The ECB Warns Ireland, and the Truth Comes Out... Who is really getting bailed out?

The Irish crisis differs from the Greek crisis, but the result, in my opinion, is the same.  The so-called bailouts are really bailouts of investors, to be ultimately paid for by the "little people" that reside in these "bailed out" countries.

In Ireland, the initial crisis was not that the government was overextended, but that its banking sector was.  As its banking sector imploded, the ECB and the IMF stepped in, and the debt is to be eventually taken on by the Irish government.  And rightly so, the Irish people are not too thrilled with it.  Recently Ireland had elections and the people are hopping mad.  They don't want to pay for the speculative losses incurred by outside investors.  They want the senior bondholders of Irish banks and Irish sovereign debt to share this pain.

So who are these senior bondholders? From the Irish Tribune, emphasis mine:

The chief buyers of Irish bonds are large European asset managers, particularly Germany, followed by France. Union Investment, one of the four largest asset management firms in Germany, is a significant buyer of Irish debt. Pioneer Asset Management, which has a large operation here, is also a substantial investor. It is a subsidiary of Italian bank UniCredit. 

Capital Research, part of the Capital Group Companies, is also an investor. This company has also taken stakes in a large number of Irish listed companies. Italian fund Fondaco is also an investor, as is Clerical Medical Investment Group, a division of Lloyds, which also bought up debt in recent years in Anglo Irish Bank. The rest of the buyers of Irish debt tend to be major European banks, such as Fortis and Deutsche Bank, which often purchases bonds through its DWS Investments arm. 

...As many have alleged, there is a lot of crossover between Irish government and bank debt. Put simply, large French and German asset managers invest in both. In the case of AIB, Pioneer Asset Management is a large investor, as is Deka International, a division of German Deka Bank. Fondaco is also an investor in AIB and government debt. Other investors in AIB with large bond holdings are Barclays, Aviva and Julius Baer, a Swiss wealth manager.

SOURCE

Will the Irish get their way, and like Iceland before them, tell these bondholders to suffer for their investments?  In comes the ECB with a stern warning to the people of Ireland, emphasis mine:

THE EUROPEAN Central Bank has warned Ireland against taking the “populist” step of forcing private bondholders to share the cost of the financial crisis. 

ECB chief economist Jürgen Stark said the time had come for the ECB to end emergency intervention in the money markets. In particular, Irish banks would have to be weaned off ECB liquidity. 

“It can’t be an ongoing thing,” he told the influential Frankfurter Allgemeine newspaper. “According to the parameters of the EU-IMF programme the recapitalisation of Irish banks should have ended last February, but the last Irish government didn’t want to take on that responsibility.” 

Asked if he supported the idea of Ireland sharing the cost of its crisis with bondholders, he said: “That would be a populist move, but one has to think of the consequences. The ECB is worried that in Europe and in other parts of the world that it would come to a new wave of insecurity.” 

“Therefore we are warning the Irish Government in case it wants to solve its problems at the cost of bondholders.”

SOURCE

The ECB is not mincing words here.  But it's not like everything will be fine if the senior bondholders feel the pain as well.  Contagion is the word here.  What if Greece does this?  Or Portugal, or worse yet, Spain?  And is it really that unavoidable?  How can one country choose to stiff its creditors, and another country, equally burdened by debt, just sit by?  I think that the austerity measures will slowly crush these periphery economies and tremendous political turmoil will result.  One way or another, there will be a sharing of pain, and with it, a new view of sovereign debt will emerge.

Europe has many problems that have not been addressed at all.  Nothing has been done about the trade imbalances within the Eurozone that have contributed to the subsequent debt imbalances.  This will be the ultimate test of the Euro.

Could Peak Oil Reverse Globalization?

Yes, there are many alternative sources of energy, however, when it comes to transportation, either by truck, ship, or airplane, petroleum is still King.  It is used well over 90% in the transportation of products in the global economy.  Windmills and solar panels are not going to be pushing cargo ships across the Pacific anytime soon.

Oil, as the largest component of global energy, also supports our monetary system.  Think of oil as we think of interest rates.  Low interest rates spur investments, just as cheap oil spurs economic growth.  But it is not just the price that matters, but the direction of the trend.  Just as a rising interest rate environment diverts money into non productive uses - the servicing of increased debt loads, so too do increasingly higher energy costs divert money to non productive uses.  Higher oil also diverts money from industrialized nations to resource exporting nations.  But it is also a very strategic resource that gives strength to the US Dollar, as the world's reserve currency.

The use of oil is not going away anytime soon.  However, the sources of cheap oil are diminishing.  There is still plenty of oil out there - but it is located in the tar sands of Canada, or deepwater offshore.  This oil is much more expensive to extract and process.  And as political instability in the Middle East increases, so too does the price of the easy oil - conventional oil that does not need as much processing and literally gushes out of the ground like a fountain.

Economist Jeff Rubin gave a speech to ASPO (Association for the Study of Peak Oil and Gas) last October. In it, he predicted triple digit oil prices within 10 months.  Was he right for the wrong reasons?  After all, he attributes the rising cost to diminished production of cheap conventional oil.  I guess we'll know in another ten months?

Nonetheless, he ends his speech on a rather optimistic note, very unlike many peak oil adherents.  He sees an economic revival occurring in the US as it imports less and produces more for itself.  However, he still warns us that an alternative transportation policy needs to be developed.

Here is the presentation, the link that follows contains the transcript of the speech for those that prefer to read it.

And an interesting quote on Oil costs and domestic industry, particularly the Steel Industry:

Take the steel industry, for example. Just before the recent recession, some very curious things were happening in the US market. When oil prices got to be over $100 barrel, all of the sudden, Chinese steel exports to the US fell at double-digit rates. And all of the sudden, US steel production was up. And all of the sudden, US Steel Corp., which was one of the biggest dogs in the market, all of the sudden its share price doubled. 

What was going on? I’ll tell you what was going on. For the first time in 20 years, it was cheaper to make steel in the United States than to import it from China. Why? Consider what China has to do to send you steel. First, it has to ship iron ore from Brazil, across the Pacific Ocean, turn it into steel, which is itself a very energy-intensive process, then ship it back, across the Pacific Ocean, to you. At $20 barrel, that works. At $100 barrel, that doesn’t work.

Transcript HERE

The Rise of the Fourth Reich

Let's not kid ourselves.  Most of EU policy, especially EU monetary policy, is heavily influenced by Germany.  There's a reason the ECB is located in Germany;  from the get-go Germany had the greatest influence in Europe.

So where does that leave us today?  The Portugal crisis is flaring up again with the recent dissolution of its government.  It is only a matter of time when Portugal goes to the ECB and IMF.

So the next question is - will Europe converge or diverge?  Will the EU evolve into a United States of Europe - closer to the system the US has?  Or will it slowly break apart with members leaving the EU as they see debt deflation/depression slowly rip apart their economies?  Who wants to sign up for that scenario?  I just don't see peripheral countries staying in the EU if the transition to fiscal and political union is that destructive to their economies.  Unlike Americans, Europeans have a habit of taking to the streets en masse and reminding their governments of who they serve.

And so, political and fiscal union all depends on the rest of the countries' willingness to belong to the Fourth Reich.  Let's not kid ourselves, the EU is a German-run shop.

The so called sovereign "bailouts" are really banking bailouts, and disproportionately, German ones at that.  The banks get fed, while the southern sovereigns plus Ireland and their subjects get "disciplined."  When the German banks, the highest leveraged in the EU banking system get disciplined, then I'll change my mind. But so far - they are the only ones that are being maintained "as-is" without experiencing any discipline or failure on the horizon.

This is how I see things playing out in Europe.  There will be debt deflation/depression in the periphery, followed by fire market sales to the benefit of German companies financed by German banks that enjoy re-capitalization via sovereign "bailouts."  France too, will be jumping in on the game.

It is unavoidable.  The periphery countries can not cut government spending, belong to an expensive Euro, and expect to somehow manage their ballooning existing debts as their GDP plummets.  With a strong Euro, they can not export their way out of debt, and they can not devalue either.  The US is playing this game, the smaller EU countries - which soon, by the way, will include Belgium, can not play this game.  They gave up their sovereign rights to control their currency.

I fear that Germany has not changed.  Dreams of a German Europe only faded away temporarily after WWII.  History repeats.  Yet if history is any guide, the Germans will once again fail spectacularly in their endeavor to conquer Europe by economic means.

But there is one more recent development that sheds light on a future political union in Europe - it's the Libyan Conflict.  What a disaster.  France and Germany are at odds with each other on how to handle this crisis.  It is a political crisis for the Libyans, and an energy crisis for the Europeans.  If Europe can't agree on how to handle the Libyan turmoil, how can it transition to a United States of Europe?

There's no leadership structure.  And when there is no leadership structure that looks after Europe as a whole, there is only conflict.  What leadership exists is narrow in scope, and one nation needs to have an advantage to use that leadership.  Right now, the only leadership in Europe is in the economic/monetary sphere.  And that would be Germany.

But is Germany formulating an economic and monetary policy that will benefit all of Europe, or is Germany formulating a policy of Deutschland über alles?  The imbalances in Europe need to be addressed, not re-enforced.

Otherwise, the grand EU experiment will end in failure, along with the Euro.

The Heroes of Fukushima

I wanted to write about something that doesn't deal with economics today.  But I didn't just want to focus on the tragedy unfolding in Japan.  Yes, it is a human catastrophe, and could get even worse at any moment.  While people are leaving Tokyo and other areas of Japan, in all that chaos, there is a team of people that are working in the midst of a nuclear plant that could meltdown at any moment.

Just imagine what is going on in their minds.  The weight of the world lies on their shoulders. They are fighting to save millions of lives, people they will never know, all the while knowing that they could die at any minute.

They are the remaining workers at the Fukushima Nuclear Plant that decided to stay and finish the job. From CBS Evening News:

Since the disaster struck in Japan, about 800 workers have been evacuated from the damaged nuclear complex in Fukushima. The radiation danger is that great. 

However, CBS News correspondent Jim Axelrod reports that a handful have stayed on the job, risking their lives, to try to save the lives of countless people they don't even know. The exact number of workers is unclear and has been reported to be anywhere from 50 to 180. 

Although communication with the workers inside the nuclear plant is nearly impossible, a CBS News consultant spoke to a Japanese official who made contact with one of the workers inside the control center. 

The official said that his friend told him that he was not afraid to die, that that was his job.
Cham Dallas, who led teams responding to the Chernobyl disaster, said that kind of response is not out of the normal for some workers in the nuclear energy sector. 

"(In) my experience of people in the action area of nuclear power is much like that," Dallas said. 

The workers are doing so amid decreasing but still dangerously high levels of radiation. On Wednesday, Japanese officials raised the legal limit on radiation for the workers from 100 millisieverts to 250. 

"The longer they stay the more dangerous it becomes for them," said expert Margaret Harding. "I think it is a testament to their guts for them to say, 'We'll stay and if that means we go, we go.'"

Full article HERE

I think it is important that more people are aware of these heroic individuals.  My thoughts are with the Japanese people, and especially this handful of individuals that are knowingly placing themselves in danger so that others may be saved.  

May they succeed and be unharmed.

International Energy Agency: Libyan Oil Exports Halted

As the world focuses on the Nuclear disaster in Japan, another crisis is far from resolved. Actually, it is intensifying.  The issue is Libyan oil production: according to the IEA, it has ground to a halt.  From the Associated Press:

CAIRO — The International Energy Agency says Libyan oil exports have "ground to a halt" because of the fighting between rebels and forces loyal to Libyan leader Moammar Gadhafi. 

The Paris-based group said Tuesday in its latest oil market report that production from the North African nation appeared to have "slowed to a trickle" as the fighting and mounting unrest prompted an exodus of foreign oil workers and led international companies to halt their operations. 

Analysts have said they believe that oil production and exports from the OPEC member are sharply down because of the unrest. 

The violence had driven oil prices as high as almost $107 per barrel last week before they cooled quickly following the massive earthquake in Japan.

SOURCE

However, according to Reuters Africa:

TOBRUK, Libya (Reuters) - Agoco, an oil firm based in rebel areas, said on Tuesday it was now only pumping oil to Tobruk in the far east of Libya after Muammar Gaddafi's forces retook Ras Lanuf, where it has facilities. 

Arabian Gulf Oil Co (Agoco) management board member Hassan Bulifa also told Reuters that output from the firm's fields was holding steady at one-third of its normal production levels. 

Agoco had previously said it was producing about 130,000 barrels per day (bpd), compared to about 400,000 bpd before a rebellion against Gaddafi's rule erupted in mid-February. 

"We stopped pumping oil to Ras Lanuf. Production at our fields is still about one-third of normal output but now all the oil is being pumped to Tobruk," he said. "We have a tank farm, a storage facility, there." 

Bulifa said it would take about three weeks to fill up the storage available at the current rates of production. On March 10, he had said storage could be filled in two or three weeks.

SOURCE 

Either way, this is another issues the markets need to contend with.  Will Saudi Arabia, as it deals with Bahrain, and will other OPEC members be able to fill the void?  The Japanese Nuclear disaster may have pushed oil down as the market fears a drop in demand.  But if we are to have a sustained global recovery, oil can not continue to rise.

Not only do we have the human catastrophe in Japan to be concerned about, but we still have the Euro crisis, as well as the political turmoil in the Middle East to contend with. The Federal Reserve meets today.  It will be interesting to see what they have to say.  The issue of QE2 ending in June is high on the list.  Wall Street is looking kind of nervous right now.

Market Meltdown Tuesday

I often write that the world we live in today is an extremely hyper-complex system that relies on energy and capital to move long distances around the world to give us the lifestyle we have today.  But such hyper-complex systems also have a degree of fragility.  That is, to increase efficiency and productivity, robustness is sacrificed.  This is no surprise; robustness costs money, it is expensive.

So when a black swan of a disaster hits, the world's complex system can easily go into a tailspin.  We are witnessing such an episode right now on the macro level these past few years.  But occasionally, we have one-off events that really throw us for a loop.  The 2008 Wall Street meltdown was one such event.  Now we have the Earthquake and Tsunami in Japan to contend with.  It is no longer a natural disaster, as it has now affected Japan's nuclear industry - it is now an environmental disaster involving radiation.

And now as Japan is losing control at the Fukushima plant, things are getting worse fast. I am in Greece right now, and it is approaching 9 am.  It is 3am in the US right now.  Markets in Aisa are plummeting.  The Japanese Nikkei is down over 10%, the Hang Seng, over 3%.  It is no longer a human catastrophe for the Japanese people living near the reactor and near the tsunami's path.  It is a chain reaction that is being felt outside of Japan around the globe.

OPEC Slashing US Treasury Holdings, Dollar Weakens

One thing I often write about regarding the value of fiat money, is its use by trading partners around the world.  There is a process of recycling going on, where surplus nations buy the debt of their trading (oftentimes trade deficit) partners.  

The issuance of government debt gives nations with surplus foreign reserves a place to park their cash and earn interest.  So long as the value of their investments is maintained, the trading relationship continues, and in the case of the US Dollar, it's reserve status is maintained.  Keep in mind, the current debt for trading paradigm is merely 40 years old.  The use of gold as a foreign reserve asset no longer plays a role in limiting global imbalances.  I'm not saying the gold standard era was perfect - but it did not allow for the outrageous imbalances we have today to form either.

And so we have a recent development.  It could be temporary, or it could be a trend.  There is a lot going on in the world today, and identifying trends is tricky.  Time needs to march on a little longer in order to gain some clarity on where we are going.  The trend is of a decreasing share of US Dollar global foreign exchange reserves... so far.  And now we can add OPEC to the list.  From Bloomberg/Businessweek, emphasis mine:

Dollar Depressed by OPEC Slashing Treasury holdings by 9% 

March 14 (Bloomberg) -- Oil-exporting countries are cutting holdings of U.S. government debt as energy prices rise, helping depress the dollar, the worst-performing major currency of the past six months. 

Treasuries owned by oil producers and institutions such as U.K. banks that are proxies for Middle East nations fell 9 percent in the second half of 2010 to $654.6 billion, the first decline in the final six months of a year since the Treasury Department began compiling the data in 2006. The sales may continue, if history is any guide, because Barclays Plc says Middle East petroleum exporting nations have traditionally placed only 25 percent of their savings in dollar-based assets. 

“Middle Eastern oil exporters are now getting this extra windfall of dollars and the question is on the margin what they want to do with that,” said Jeffrey Young, the head of North American foreign-exchange research at Barclays in New York. “It’s dollar negative” unless political risks around the world increase and spur demand for the safety of U.S. assets, he said. 

The appeal of the dollar has diminished as the Federal Reserve keeps interest rates at almost zero, prints cash to purchase $600 billion of bonds in a policy known as quantitative easing and the budget deficit holds above $1 trillion. The currency fell to 61.3 percent of global foreign-exchange reserves in the third quarter, from a peak of 72.7 percent in 2001, the latest International Monetary Fund data show. 

Biggest Gains 

The 12 members of the Organization of Petroleum Exporting Countries -- Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela -- provide about 40 percent of the world’s oil. While it’s almost impossible to trace the flow of their dollar revenues from crude sales, the biggest gaining major currencies over the past six months based on Bloomberg Correlation-Weighted Indexes are Sweden’s krona, Norway’s krone, the euro, franc and Australia’s dollar, all rising more than 2 percent. 

Currency Forecasts 

The euro may fall to $1.30 by year-end, Halpenny said. The median estimate of 44 strategists and economist surveyed by Bloomberg is for the currency to weaken to $1.35. Japan’s yen may depreciate to 88 per dollar, a separate poll shows. 

“There is relatively persistent global demand for dollars even with a structural trend of it slightly declining over time as a percentage of overall asset holdings,” said Jens Nordvig, a managing director of currency research in New York at Nomura Holdings Inc. “That will be true for Middle Eastern central banks as well as the alternative, the euro, is not looking like a clear winner because of fundamental reasons.” 

As the dollar’s share of global reserves has fallen, the IMF’s report shows that holdings categorized as “other,” which excludes dollars, euros, British pounds, yen and francs, rose to 4 percent of the total, the highest on record.

Full article HERE.

There is a twist to this story. As the dollar depreciates, US exports are boosted.  But this too has another consequence - a nation that controls the world's reserve currency can not run a trade surplus.  See Triffin's Dilemma.  The US is far from having a trade surplus, but increasing exports decreases the amount of dollars that are being exported via a trade deficit, dollars that are needed for the world economy to grow.  Unless, of course, nations begin to enter into non dollar denominated bilateral trade agreements.  Kind of what China is doing right now.

Michael Moore: This Is War!

From AP:

MADISON, Wis. (AP) -- The nearly month-long standoff in the Wisconsin Legislature over explosive union rights legislation rocketed toward a dramatic finish Thursday after Senate Republicans outmaneuvered their missing Democratic counterparts and pushed through the bill. 

The dramatic turn of events late Wednesday set up a perfunctory vote Thursday morning in the Assembly on the measure that would strip nearly all collective bargaining rights from most public workers. Once the bill passes the Assembly, it heads to Republican Gov. Scott Walker for his signature.  

Within hours after the Senate passed the bill, a crowd of hundreds of protesters grew to about 7,000 in the Capitol, a crowd as large as any seen inside the building over three weeks of demonstrations.  

"The whole world is watching!" protesters shouted as they pressed up against the heavily guarded entrance to the Senate chamber.

SOURCE

The battle lines are slowly being drawn.  After the massive Wall Street bailouts of 2008, and the resumption of Wall Street record bonuses, many government workers have now found a moral basis for arguing in their interests.  If Wall Street fatcats can have free money and undue government influence, why can't government unions have the same?  That is a tough argument to beat.

Personally, I have always been a private sector employee, and I have had my own businesses in the past.  I have skin in the game.  I take losses and profits - something that Wall Street Bankers and Government Union workers don't know anything about.  I pay my own health insurance, save for my own retirement.  Government has given me nothing.  I pay government.  Government costs me, and in return, I get no bailouts, no health insurance, no guaranteed pension.

I'm the average guy that has received nothing.  But you know what?  At this point - I really don't care anymore.  It's a clusterfuck.  Everyone is fighting for the last few crumbs of a broken system that is ready to implode.  There will be societal, political, and economic ramifications to this crisis.  I am in Greece right now and I have been to Athens and have seen what demonstrations can look like.  

The conflict is brewing.

Visit msnbc.com for breaking news, world news, and news about the economy

Niall Ferguson: China Will Overtake the US in a Decade

More on the Chinese Challenge to US Hegemony.  I'm not entirely sold on this.  I think China has its own demons it will be facing soon.  Access to oil, for example will affect everyone, including China.  And another thing: in a fiat money world, is it really better to be a surplus country?  What exactly do trade surplus countries exchange their economic output for? Someone else's debt?  Good luck with that.

VIDEO LINK

Don't Discount the US or the Dollar Just Yet - Repost

I have noticed that there are a lot of new readers to this blog.  We are also seeing a lot of doom and gloom in the media regarding the US Dollar's future.  With those two things in mind, I am reposting an article I wrote last November regarding one possible fate of the US Dollar.  I think we need to separate the fact that the US Dollar represents two things: 1) It represents the strength and power of both the US Military and Economy, and 2) in its current form, it represents the fiat model the world uses for trade.  In my view we need two think about these two factors individually when analyzing the future of the US Dollar.


Also keep in mind that China, Russia, and other nations are scrambling to increase their gold reserves for a reason.


Here is the article:


In 2004, writing for the New York Times Magazine, Ron Suskind interviewed amongst others, an aide to then George Bush's administration. The article covered Bush's handling of world affairs, and the US's role in the world. There is an interesting quote in that article that conveys, to me, the reality of a superpower. And even though the early 2000s were emerging "war years" for the US in Iraq and Afghanistan, there is a quote in that article that also applies, in my view, to all US Presidential Administrations and their actions, which covers the economic sphere as well. 

Ron Suskind was speaking to this aide about how solutions are promulgated - through the "judicious study of discernable reality." To which this Presidential aide elaborated:

''That's not the way the world really works anymore,'' he continued. ''We're an empire now, and when we act, we create our own reality. And while you're studying that reality -- judiciously, as you will -- we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors . . . and you, all of you, will be left to just study what we do.''

SOURCE

So why do I bring this up? I want to make a point clear. Although my blog is titled fiat collapse, and I write about the US Dollar paper standard's inevitable collapse, I am not discounting the US or the Dollar. Notice, I say "paper" dollar. That is, the debt based system that was begun under Nixon when the gold window of convertibility was shut. So yes, I believe that debt based fiat money is on its last legs, but that doesn't mean the US Dollar disappears. It can transform and so, my views are still open on the US's future role in the world. I will not underestimate the US - not yet. But I also believe that American banks have cost the US dearly, in both power and national security - but all is not lost - as I said, not yet. The US has something up its sleeve that can't be ignored. Gold.

Writing for the Gerson Lehrman Group, George Anastasiadis comments in his summary:

"The U.S. message at the G20 is the following: if we do not act together to rebalance the world economy, the US will act unilaterally to rescue its economy. This will entail a change in the rules of the global game as the U.S. will try to impose its will via the printing press by inflating the rest of the world or forcing their currencies to appreciate relative to the dollar."

SOURCE

I agree with the above comment on the US acting unilaterally, though I disagree with the success of quantitative easing ("QE"). I think the US's QE is plan "A," but there is also a plan "B," in my view.

So what is this plan "B"? Gold, in my opinion, is plan "B." The US has by far, the largest gold reserves of any other nation. And it doesn't just end there. The US, acting as custodian, also stores many other nations' gold. Under the Bretton Woods system, as many may already know, the US Dollar was converted to gold. But that didn't mean it also went across the Atlantic either. More often, all that transpired was a book entry. The gold went to another nation's balance sheet, while it sat in a vault in the US.

According to Jim Rickards, the US has over 6,000 tons of gold stored in custody for other nations. This makes the US the "Saudi Arabia" of gold. In a recent interview at King World News, Rickards has stated the following:

"In a way, the Fed can afford to trash the paper dollar, or at least experiment and risk trashing the paper dollar because if the dollar collapses we can go back to gold pretty quickly."

"We have the world over a barrel; the US wins either way... we have a plan 'B' and the rest of the world does not." 

SOURCE

In 1933, then President Franklin Roosevelt signed executive order 6102, "forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates." The US purchased gold, from its citizens, at $20.67 an ounce. It then proceeded to devlaue the dollar against gold. The US can do the same thing with its custodial gold. It can write a check to say, Germany, and then devalue the dollar against gold. I have speculated how the gold bubble would end in the past - and I covered this type of "sovereign revaluation of gold" scenario in my post: Gold Will Be A Bubble Until It Isn't.

I want to note that much of this custodial gold is Europe's. Thus, for those that follow FOFOA's blog, it makes me wonder if the Euro-Gold connection is really that solid? Isn't possession 9/10ths of the law? Overall, Rickards still believes that most US policymakers are not thinking about gold and so we'll stumble into it in a "chaotic way."

About a month after that Rickards interview Robert Zoellick, President of the World Bank, started a gold debate, which I covered in my post The Gold Standard Debate Unleashed. This article in the Financial Times sure enough created quite the buzz of academic thinking on the gold standard. Most main stream economists are trained in the Keynesian school and thus furiously disagree with gold. But what they miss, what they ignore, is the quote I posted above. Let's look at it again:

''That's not the way the world really works anymore,'' he continued. ''We're an empire now, and when we act, we create our own reality. And while you're studying that reality -- judiciously, as you will -- we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors . . . and you, all of you, will be left to just study what we do.''

To me, this quote hits the nail on the head. It not only describes journalists and analysts, but economists as well. It basically states: let the eggheads debate all they want, when push comes to shove, when national security is at stake, we act in our own interests, and everyone else reacts. Now that's Realpolitik. And for those that may have missed it, James Grant wrote an article on the gold standard in the NY Times yesterday. The article is titled: How to Make the Dollar Sound Again.

Bernanke and the "Global Savings Glut" Theory

CNBC, in a rare moment of clarity, has published on its website an economist's criticism of Bernanke and fiat money management by central banks.  Economist Richard Duncan addresses many of the issues this blog covers- rampant fiat money creation by Central Banks, and the unintended consequences.

The obvious question the article leaves unanswered is how this fiat money system created imbalance eventually will correct.

Here is the article:

Blog:  Why won't Bernanke Come Clean on Glut?

Perhaps the greatest mystery in the world of finance and economics is why Fed Chairman Ben Bernanke refuses to acknowledge that paper money creation by central banks produced the “global savings glut” which, according to him, destabilized the global economy and led to the crisis of 2008. 

Six years ago, Bernanke unleashed his Global Savings Glut (GSG) theory on the world. Since then, he has made numerous other speeches touching on this subject, including one last month in Paris. With each speech he came a little closer to admitting the obvious, but in every case he holds back, as if not at liberty to discuss the secret money-making powers of central bankers. 

The basic gist of GSG is Asians, and oil exporters, save more than they wish to invest in their own countries and they choose to invest the surplus in the United States because of attractive returns. Those capital inflows into the US, he claims, push up US asset prices and push down US interest rates, leading to asset-price bubbles and the US current account deficit. 

The GSG theory would be accurate if only he would add that most of the “savings” causing the “glut” originate because central banks created and “saved” the equivalent of many trillions of dollars over the past 15 years. 

The theory comes across as rather absurd when that fact is omitted. As it stands, the GSG theory clashes with reality in two important respects. First, US financial markets may be deep, but they are certainly not well regulated. Second, Asians do not believe US investments offer attractive returns. 

In June 2009, Treasury Secretary Tim Geithner was laughed at by an audience of Chinese students after insisting that China’s US assets are safe. Asians believe the United States and its dollar are in terminal decline and the future belongs to Asia. 

But the theory does make sense when it is modified to recognize that Asian “savers” investing in US assets are Asian central banks that bought US dollars in order to hold down the value of their own currencies perpetuating their low-wage trade advantage; and that those central banks must invest those dollars in US dollar-denominated assets to earn a return. 

Coming Close to Disclosing 

A few times over the years, Bernanke has come close to clarifying this. In the 2005 speech, he said "some East Asian countries, such as Korea and Thailandbegan to build up large quantities of foreign-exchange reserves" and “China also built up reserves." 

The article concludes with:

But in reality, he must know. How could he have missed the explosive growth of central bank balance sheets in China and many other developing countries? But why would he want to hide from the public the creation of trillions of dollars worth of paper money when it has played the driving role in destabilizing the global economy? 

This is the mystery. 

What's clear is that the equivalent of trillions of dollars was created by central banks in the decade leading up to the global economic crisis, that money played a leading role in causing the crisis, that central banks have created trillions more since the crisis began, that global food prices spiked, causing revolution across the Arab world and that central bankers are doing everything possible to avoid accepting responsibility for the havoc. 

There is no mystery about the causes of inflation. As Milton Friedman put it, “Inflation is always and everywhere a monetary phenomenon.” 

Full article HERE.

With Currency War Underway, Global Re-Militarization is the Logical Next Step.

    

The world finds itself in an increasing state of fragility.  Gone are the days of the post Soviet collapse where the US was the unrivaled, lone Superpower.  We witnessed a global economic boom soon after the Soviet collapse, with occasional hiccups such as Russia's default, the Asian Crisis, and the collapse of hedge fund LTCM.  But overall, it was a great ride.  Or so we thought?

So now we notice that the system of global debt based fiat currency that brought us tremendous wealth gains also gave us tremendous debts and severe global trade imbalances.  The US finds itself in a situation of having to devalue the dollar to stimulate exports and to devalue its debt.  This policy of dollar devaluation has created a race of devaluations around the world.  A currency war, of sorts.  It has also created a situation where inflation is being exported by the wealthy West to the poorer East - with unimaginable political unrest in the Middle East and elsewhere.

And so, as the world's resource rich emerging nations experience turmoil, and as currency and trade conflicts intensify, the world's powers are looking at their insurance policies to weather the economic storm.  There are two insurance policies that nations rely on:  One is the result of the fiat money world we live in: it is gold.  Nations know that if the current fiat system breaks down, that nations with the most gold will feel the least pain.   That's why China, Russia, and India are racing to accumulate gold. Gold cannot be printed at will by Central Banks, and so in a situation of a severe currency or sovereign bond crisis, gold becomes the only remaining, trusted medium of exchange.  But there is another "insurance policy" powerful nations rely on to maintain their access to the world's resources and to keep competitors in "check." It is their military.

Here I report two recent developments that prove the world is becoming increasingly multipolar, and thus increasingly fragile.  It is becoming fragile because when clear leadership is lacking - military conflict or re-armament is the resolution mechanism that settles disputes.  What are the disputes?  Who influences what regions, and why.

Murray Rothbard: The World Currency Crisis

The article below was written by Austrian Economist Murray Rothbard, and can be viewed on Mises.org.  The date of the article is 1995, and it is part of a longer series of writings by Murray Rothbard titled "Making Economic Sense."

This article, written in 1995, reads like prophecy.  But no magic or higher power enlightenment is needed here.  Just common sense and a basic understanding of economics and political realities tells you, even in 1995, that the world's experiment of free floating fiat currencies was destined to fail.  But most did not see this type of end coming.  Many still don't and cling to the belief that a global fiat currency will solve the crisis.

Here is the full article, the link follows.  For those that are interested in more of Murray Rothbard's writings on the global monetary system, I will provide a link at the end of the article.

The Keynesian Dream

For a half-century, the Keynesians have harbored a Dream. They have long dreamed of a world without gold, a world rid of any restrictions upon their desire to spend and spend, inflate and inflate, elect and elect. They have achieved a world where governments and Central Banks are free to inflate without suffering the limits and restrictions of the gold standard. But they still chafe at the fact that, although national governments are free to inflate and print money, they yet find themselves limited by depreciation of their currency. If Italy, for example, issues a great many lira, the lira will depreciate in terms of other currencies, and Italians will find the prices of their imports and of foreign resources skyrocketing.

Calling All Gold Bears!!!!

You know who you are.  Calling for a "correction."  Calling it a "bubble."  Saying everything is going to be fine.  Saying the Dow/Gold ratio will soon revert in favor of the Dow...

Where are the Gold Bears?

I think I hear them here:




I'm not saying that gold will continue this ascent forever.  It may just as well drop at any time. But over the long haul, I just don't see things getting better until we really experience the type of meltdown we barely averted in 2008.  And the next crisis will make 2008 look like a picnic.

Repost: Re-Balancing Global Trade Before the Whole Thing Topples Into Currency Collapse and War

I decided to re-post this article I wrote back in October 2010.  Recently the G20 has been trying to create a process where global trade imbalances are addressed.  In my opinion,  the process they prefer to implement will unlikely succeed.  The resolution they recently incorporated in a communique, has since been watered down (surprise, surprise.)  

Here is the relevant text from the communique:

We agreed on a set of  indicators that will allow us to focus, through an integrated two-step process, on those persistently large imbalances which require policy actions. To complete the work required for the first step, our aim is to agree, by our next meeting in April, on indicative guidelines against which each of these indicators will be assessed, recognizing the need to take into account national or regional circumstances, including large commodity producers.  While not targets, these indicative guidelines will be  used to assess the following indicators: (i) public debt and fiscal deficits; and private savings rate and private debt (ii) and the external imbalance composed of the trade balance and net investment income flows and transfers, taking due consideration of exchange rate, fiscal, monetary and other policies. We also adopted a timetable for developing the 2011 action plan that will implement our Framework for Strong, Sustainable and Balanced Growth and monitor the commitments already made.

This is similar to what Timothy Geithner proposed before the last G20 meeting in Seoul in November 2010. Here is my post from last year addressing this, and the real underlying problem the global economy faces: