easily see the opposite occurring should China play its hand wrong. If the world gets the idea that a strong China is going to mean an economically crippling regime over piddling perceived slights, the number of those supporting Beijing's economic rise (such as its neighbors and companies like Nissan) may grow smaller.



OK, so who is this writer kidding?  China is merely flexing its muscle.  For example, Japan get's annoyed at the increased competition from China due to an artificially pegged Yuan, and in turn China doesn't mind the NY Times writing an article about the end of exports of rare earths to Japan.  China just needs to say, oops, just kidding, we never really meant to do that.  And the message is still heard, loud and clear.  That's how nations remind others of their leverage. 

It was never about a fishing boat.  It's about Yuan manipulation and Yen intervention.  Don't forget,  the Chinese economy just recently surpassed Japan's economy.

Jockeying for Power at the IMF

In a previous post, Gold Will be a Bubble Until It Isn't, I made the assertion that as the US Dollar global reserve status falters, nations have one of two choices:  cooperate and create a new supra sovereign currency, (currently the SDR) or choose conflict, which in my opinion, would bring about the re-emergence of the traditional gold standard for international trade.  Conflict is the most likely scenario, in my opinion.

And speaking of global monetary system conflict, this from the Washington Post:

U.S. presses for fewer Western Europeans on the IMF board

The Obama administration has launched a battle to cut the number of Western Europeans on the board of the International Monetary Fund and make room for more representatives from developing countries.

Taking on a cluster of small nations such as Belgium and the Netherlands, the administration has threatened to to let the board dissolve unless the Europeans give up two or three of the nine seats they hold. The U.S. appointee to the IMF board, Meg Lundsager, in August blocked a vote needed for new board elections, part of an effort to redistribute power within the IMF and, the administration says, sustain the agency's credibility in newly influential parts of the world...

U.S. Treasury Secretary Timothy F. Geithner, speaking at a congressional hearing last week, said the IMF "still has a very unbalanced governance structure," with Western European countries enjoying a "disproportionate share" of spots on the executive board.

But the Europeans are not cooperating, the article continues:

European officials have argued that if they give up executive-director seats, the United States should relinquish the effective veto it has over some IMF decisions and set aside the long-standing agreement under which the managing director of the IMF is chosen from Europe and the president of the World Bank is an American. In a more multilateral world, they argue, the jobs should be open to anyone, something the United States, as the top donor to both organizations, has not yet accepted.
"It is not unreasonable to look for change, and people don't object, but these are big steps," said one European director, who like others interviewed would not speak publicly, because of the sensitivities involved.
The article ends with:
"Major changes are underway in the global economy," with Asia leading the global recovery and both population and economic growth in Europe at tepid levels, said Amr Battacharya, director of the Group of 24, a coalition of finance ministers from developing countries. "The issue is where within the developed world should the adjustment take place, and when you look relative to the world economy - population, other indicators - the spotlight really is on Europe."
Very interesting development.  And expect to see more of this as the Global Financial Crisis evolves.  On the one hand, the US has a fair argument, but what will the US relinquish?   And what of gold?  The EU combined has over 10,000 tons of gold whereas the US has over 8,000 tons.  Asia, and BRIC?  Their gold reserves are a fraction.  So, does Europe acquiesce?  Or maybe Europe may have already realized that the current fiat paper standard is approaching the end of an era, and to give in today when the rules of trade may change tomorrow would be a foolish policy?

Mark my words...  conflict is the only resolution when it comes to these matters.  The US Dollar reserve standard arose from the destruction of WWII.  The US, in 1944, had no peer economically.  So it was easy to be the lone power calling the shots.

It is a different world today.  It is increasingly multi polar and the potential for extreme disagreements over international trade, in an era of financial crisis, resource depletion and increased competition and consumption, is on the rise.

Gold Will Be A Bubble Until It Isn't

Many people, including George Soros, have recently described gold as being in a bubble.  But economically speaking, what is a bubble?  From Wikipedia:
An economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania or a balloon) is “trade in high volumes at prices that are considerably at variance with intrinsic values”.[1][2] (Another way to describe it is: trade in products or assets with inflated values.)
Gold is definitely trading at high volumes and at prices that are well above near term historical averages:


Keep in mind the chart above isn't adjusted for inflation.  But nonetheless, there has been a marked rise in the price of gold the past ten years.  So the question on every one's mind is: How will this investment cycle end?  Nothing increases in value at such a high rate in a relatively short period of time without a subsequent reversion to the mean... that is, a significant correction, a drop in price.

But what is gold?  Is it a commodity or is it money?  I guess the answer depends on who you ask.  A jewelry designer looks at gold as a commodity.  Whereas a Central Bank may deride gold, yet monitors its price and the reserves the Central Bank maintains.  Quite the dichotomy, no?

So why do governments continue to maintain gold reserves?  After 1971, gold was effectively demonetized.  The world began to function on a fiat paper standard when the world reserve currency, the US Dollar, was no longer redeemable in gold.  When central banks accumulate foreign reserves, they do not sit on those reserves, they put them to use.  For example, China runs a large trade surplus with the US.  What can it do with that surplus?  It invests it in such a way to receive a return , i.e.government debt, agency debt. It puts that money to use.

Gold pays no dividend, no interest, nothing,  It sits there and its price rises and falls with the market.  Yet governments still hold onto it.

From ancient times to 1971, trade in the global economy was conducted using precious metals (coins) or commodities.  Occasionally some countries experimented with a fiat paper standard, but it always ended in collapse.  Weimar Germany, France under John Law's experiment, etc...  Nonetheless, when a nation experimented with a fiat paper standard, most of the rest of the world still used commodities or precious metals.  Today, that is not the case.  And when one looks at the broad sweep of global economic history, one has to realize that our times are truly unique.  They are far from the historical norm.

So did mankind finally figure it out?  Did mankind find a new wonderful monetary system that couldn't be restrained by a commodity or metal supply?  Would this new system continue for the next few thousand years as the old system did?  No one knows the answers to those questions.  Not even governments or central banks.  And that's why they hold gold.  Because you never know when this grand fiat paper experiment goes to hell, so to speak.

So ask yourself.  How is paper fiat functioning today?  What are the odds of a dollar world reserve currency crisis?  What is the US's fiscal condition?  What is the fiscal condition of many other countries?

Which leads me to the title of this post: Gold Will Be A Bubble Until It Isn't

What do I mean by that?  Well, if the current fiat paper dollar-based global monetary system meets its end - and historically speaking, all national currencies that function as global reserve currencies eventually lose that global role.  And if you believe that all the major nations can cooperatively and peacefully agree on a new paper system such as the IMF's SDR to replace the US Dollar's global role, then gold has no long term investment value and it is in a bubble.

But if the end of the current global monetary system is chaotic, and distrust grows not just with the US Dollar, but in all paper currencies, and all nations begin to distrust the stewardship of other nations' currencies, then gold is the only thing left they can deploy.  Gold must back their currencies.  It strengthens, once again, what we call "money."

And you know what else?  When this global monetary event transpires, gold's price may not go down.  When this event transpires, nations will have to look at their money supply, and their gold reserves, and determine - do they want to peg their currency at a gold price that is at the going price, below market, or above the market.  If they peg their currency at a price below the going gold price - they are choosing deflation.  If they choose above the price - they are choosing inflation.

What do nations prefer?  Governments always prefer inflation to deflation. So there you have it. 

Gold will be a bubble until it isn't. 

Wednesday, September 22, 2010

Chanos on China's Bubble...

Hedge Fund manager Jim Chanos, famous for shorting companies, particularly Enron, still has his doubts on China.  While I frequently criticize the West for its irresponsible overleveraging, countries in Asia are either not immune to the global crisis, or are fueling their own economies with easy money.  In China, it's using real estate bubble blowing to contribute to GDP.  In Japan, it's currency manipulation to maintain exports.




Nouriel Roubini has speculated that the Chinese Yuan could replace the US dollar as a world reserve currency.  I have my doubts that another nation's fiat will be the replacement of the US Dollar after the current fiat system breaks down.  The US won't allow it.  You know why?  No other country in the world has the gold reserves that the US has.  The US need only go back to some sort of gold standard to ward off any currency challenge.  Gold always triumphs over empty IOUs.

Hair of the dog that bit you...

We are in the midst of a global balance sheet recession, and the world's central banks have decided, in their wisdom, that more debt needs to be shoved down the throat of a system that is already choking on credit.
So...
Not to be outdone by each other, it seems that recently, within just the last few days, the central banks from the world’s largest economies are greasing the printing presses, or at least warning everyone that they intend to run their presses soon...  so get ready for some serious overtime printing, and keep an eye on the price of gold. 
Japan
From the International Business Times: BoJ under pressure to ease policy further – Sept 22, 2010:
A Bank of Japan policy board member said on Wednesday buying more Japanese Government Bonds (JGB) by the Bank of Japan (BoJ) was one policy option on the table even as global growth outlook was dealt fresh blows from a downbeat Fed report on Tuesday.

Addressing a news conference, Ryuzo Miyao said: "That's one policy option ... We won't have preset ideas about our future policy." 
Article continues:
Miyao's comments are a sign that pressure is building on the BoJ to further loosen its monetary policy, especially as the yen is showing signs of strengthening against the U.S. dollar.
He said a weakness in the U.S. economy will lead to a bleaker outlook for the world economy, which could hit Japanese exports further.

Earlier on Wednesday Miyao said the central bank was ready to ease monetary measures further if downside risks to the economy intensified.
"As the uncertainty over the outlook--mainly the U.S. economy--grow, we cannot let our guard down against downside risks to our economy," he said in comments made following the US Federal Reserve suggested it was uneasy about the current fragile economic backdrop, particularly the subdued inflationary trends
 
Bank of England
The Bank of England signaled that policy makers are moving closer to adding more stimulus to the economy, joining the Federal Reserve in contemplating further bond purchases to revive a flagging recovery.
The Monetary Policy Committee, led by Governor Mervyn King, voted 8-1 to keep the benchmark interest rate at 0.5 percent and the bond-purchase plan at 200 billion pounds ($313 billion). While Andrew Sentance pushed for a fourth month to raise the rate “gradually,” “most” officials see the central bank’s current stance as “appropriate,” according to minutes of the Sept. 9 meeting released by the central bank today in London.
“For some of those members, the probability that further action would become necessary to stimulate the economy and keep inflation on track to hit the target in the medium term had increased,” the minutes said.
“It certainly seems that the MPC is edging closer towards doing more quantitative easing and perhaps out of all the central banks is getting closest in providing additional stimulus to the economy,” said Samuel Tombs, U.K. economist at Capital Economics Ltd. in London, in a telephone interview. Tombs said the Bank of England may buy an extra 50 billion pounds in government bonds “at the start of next year.”
European Central Bank

From the Wall Street Journal: ECB Steps Up Its Bond Buys Amid Worries  - Sept. 20, 2010

The European Central Bank has increased its purchases of government bonds amid rising concerns in financial markets about the ability of Greece, Ireland and Portugal to repay their debts.

The ECB initiated the bond-buying program in May, the height of Europe's fiscal crisis, purchasing the debt of troubled countries in the 16-nation euro zone. The program was the central bank's two-fold bid to build confidence—first, public confidence in the ability of those countries to meet their obligations and second, investors' confidence that the central bank could always step in to keep markets liquid.

The objective of the bond purchases, ECB President Jean-Claude Trichet said last month, is "to help restoring a functioning of our monetary policy transmission."
USA
Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term…
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.
The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.
Well, there you have it.  The race to the bottom continues.  But can you blame the central banks?  A monetary system that needs to constantly expand or else it collapses, requires such measures.  The time for responsible stewardship of the currency is over - it was over decades ago.  So... let them print, at least it  gives the rest of us more time to prepare for the monetary transition ahead. 
To my Northern hemisphere readers:  Happy Autumn, and Happy Spring to my Southern hemisphere readers. 

Tuesday, September 21, 2010

CNBC: The Shocking lack of Gold Volatility

From CNBC (emphasis mine):

When you ask traders why the price is still going up, you get the same story — lots of buyers, no natural sellers. The traditional sellers in this market — mining companies and in recent years, central bankers — have turned hoarders. And with the advent of ETFs, investors have an easy way to get long.  
Looking for a catalyst to a big move, I asked Lou Grasso, trader at Millennium Futures what could happen in the gold market if the Fed initiates a second round of quantitative easing tomorrow. “If you get QE2, you could see a rally but, don’t think the market will sell off if there is no QE2”. 

Next week, Kevin Grady, gold trader at Man Financial tells me traders are watching October gold options expiration on Monday. Out of the money calls are where the action is indicating the bias is still up. Kevin is expecting a run at $1300 in the spot market but says, “first time up, it’s probably going to fail”. Strikes to watch: $1295 and $1300 calls.
Full article HERE.

My view:  In times of economic duress, people hold on to money right?   And for those that think gold is just a fad, ask yourselves this:  Why are Central Banks hoarding the stuff?  Maybe they know something you don't?  Something they don't want you to know?

Max Keiser and Yves Smith of Naked Capitalism

Excellent dialogue between two of my favorite financial bloggers.  The extremely knowledgeable Yves Smith, and the shoot first ask questions later Max Keiser.  Interview begins 14 minutes into the video below.  Great overview of the financial crisis from a banking perspective.

My view:

Fiat money, over time, needs to "go casino" so to speak, in order to survive  It's a natural evolution, despite all the immoral behavior that goes with that evolution.  That is, the geometric growth of debt surpasses the productive economy and the financial players of the economic system, the banks, need to create a casino, a "new economy" to survive.   That "casino" economy of exotic financial instruments becomes inherently fraudulent.  The monetary fiction of fiat then grows on a completely different level.  Hence, the explosive growth of the derivatives market and the subsequent meltdown that has been absorbed by sovereigns.  The question now is, how long can governments absorb losses and stimulate spending at the same time?

Enjoy:

Monday, September 20, 2010

PIMCO's El Erian does not believe EU bailout of periphery is a success, and what Michael Hudson has been saying all along.

Good article from MoneyMarketing.co.uk (emphasis mine):
In a post for the Financial Times, Pimco chief executive Mohamed El-Erian warned that the European Central Bank/International Monetary Fund aid handed to Greece, Portugal, Spain and Ireland have not aided their economies, rather just aided those looking to take their money out of them.
He says: “The public sector bailout is not working. Rather than provide assurances of better times ahead and, thus, encourage new investments, ECB/EU/IMF support funding is being used by existing investors to exit their exposures to the most vulnerable peripheral European countries.”
That's an interesting point El Erian makes.  I would add: isn't that what the bailouts were designed to accomplish first?  I am in agreement with many of Michael Hudson's points in the "The People v. the Bankers." It's a common story that one can also see ocurring in the US.  The elites are protected first and foremost, and the losses are socialized.  That's not to say that Greece was not run poorly, or that there wasn't corruption that needed to be addressed.  As Michael Hudson states in "The People v. the Bankers:"

Let’s call the “Greek bailout” what it is: a TARP for German and other European bankers and global currency speculators. The money is being provided by other governments (mainly the German Treasury, cutting back its domestic spending) into a kind of escrow account for the Greek government to pay foreign bondholders who bought up these securities at plunging prices over the past few weeks. They will make a killing, as will buyers of hundreds of billions of dollars of credit-default swaps on the Greek government bonds, speculators in euro-swaps and other casino-capitalist gamblers. (Parties on the losing side of these swaps now will need to be bailed out as well, and so on ad infinitum.)
This windfall is to be paid by taxpayers – ultimately those of Greece (in effect labor, because the wealthy have been untaxed) – to reimburse Euro-governments, the IMF and even the U.S. Treasury for its commitment to predatory finance. The payment to bondholders is to be used as an excuse to slash Greek public services, pensions and other government spending. It will be a model for other countries to impose similar economic austerity as governments run up budget deficits in the face of falling tax collections from the financial sector being enriched by the translation of junk economics into international policy. So the bankers for their part will have little trouble meeting their bonus forecasts this year. And by the time the whole system collapses, they will have spent the money on hard assets of their own

Bank lobbyists know that the financial game is over. They are playing for the short run. The financial sector’s aim is to take as much bailout money as it can and run, with large enough annual bonuses to lord it over the rest of society after the Clean Slate finally arrives. Less public spending on social programs will leave more bailout money to pay the banks for their exponentially rising bad debts that cannot possibly be paid in the end. It is inevitable that loans and bonds will default in the usual convulsion of bankruptcy.
Back to the article on Pimco's El Erian.  As I mentioned in prior posts on debt deflation and economic contraction:
El-Erian says the market risk for the sovereign debt of the so-called PIGS is still “at or near danger levels” and something must be done soon to avoid sovereign defaults.
He says: “This situation cannot be sustained forever. It undermines any chance that the most vulnerable countries have of limiting the collapse in their GDP and maintaining social cohesion; it contaminates the balance sheet of the ECB; it exposes the revolving nature of IMF resources to considerable risk; and it raises the risk of renewed contagion.
“If [policymakers] continue to stumble and hesitate, what has been simmering may well come to a full boil in the next few months.”
Source HERE.

From my current experience living in Greece, I am witnessing what I believe to be a debt deflation economic contraction.  The government is cutting spending, collecting more in taxes, people are consuming much less, and private lending is decreasing.  I think the situation will become more obvious as the tourist season finally ends and the winter is in full swing.  Crime too, is on the rise.  Businesspeople I know are extremely negative and many are just happy to hold onto their businesses.

Obviously much of the wealth in Greece these past 10 years was illusory.  It was a debt driven economic expansion that also relied on EU funds that unfortunately were mismanaged.   Ireland too, is getting a lot of press lately about doubts it will not need IMF support.  We'll see.

The Euro crisis is far from over.  By the time all is said and done, it will be an historic political, social, and economic test of cohesion.

Sunday, September 19, 2010

The inextricable relationship between Energy and Money

Modern civilization is based on the continued growth of what I call the "Trinity" of money, credit, and energy.  Credit, of course is what drives money.  Money is lent into existence, that is, one man's loan is another man's savings.  The two can not be separated.  Savings cannot be created without someone, somewhere in the system, taking on debt.  This applies to individuals, corporations, and governments.

So what of energy?  Energy is the real world, tangible engine of growth.  Energy feeds us, it transports us, it builds things, in essence, it IS the economy.  Money is what we use to measure our progress, to allocate resources, to "keep score" so to speak.

Without a constant, affordable supply of energy, balance sheets, budgets, asset valuations - all get affected.  If you think of an economy as a system of inputs and outputs, energy is the greatest input that creates wealth.  But energy is not free.  It takes energy to extract energy - i.e. coal, oil, gas, etc...

And just as a monetary system needs to grow to survive, so too does the supply of energy need to grow to allow the monetary system to grow.  And that supply of energy doesn't just have to grow, but it has to grow at best, at a constant cost.  That is, if the cost of extracting energy rises, then that impacts the ability of the money supply to grow.

Think of it this way.  I have an investment.  At first, for every dollar I sink in to that investment it yields me $1.50 - I'm doing pretty well.  But what if, over time, there is a diminishing rate of return?  What if I only receive $1.25 for each dollar of input?  Or less?

That is what is happening to industrial civilization today.  It is taking more energy to produce energy.  The easily accessible oil and natural gas is diminishing, and we are now extracting more difficult sources of energy.  And on top of that, there are billions of more people in the world today that want that industrial lifestyle, and hence, need the same energy usage.

So what does that do to a monetary system based on irredeemable currency, born of credit?  How does that impact future growth?

The US Department of Energy commissioned Scientist Robert Hirsch to produce a report that was published in 2005 titled "Peaking of World Oil Production: Impacts, Mitigation, and Risk Management."  Here is the REPORT.

Robert Hirsch was recently interviewed by Matthieu Auzanneau, Oil Man (blog), Le Monde,  to discuss his upcoming book, and how his  2005 report and conclusions have been handled by various US government officials.

Here's an excerpt:
oil man:  What should we expect, before the world is able to catch up with the ‘peak oil’ issue ?
Hirsch:  From a world standpoint, Growth Domestic Product will decline every year for over a decade, and could easily be down 20 or 30 % over this period of time. That’s what I mean when I say « catastrophic ».
Wherever you live, somebody has to get food to you. And modern farming is run by oil, because the tractors that plow the ground and plant the seeds, and do the harvesting, run on oil. And then you have to transport the food to some kind of processor, and from there to the consumer.
From Part II of the interview:

oil man: - What happened after you published your 2005 report on ‘peak oil’ for the US Department of Energy (DoE) ?
Hirsch: The people that I was dealing with said : « No more work on peak oil, no more talk about it ».
People that were high in the administration hierarchy ?
Hirsch: The people that I was dealing with were high in the laboratory level. They were getting their instructions from people on the political side of the DoE, at high levels.
After the work we did on the 2005 study and the follow-up of 2006, the Department of Energy headquarters completely cut off all support for oil peaking and decline analysis. The people that I was working with at the National Energy Technology Laboratory were good people, they saw the problem, they saw how difficult the consequences would be – you know, the potential for huge damage – yet they were told : « No more work, no more discussion. »
I'm sure there are many people that will say, "but there's plenty of oil out there!"  That is true - but there is an increasing cost to extract that oil.  In my opinion, we are in the midst of a global recession, if not depression.  Why is the price of oil still so high?  What would happen to the price of oil if the global economy started growing at the rate is was pre-crisis?  What would that do to the price of oil? 

But you know what else?  If somehow the world economy did rebound to prior growth rates, and energy costs rose with the increased demand, the economy would fall right back into recession.  It's as if the price of oil becomes a wall that stops or slows the growth rate of the world economy.  That wall rises as the economy grows, and shrinks as the economy shrinks.  Catch 22.



 

Friday, September 17, 2010

Ireland Responds

Watching the cost of insuring Irish Sovereign debt against default skyrocket as the Irish/German spread spiked as well, Ireland needed to respond to the markets:
Ireland's Department of Finance slammed the Irish Independent article.
"There is absolutely no truth to a rumor concerning external assistance. It is based on a local misinterpretation of a research report," a spokesman said in a statement.
Reuters full article HERE.

It's anyone's guess what the true state of Ireland's finances will be in the next 6 months to a year.  But keep in mind the protestations against default by the Greek government up to the eve of the massive EU bailout.

Is Greece really alone? Ireland requiring IMF assistance not ruled out.

As reported in the Irish Independent, Barclays warns that Ireland may yet need the IMF. From the article:

IRELAND may need to call in International Monetary Fund (IMF) assistance if bank losses rise any further or the economy deteriorates beyond current forecasts, Barclays, one of Europe's largest banks, has said.

In one of the bluntest assessments yet of the Irish economy and banking crisis, the company said assistance from the EU or IMF was not needed -- "at least not yet''.

The report also suggested the Government should seek to do a "deal'' with bondholders at Anglo Irish Bank.

The bank said Ireland had a comfortable position, having raised most of the money it needs this year, but that the country wasn't completely safe.

"Should further unexpected financial sector losses or macro-economic conditions deteriorate... the Government may need to seek outside help."

The bank said a credit line from the IMF could "provide a suitable funding vehicle should this be required by the Irish Government''.
Full article HERE.

Now is this really a surprise?  Ireland, like Greece, owes its debt in a currency it does not control.  And like Greece, it has experienced a massive credit bubble these past ten years.  EU driven austerity has a deflationary effect on an economy.  It reverses the prior feedback loop of increasing credit, a feedback loop that hit a wall anyway, and accelerates a new feedback loop of credit and demand destruction.

I'm not suggesting that Keynesian stimulus spending is the answer.  What I am saying is that austerity alone, while unavoidable in the long run, will not re-create the same conditions that existed prior to the financial crisis.   It may even foster overshoot to the downside.  Is Ireland ready for the consequences?

Fiat and Gold.... the current conflict

Greenspan of all people, has recently discussed the rising price of gold.  At a meeting at the Council of Foreign Relations, in NYC, Greenspan had this to say:

“Fiat money has no place to go but gold,”

Responding to a question on gold's recent spike, the article continues with:

Mr. Greenspan replied that he’d thought a lot about gold prices over the years and decided the supply and demand explanations treating gold like other commodities “simply don’t pan out,” as Mr. Malpass characterized Mr. Greenspan. “He’d concluded that gold is simply different,” Mr. Malpass wrote. At one point Mr. Greenspan spoke of how, during World War II, the Allies going into North Africa found gold was insisted on in the payment of bribes.* Said the former Fed chairman: “If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it.”

Also in the news, one of my favorite analysts, James Rikards on the US-Chinese yuan revaluation dilemma. At the end of the interview, he too discusses gold and the status of the US Dollar. Yet unlike Greenspan's characterization, Rickards is more negative... he says the US Dollar is collapsing:


Thursday, September 16, 2010

Intro

“Unfortunately, no one can be told what the Matrix is. You have to see it for yourself.”

- Morpheus, The Matrix



The world’s monetary system, the thing that allows us to live the modern industrial lifestyle many of us enjoy, the thing that also allows nations to silently plunder other nations or its own populace, and for banks to quietly strip a society’s wealth, the thing that has also financed some of the most fantastic technologies mankind has ever created, is going through a metamorphosis right now.

Historically, monetary systems have always gone through a birth, maturation, and decline process. They are always re-adjusted, re-invented, or just retired. Sometimes by choice, and other times, by an inevitable collapse brought on by the real world’s limitations – the world of resources, of demographics, and of wars.

Among other things, monetary systems are engineered to allocate resources, to store wealth, to provide a universally accepted means of exchange, and oftentimes, to maintain the status quo power structure. Modern central banks and the governments they theoretically answer to are the great stewards of today’s global monetary system.

I first learned about central banking when I was in Law School in the mid 1990s. I knew by my second year that I did not want to practice law, so I focused my curriculum on business/corporate oriented classes. And having an interest on the global issues of the day, I chose to write my paper on the emerging European Monetary Union. Bad enough I was racking my brains with complex legal theories, I unwittingly added central banking to my already full plate.

It was very difficult, I admit. But it also exposed me to such books as William Greider’s “Secrets of the Temple” and G. Edward Griffin’s “The Creature from Jekyll Island.” It was an entire new world to me. Looking back, it was like the movie – The Matrix. That “new world” always existed, always affected my life, yet was invisible at the same time. Most don’t know how it works, or how it affects them – they just carry on and accept what little they know about it.

I decided to start this blog, not that the world needs another doom and gloom financial blog, there are plenty of those. But I decided to start this blog to chronicle the upcoming socioeconogeopolitical upheaval that occurs when a global monetary system nears its end. This blog will cover current global events and important economic theories that shed light on the current global financial crisis.

I will not be covering detailed stories on such topics as banking reform, high frequency trading, consumer protection reform, etc… unless those topics tie in with my focus. There are plenty of great blogs on those topics. But rather, I will be covering how nations are reacting to this monetary crisis, how it began, and how it will likely resolve itself. By no means is this a normal cyclical recession. It is the end of a monetary era.

In an upcoming post, I will flesh out my thesis that this blog will revolve around. Great changes are afoot. This will be bigger than the collapse of the U.S.S.R. Few nations will be spared the consequences. There will also be a tremendous amount of wealth destruction and wealth transfer. And the conventional pundits and power elites will once again say: “no one saw this coming.”