Saturday, October 1, 2011
'The Sharks Will Soon Be Swimming Our Way'
(Image: source)
While I'm not sure Professor Laurence J. Kotlikoff's solution to the mess we are in, which involves a fundamental restructuring of the tax system along with other fixes collectively known as The Purple Plans, has any chance of being adopted in the absence of a full-blown crisis -- which has historically been the only real impetus to fixing broken economic and political systems -- the grim assessment of where things stand he offers in a CNN op-ed, "America's Debt Woe Is Worse than Greece's," suggests the day reckoning is not far off.
Our government is utterly broke. There are signs everywhere one looks. Social Security can no longer afford to send us our annual benefit statements. The House can no longer afford its congressional pages. The Pentagon can no longer afford the pension and health care benefits of retired service members. NASA is no longer planning a manned mission to Mars.
We're broke for a reason. We've spent six decades accumulating a huge official debt (U.S. Treasury bills and bonds) and vastly larger unofficial debts to pay for Social Security, Medicare, and Medicaid benefits to today's and tomorrow's 100 million-plus retirees.
The government's total indebtedness -- its fiscal gap -- now stands at $211 trillion, by my arithmetic. The fiscal gap is the difference, measured in present value, between all projected future spending obligations -- including our huge defense expenditures and massive entitlement programs, as well as making interest and principal payments on the official debt -- and all projected future taxes.
The data underlying this figure come straight from the horse's mouth -- the Congressional Budget Office. The CBO's June 22 Alternative Fiscal Scenario presents nothing less than a Greek tragedy. It's actually worse than the Greek tragedy now playing in Athens. Our fiscal gap is 14 times our GDP. Greece's fiscal gap is 12 times its GDP, according to Professor Bernd Raffelhüschen of the University of Freiburg.
In other words, the U.S. is in worse long-term fiscal shape than Greece. The financial sharks are circling Greece because Greece is small and defenseless, but they'll soon be swimming our way.
Click here to read the rest.
More and More Like the Real Thing
Is America under siege?
Perhaps not in the literal sense (yet). But this scary-looking chart, which comes from a new report published by Colgen LP, "Texas Border Security: A Strategic Military Assessment," detailing the extent to which Mexican criminal gangs have infiltrated the United States, suggests the violent and chaotic "war" on our southern flank is looking more and more like the real thing.
With that in mind, the report, written by General Barry McCaffrey, Director of the Office of National Drug Control Policy under President Bill Clinton, and Major-General Robert Scales, former Commandant of the United States Army War College, offers a military perspective on how to secure the increasingly hostile border regions along the Rio Grande River.
Here's an excerpt from the Executive Summary:
During the past two years the state of Texas has become increasingly threatened by the spread of Mexican cartel organized crime. The threat reflects a change in the strategic intent of the cartels to move their operations into the United States. In effect, the cartels seek to create a “sanitary zone” inside the Texas border -- one county deep -- that will provide sanctuary from Mexican law enforcement and, at the same time, enable the cartels to transform Texas’ border counties into narcotics transshipment points for continued transport and distribution into the continental United States. To achieve their objectives the cartels are relying increasingly on organized gangs to provide expendable and unaccountable manpower to do their dirty work. These gangs are recruited on the streets of Texas cities and inside Texas prisons by top-tier gangs who work in conjunction with the cartels.
Strategic, Operational and Tactical Levels of Conflict
The authors of this report, both retired senior military executives bring more than 80 years of military and governmental service to their perspective on Texas border security viewed in terms of the classic levels of conflict: strategic, operational and tactical.
Strategic
America’s fight against narco-terrorism, when viewed at the strategic level, takes on the classic trappings of a real war. Crime, gangs and terrorism have converged in such a way that they form a collective threat to the national security of the United States. America is being assaulted not just from across our southern border but from across the hemisphere and beyond. All of Central and South America have become an interconnected source of violence and terrorism. Drug cartels exploit porous borders using all the traditional elements of military force, including command and control, logistics, intelligence, information operations and the application of increasingly deadly firepower. The intention is to increasingly bring governments at all levels throughout the Americas under the influence of international cartels.
Operational
In the United States the operational level of the campaign against cartel terrorism is manifested at the state. Texas has become critical terrain and operational ground zero in the cartel’s effort to expand into the United States. Texas has an expansive border with drug cartels controlling multiple shipping lanes into the state. Texas’ location as the geographic center of the U.S. allows for easier distribution of drugs and people. In effect, the fight for control of the border counties along the Rio Grande has become the operational center of gravity for the cartels and federal, state and local forces that oppose them.
Tactical
At the tactical level of war the cartels seek to gain advantage by exploiting the creases between U.S. federal and state border agencies, and the separation that exists between Mexican and American crime-fighting agencies. Border law enforcement and political officials are the tactical focal point. Sadly, the tactical level is poorly resourced and the most vulnerable to corruption by cartels. To win the tactical fight the counties must have augmentation, oversight and close support from operational and strategic forces. History has shown that a common border offers an enemy sanctuary zone and the opportunity to expand his battlespace in depth and complexity. Our border with Mexico is no exception. Criminality spawned in Mexico is spilling over into the United States. Texas is the tactical close combat zone and frontline in this conflict. Texans have been assaulted by cross-border gangs and narco-terrorist activities. In response, Texas has been the most aggressive and creative in confronting the threat of what has come to be a narco-terrorist military-style campaign being waged against them.
Click here to read the rest.Unelected, Unaccountable, Unrepentant: The Federal Reserve Is Using Your Money To Bail Out European Commercial Banks Once Again
For a moment, imagine that there is a privately-owned organization in the United States that can create U.S. dollars out of thin air whenever it wants and can loan that money to whoever it wants to. Imagine that this organization is able to act with the full power of the U.S. government behind it, but that nobody in the organization is ever elected by the American people, and that for all practical purposes the organization is not accountable to the president or to Congress. Imagine that the organization is able to make trillions of dollars of secret loans to banks, to foreign governments and even to their close friends without ever having to face a comprehensive audit. Does that sound preposterous? Well, such an organization actually exists. It is called the Federal Reserve, and today we found out that once again the Fed is going to be taking huge piles of your money and loaning it to commercial banks in Europe. The Congress cannot overrule this decision. Neither can Barack Obama. Because it has so much power, many refer to the Federal Reserve as "the fourth branch of government", but unlike the other three branches of government, there are basically no significant "checks and balances" on the Federal Reserve. If you don't like the fact that the Federal Reserve is racing in to help big foreign banks survive the European debt crisis that is just too bad. The Federal Reserve pretty much gets to do whatever it wants to do, and the folks over at the Fed simply do not care whether you like that or not.
So what in the world just happened today? The following is how an article on CNBC explained it....
Just ahead of the Wall Street open Thursday, the European Central Bank, along with the U.S. Federal Reserve, Bank of England, Bank of Japan and Swiss National Bank announced they would offer three-month dollar loans to Europe's commercial banks, easing dollar funding constraints.
It must be nice to do whatever you want without having to get the approval of anyone else.
What do you think Barack Obama would give for such power right about now?
The Federal Reserve and other major central banks around the world decided that lending big European banks gigantic piles of dollars would be a good idea, so they are just doing it.
No debate, no votes and no democracy - they just tell us how things are going to be and that is that.
It is a bit ironic that all of this happened on the third anniversary of the collapse of Lehman Brothers. It is almost as if the central bankers of the world are trying to send some sort of a message.
So how much money is going to be loaned out?
Well, according to an article in The Daily Mail, big European banks are going to be able to borrow an "unlimited" amount of money....
The deal announced yesterday means banks will be able to borrow ‘any amount’ of money in three separate auctions in October, November and December. Banks will have to put up collateral, or security, to tap the emergency funds.
Wow - I wish someone would offer to lend me an "unlimited" amount of money.
But of course this really is not going to solve anything in the long run. You can't solve a raging debt problem with more debt.
Yes, it will help the big European banks with their short-term liquidity problems, but it will do nothing to fix the long-term structural problems that are tearing Europe to pieces.
Win Thin, a senior currency strategist at Brown Brothers Harriman, said essentially the same thing to CNBC today....
"They're taking care of the symptoms, but the underlying illness is still out there. On the margin, it's positive. Until Greece defaults and we clear this whole thing up, they're still treading water"
So, no, the financial problems of Europe have not been solved.
Just think of this latest move as a temporary band-aid.
So why get upset about it?
Well, what all of this shows is just how arrogant the Federal Reserve is.
The Federal Reserve gets to throw around trillions of dollars without any accountability to the American people.
As I have written about previously, the Federal Reserve made $16.1 trillion in secret loans to their friends during the last financial crisis.
This was revealed in a GAO report, and members of Congress such as Ron Paul and Bernie Sanders tried to get people to pay attention to this. The following is a statement about this report that was taken from the official website of Senator Sanders....
"As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world"
So how much of that money went overseas? Well, it turns out that approximately $3.08 trillion of that money was loaned to big banks and major financial institutions in Europe and Asia.
Barack Obama can't lend trillions of dollars to foreign banks.
So why does the Federal Reserve get to do it?
Sadly, most Americans know very little about the Federal Reserve. In the United States today, most Americans graduate from high school without ever learning much of anything about the Fed.
But if you really want to understand what is going on with our economy, it is absolutely critical that you understand the Federal Reserve.
The following are some more reasons why you should be upset about what the Federal Reserve has been doing....
*The Federal Reserve is a perpetual debt machine. Today, the U.S. national debt is 4700 times larger than it was when the Federal Reserve was created back in 1913.
*The Federal Reserve has recently been actually paying banks not to make loans. Right now banks can park money at the Federal Reserve and make risk-free income without having to make loans to the American people.
*Current Federal Reserve Chairman Ben Bernanke has a track record of failure that is legendary, and yet George W. Bush and Barack Obama both backed him 100%.
*The Federal Reserve system is designed to create inflation. The truth is that the United States has only had a persistent, ongoing problem with inflation since the Federal Reserve was created back in 1913.
*Since 2008, what the Federal Reserve has been doing to our money supply has been absolutely insane. Eventually this is going to have very serious consequences for us.
*The U.S. government has handed over the task of "centrally planning" our economy to the Federal Reserve. The Fed decides what the target rate of inflation should be, what the target rate of unemployment should be, what interest rates are going to be and what the size of the money supply is going to be. This is quite similar to the "central planning" that goes on in communist nations, but very few people in our government seem upset by this.
*The Federal Reserve picks "winners" and "losers" in the financial system. For example, when the last financial crisis hit, the Fed bent over backwards to help out the big Wall Street banks, but hordes of small banks were left out in the cold.
*As mentioned above, the Federal Reserve has become way, way too powerful. The Fed is able to do a lot of things that the three branches of government are simply not able to do. Fortunately, there are a few of our leaders that are alarmed by this. For example, Ron Paul once told MSNBC that he believes that the Federal Reserve is now more powerful than Congress.....
"The regulations should be on the Federal Reserve. We should have transparency of the Federal Reserve. They can create trillions of dollars to bail out their friends, and we don’t even have any transparency of this. They’re more powerful than the Congress."
As long as we continue to use a debt-based currency that is controlled by a privately-owned central bank, we are going to continue to have permanent inflation and government debt that expands at an exponential pace.
The "central planning" done by the Federal Reserve has created bubble after bubble after bubble. Our dollars is on the verge of dying and our financial system is about to collapse.
The Federal Reserve system simply does not work.
Hopefully we can start sending more politicians to Washington D.C. that will be willing to stand up to the Federal Reserve.
But for now, the Federal Reserve is going to keep running around doing whatever it wants to do whether we like it or not.
30 Signs That The U.S. Economy Is About To Go Into The Toilet
If you think the U.S. economy is bad now, just wait for a few months. Things are about to become absolutely nightmarish. None of the long-term economic trends that are hollowing out our economy have been addressed and more bad economic news seems to come out virtually every single day. Now there is constant talk of the "next recession" in the mainstream media. But did the last recession ever truly end? The number of good jobs continues to decline, more stores are closing, incomes continue to go down, credit card debt and student loan debt are soaring, the housing market resembles a corpse, the number of Americans living in poverty continues to rise and government debt is at unprecedented levels. We are losing blood fast, and almost all of our leaders are either too corrupt or too incompetent to be able to do anything about it. The U.S. economy really and truly is about to go into the toilet, and if something is not done very quickly we are going to experience a complete and total economic disaster in this nation.
Americans have been promised over and over that this economic downturn is just "temporary" and that things will return to normal soon. During this upcoming election cycle, the Democrats will swear that they have all the answers and that if we just elect them everything will be okay. The Republicans will also swear that they have all the answers and that if we just elect them everything will be okay.
Well, both sides are lying. The economic plans of both major political parties are a joke. Neither of them can restore economic prosperity to this nation.
Our politicians could delay the coming economic collapse by borrowing gigantic piles of money and pumping all of that cash into the economy. But stealing from our children and our grandchildren is not exactly sound economic policy.
Yes, the U.S. economy is in bad shape right now, but things are about to get even worse. The long-term problems that are destroying our economy have not been fixed, and the leaks in our ship are going to continue to grow.
The following are 30 signs that the U.S. economy is about to go into the toilet....
#1 An increasing number of unemployed Americans have become so desperate that they have started to look for work overseas. For example, the number of Americans that are submitting applications for temporary work visas in Canada has approximately doubled since 2008. Other Americans are willing to learn foreign languages and travel to the other side of the world if that is what it takes to land a decent job. Just consider the following quote from a recent USA Today report....
Job placement firms are reporting a surge in American worker interest in booming economies such as Hong Kong, Singapore, China and, increasingly, India. Hunt Partners, an executive search firm, estimates that it's getting 50% to 100% more unsolicited résumés from Americans looking for Asia-based positions today than before the recession.
#2 When Barack Obama first took office, the official U.S. unemployment rate was 7.6 percent. Today it is 9.1 percent.
#3 The number of Americans that are concerned that they will lose their jobs continues to hover near record highs. According to Gallup, 30 percent of all employed Americans are worried that they will soon be laid off.
#4 After three straight years of very high unemployment, you can feel frustration and desperation in the air almost everywhere that you go. Many unemployed Americans are now at the end of their ropes. The following is from a testimonial that was recently posted on The Atlantic....
The most difficult part of the job search is:
1. that I don't live near a factory or outsource outlet in China, India, or Malaysia.
2. trying not to appear desperate for a job when I am, in fact, quite desperate for a job.
3. that I am subject to everyone's advice on how to get a job, but no real job leads.
4. that I am reminded that having a good job is not an entitlement.
5. that when I become depressed from my job search, I'm told told to cheer up or else give a bad vibe to prospective employers ... yet when I become happy through non-search related activities, I am reminded that I should be looking for work
7. that when I confide to friends and family that I have "given up" to pursue more fruitful interests, it elicits a crushing look of disbelief, disappointment, and disgust
8. waiting for permission to give up.
#5 The percentage of American men that are employed continues to plummet. In July, only 63.5 percent of all men in the United States had a job. Since 1948, that number has only been lower one time (63.3 percent in December 2009).
#6 Back in the 1950s, manufacturing accounted for about 28 percent of U.S. GDP. Last year, it accounted for just 11.7 percent. Meanwhile, manufacturing now accounts for about 25 percent of GDP in China and they now actually have more factory production each year than we do. Sadly, Barack Obama is pushing for even more trade agreements that will send millions more of our jobs overseas.
#7 The percentage of Americans that are working low paying jobs continues to relentlessly march upwards. Back in 1980, less than 30% of all jobs in the United States were low income jobs. Today, more than 40% of all jobs in the United States are low income jobs.
#8 According to John Williams of shadowstats.com, after you add in all short-term discouraged workers, all long-term discouraged workers and all Americans that are working part-time because they cannot find full-time employment, the real unemployment rate should be approximately 23 percent.
#9 We are starting to see another huge wave of store closings and layoffs. For example, the parent company of Payless stores has announced that it will be permanently closing 475 stores. Borders is in the process of closing every single one of its 399 stores. Also, Bank of America has just announced that it will be closing about 600 branches, and that could result in the loss of about 30,000 good jobs.
#10 Median household income has fallen for three years in a row.
#11 Americans are really starting to rack up consumer debt once again. According to Time Magazine, U.S. consumers are on pace to collectively add 54 billion dollars in credit card debt in 2011.
#12 Student loan defaults are rising very sharply. Just consider the following excerpt from a recent New York Times article....
The share of federal student loan defaults rose sharply last year, especially at for-profit colleges and universities, where 15 percent of borrowers defaulted in the first two years of repayment, up from 11.6 percent the previous year.
#13 According to a chart in The Economist, whenever the number of newspaper articles in the Financial Times and the Wall Street Journal that mention the word "recession" goes over 1,500 in a particular quarter, the U.S. economy almost always goes into a recession.
#14 The U.S. housing crash just continues to get worse. The index of home builder sentiment put out by the National Association of Home Builders fell once again during the month of September. With such a glut of unsold foreclosed homes on the market, it is making things really hard of home builders. Things have gotten so bad that even the U.S. government now owns nearly a quarter of a million foreclosed homes. The impact of this housing nightmare on families has been absolutely devastating. Just check out what a recent Time Magazine article had to say about what has been going on in California....
The impact on children has been brutal: since 2007, 7% of the state's children have had a foreclosure process started on their homes, the fourth-highest level in the nation, according to a study released this month by the Annie E. Casey Foundation.
#15 Many believe that due to much tighter lending standards, it is now harder to be approved for a mortgage than at any other time since World War II. This is absolutely crushing the housing market.
#16 Most Americans don't seem to expect housing prices to recover for an extended period of time. One recent survey found that 54 percent of Americans believe that there will not be a housing recovery until "2014 or later".
#17 The combined debt of the largest GSEs (Fannie Mae, Freddie Mac and Sallie Mae) has increased from 3.2 trillion in 2008 to a whopping 6.4 trillion in 2011. If that debt goes bad, U.S. taxpayers will be left holding the bill.
#18 There are now nearly 50 million Americans that do not have health insurance, and the percentage of Americans covered by employer-based health plans has fallen for 11 years in a row. Meanwhile, Americans now spend about 3 times as much on health care as they did back in 1990.
#19 The Postal Service has publicly announced that it is "on the verge" of financial collapse.
#20 The number of small businesses continues to fall. I recently noted this fact on The American Dream Blog....
The number of "self-employed" Americans continues to rapidly shrink. According the Bureau of Labor Statistics, 16.6 million Americans were self-employed back in December 2006. Today, that number has shrunk to 14.5 million. Even though we have 14 million unemployed people in this country and jobs are incredibly difficult to come by, the number of people trying to work for themselves continues to decrease because the environment for small businesses in this country has become so incredibly toxic.
#21 American consumers have become tremendously pessimistic. According to one recent survey, 61 percent of all Americans believe that they will not return to their "pre-recession" lifestyles until at least 2014. According to a different recent survey, 39 percent of Americans actually believe that the U.S. economy has now entered a "permanent decline".
#22 Many U.S. investors certainly seem to believe that trouble is coming. According to CNN, last month the number of bets against the S&P 500 was the highest that we have seen in about a year.
#23 The number of U.S. households that are "doubling up" continues to grow. According to the U.S. Census Bureau, the number of combined households has increased by 10.7 percent since 2007.
#24 When Barack Obama moved into the White House, the average price of a gallon of gasoline in the United States was $1.83. Today it is $3.58.
#25 The number of Americans living in poverty grew by 2.6 million last year. That was the largest increase since the U.S. government began calculating poverty figures back in 1959.
#26 Back in the year 2000, 11.3% of all Americans were living in poverty. Today, 15.1% of all Americans are living in poverty.
#27 On Barack Obama's first day on the job, there were about 32 million Americans on food stamps. Today, there are more than 45 million Americans on food stamps.
#28 If there is a financial collapse in Europe, that will definitely plunge us into another recession. Right now, things do not look promising. At this point, headlines all over the world are proclaiming that Greece is dangerously close to defaulting.
#29 At some point soon, investors all over the globe may decide that it is time to start dumping U.S. government debt. For example, Chinese officials are now openly talking about the need to "liquidate" their holdings of U.S. Treasuries.
#30 The U.S. national debt continues to explode in size and spiral out of control. According to Professor Laurence J. Kotlikoff, the U.S. "fiscal gap" increased by about 6 trillion dollars last year. In fact, Kotlikoff makes a compelling argument that Greece is actually in better shape financially than the United States is.
Do you now understand how much trouble we are in?
The long-term trends that are destroying us continue to get worse.
The United States is steamrolling directly toward an economic collapse.
When this economy hits bottom and splatters all over the place, it is not going to be easy to fix.
The America that we know today is going to be wiped out by a gigantic mountain of debt and by the consequences of decades of really bad decisions.
We were handed the keys to the greatest economic machine in the history of the world and we have wrecked it.
So prepare for really, really hard times ahead.
The era of endless prosperity is ending.
Next comes the pain.
Is Financial Instability The New Normal?
The financial world is officially going crazy. Can you believe what is going on out there right now? Financial markets have been jumping up and down like crazy for months and this is creating a lot of fear. Other than during the financial crisis of 2008, in the post-World War II era have we ever experienced as much financial instability as we are seeing right now? Should we just accept that massive financial instability is going to be part of "the new normal" in the financial world? The wild swings that we are witnessing in the global financial marketplace are making a whole lot of people very nervous right at the moment. When markets go up, they tend to do it slowly and steadily. When markets go down, a lot of times it can happen very rapidly. Also, as I have mentioned before, more major stock market crashes happen during the fall than during any other time of the year. The last major financial crisis happened during the fall of 2008, and things are starting to look a little bit more like 2008 with each passing day. The last thing the global economy needs right now is another major financial meltdown, but that may be exactly what we are about to get.
The Dow got absolutely hammered once again on Thursday. It was down almost 400 points, and it has lost a total of 674.83 points over the last two days combined.
In case you are wondering, yes, that is a very big deal.
It represents the largest two day decline that we have seen since November 2008, and at this point the Dow is on pace to have its worst week since September 2008.
Over the past two days, more than 900 billion dollars of "paper wealth" has disappeared.
Hopefully you did not share in that pain.
A couple of days ago, I discussed 21 signs that the financial world was on the verge of a nervous breakdown. But I had no idea that things would get so ugly so soon.
So what comes next?
One of the keys is to watch what the "insiders" are doing. Often they will say one thing and do another.
At the moment, corporate "insiders" are selling 7 dollars of stock for every 1 dollar of stock that they are buying.
Over the past couple of weeks, "insider" investing behavior has changed dramatically. The following is from an article that was recently posted on MarketWatch....
The insiders have vanished.
Chief executives. Board members.
The head honchos. The people who know.
Just a few weeks ago, they were out in force, buying up shares in their own companies with both hands.
No longer. They’ve disappeared. Almost overnight.
“They’ve stopped buying,” says Charles Biderman, the chief executive of stock market research firm TrimTabs, which tracks the data.
For some reason, this almost always starts happening before a crash. So obviously this is not a good sign.
A lot of normal investors have been pulling large amounts of money out of stocks as well. The following is from a report in the Financial Post....
Investors have pulled more money from U.S. equity funds since the end of April than in the five months after the collapse of Lehman Brothers Holdings Inc., adding to the $2.1 trillion rout in American stocks.
About $75 billion was withdrawn from funds that focus on shares during the past four months, according to data compiled by Bloomberg from the Investment Company Institute, a Washington-based trade group, and EPFR Global, a research firm in Cambridge, Massachusetts. Outflows totaled $72.8 billion from October 2008 through February 2009, following Lehman’s bankruptcy, the data show.
Are you starting to get the picture?
Not only that, but a third very troubling sign is that an extraordinary number of bets has been placed against the S&P 500. As I noted the other day, if there is a stock market crash in the next few weeks, somebody is going to make a ton of money....
We are seeing an amazing number of bets against the S&P 500 right now. According to CNN, the number of bets against the S&P 500 rose to the highest level in a year last month. But that was nothing compared to what we are seeing for October. The number of bets against the S&P 500 for the month of October is absolutely astounding. Somebody is going to make a monstrous amount of money if there is a stock market crash next month.
It doesn't take a genius to see all the dark financial clouds that are gathering on the horizon.
And all of the bad news that is constantly coming out of Europe is certainly not helping things. For example, yesterday S&P slashed the credit ratings of seven different Italian banks.
Credit downgrades have become so frequent that we hardly even notice them anymore.
Pessimism is everywhere right now. Suddenly it seems like almost everyone is predicting that another "recession" is coming....
*According to a recent Harvard Business Review survey, 70 percent of global business leaders believe that a global recession is "somewhat likely" or "very likely" in the coming months.
*Economist Nouriel Roubini says that we are "already in recession".
*When asked by CNBC what he thought about the possibility of another recession, George Soros said the following the other day....
“I think we are in it already.”
As fear spreads, it is only going to make global financial instability even worse. If something doesn't change, we could soon have a full-blown panic on our hands.
So why should the rest of us care if global financial markets crash and a bunch of bankers lose a whole lot of money?
Well, unfortunately our entire economic system is based on credit. When the last financial crash happened in 2008, the credit markets got really tight. Economic activity started to freeze up. We entered a deep recession and unemployment skyrocketed.
As much as many of you may want to see the house of cards fall down, the reality is that when it does it is going to deeply hurt millions upon millions of innocent people too.
During the last recession (which never really ended), millions of Americans that lost their jobs also lost their homes.
Back in 2006, the home vacancy rate in America was 11.6%.
In 2009, the home vacancy rate was 12.6%.
In 2010, the home vacancy rate was 13.1%.
Just like the number of Americans on food stamps, this is a figure that just keeps going up and up and up.
Could we eventually live in a country where one out of every five homes is standing empty?
The truth is that the U.S. economy is in the middle of a long-term decline. The economy declined badly while George W. Bush was in office, and the decline has accelerated since Barack Obama entered the White House.
As I wrote about yesterday, the American people are feeling really depressed about the economy and 80 percent of them believe that we are in a recession right now.
So what kind of a mood are they going to be in if there is another major financial crisis and unemployment jumps up by several more percentage points?
We live in unprecedented times. The financial world has become incredibly unstable, and none of us is really quite sure what "the new normal" is going to look like after all of this is over.
But one thing is for sure - things never stay the same for long.
The way that things have been in the past is not how things are going to be in the future.
A "perfect storm" is coming.
Everything that can be shaken will be shaken.
You better get ready.
Prophets Of Doom: 12 Shocking Quotes From Insiders About The Horrific Economic Crisis That Is Almost Here
We are getting so close to a financial collapse in Europe that you can almost hear the debt bubbles popping. All across the western world, governments and major banks are rapidly becoming insolvent. So far, the powers that be are keeping all of the balls in the air by throwing around lots of bailout money. But now the political will for more bailouts is drying up and the number of troubled entities seems to grow by the day. Right now the western world is facing a debt crisis that is absolutely unprecedented in world history. Europe has had a tremendously difficult time just trying to keep Greece afloat, and several much larger European countries are now on the verge of a major financial crisis. In addition, there is a growing number of very large financial institutions all over the western world that are also rapidly approaching a day of reckoning. The global financial system is a sea or red ink, and when we get to the point where there are hundreds of ships going under how is it going to be possible to bail all of them out? The quotes that you are about to read show that quite a few top financial and political insiders know that things cannot hold together much longer and that a horrific economic crisis is coming. We built the global financial system on a foundation of debt, leverage and risk and now this house of cards that we have created is about to come tumbling down.
A lot of people in politics and in the financial world know what is about to happen. Once in a while they will even be quite candid about it with the media.
As I have written about previously, Europe is on the verge of a financial collapse. If things go really badly, things could totally fall apart in a few weeks. But more likely it will be a few more months until the juggling act ends.
Right now, the banking system in Europe is coming apart at the seams. Because the global financial system is so interconnected today, when major European banks start to fail it is going to have a cascading effect across the United States and Asia as well.
The financial crisis of 2008 plunged us into the deepest recession since the Great Depression.
The next financial crisis could potentially hit the world even harder.
The following are 12 shocking quotes from insiders that are warning about the horrific economic crisis that is almost here....
#1 George Soros: "Financial markets are driving the world towards another Great Depression with incalculable political consequences. The authorities, particularly in Europe, have lost control of the situation."
#2 PIMCO CEO Mohammed El-Erian: "These are all signs of an institutional run on French banks. If it persists, the banks would have no choice but to delever their balance sheets in a very drastic and disorderly fashion. Retail depositors would get edgy and be tempted to follow trading and institutional clients through the exit doors. Europe would thus be thrown into a full-blown banking crisis that aggravates the sovereign debt trap, renders certain another economic recession, and significantly worsens the outlook for the global economy."
#3 Attila Szalay-Berzeviczy, global head of securities services at UniCredit SpA (Italy's largest bank): "The only remaining question is how many days the hopeless rearguard action of European governments and the European Central Bank can keep up Greece’s spirits."
#4 Stefan Homburg, the head of Germany's Institute for Public Finance: "The euro is nearing its ugly end. A collapse of monetary union now appears unavoidable."
#5 EU Parliament Member Nigel Farage: "I think the worst in the financial system is yet to come, a possible cataclysm and if that happens the gold price could go (higher) to a number that we simply cannot, at this moment, even imagine."
#6 Carl Weinberg, the chief economist at High Frequency Economics: "At this point, our base case is that Greece will default within weeks."
#7 Goldman Sachs strategist Alan Brazil: "Solving a debt problem with more debt has not solved the underlying problem. In the US, Treasury debt growth financed the US consumer but has not had enough of an impact on job growth. Can the US continue to depreciate the world’s base currency?"
#8 International Labour Organization director general Juan Somavia recently stated that total unemployment could "increase by some 20m to a total of 40m in G20 countries" by the end of 2012.
#9 Deutsche Bank CEO Josef Ackerman: "It is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels."
#10 Alastair Newton, a strategist for Nomura Securities in London: "We believe that we are just about to enter a critical period for the eurozone and that the threat of some sort of break-up between now and year-end is greater than it has been at any time since the start of the crisis"
#11 Ann Barnhardt, head of Barnhardt Capital Management, Inc.: "It's over. There is no coming back from this. The only thing that can happen is a total and complete collapse of EVERYTHING we now know, and humanity starts from scratch. And if you think that this collapse is going to play out without one hell of a big hot war, you are sadly, sadly mistaken."
#12 Lakshman Achuthan of ECRI: "When I call a recession...that means that process is starting to feed on itself, which means that you can yell and scream and you can write a big check, but it's not going to stop."
*****
In my opinion, the epicenter of the "next wave" of the financial collapse is going to be in Europe. But that does not mean that the United States is going to be okay. The reality is that the United States never recovered from the last recession and there are already a lot of signs that we are getting ready to enter another major recession. A major financial collapse in Europe would just accelerate our plunge into a new economic crisis.
If you want to read something that will really freak you out, you should check out what Dr. Philippa Malmgren is saying. Dr. Philippa Malmgren is the President and founder of Principalis Asset Management. She is also a former member of the Bush economic team. You can find her bio right here.
Malmgren is claiming that Germany is seriously considering bringing back the Deutschmark. In fact, she claims that Germany is very busy printing new currency up. In a list of things that we could see happen over the next few months, she included the following....
"The Germans announce they are re-introducing the Deutschmark. They have already ordered the new currency and asked that the printers hurry up."
This is quite a claim for someone to be making. You would think that someone that used to work in the White House would not make such a claim unless it was based on something solid.
If Germany did decide to leave the euro, you would see an implosion of the euro that would be truly historic.
But as I have written about previously, it should not surprise anyone that the end of the euro is being talked about because the euro simply does not work.
The only way that the euro would have had a chance of working is if all of the governments using the euro would have kept debt levels very low.
Unfortunately, the financial systems of the western world are designed to push governments into high levels of debt.
The truth is that the euro was doomed from the very beginning.
Now we are approaching a day of reckoning. We have been living in the greatest debt bubble in the history of the world, but the bubble is ending. There are several ways that the powers that be could handle this, but all of them will lead to greater financial instability.
In the end, we will see that the debt-fueled prosperity that the western world has been enjoying for decades was just an illusion.
Debt is a very cruel master. It will almost always bring more pain and suffering than you anticipated.
It is easy to get into debt, but it can be very difficult to get out of debt.
There is no way that the western world can unwind this debt spiral easily.
The only way that another massive economic crisis can be put off for even a little while would be for the powers that be to "kick the can down the road" a little farther by creating even more debt.
But in the end, you can never solve a debt problem with more debt.
The next several years are going to be an incredibly clear illustration of why debt is bad.
When the dominoes start to fall, we are going to witness a financial avalanche which is going to destroy the finances of millions of people.
You might want to try to get out of the way while you still can.
Exclusive: The Inside Story Behind the Awlaki Assassination
Note: This story is based on reporting with sources knowledgeable about the Awlaki operation, including three law enforcement and intelligence officials. Anwar Al Awlaki, killed Friday morning in an American strike in Yemen, has been on the U.S. radar for several years, ever since, as one U.S. official stated, he turned from "inspirational to operational." He was believed to be behind the Nigerian "underwear" bomber who tried to ignite his explosives planted on his body as his airplane was landing in Detroit. And he was believed responsible for the cargo bomb plot targeting the United States last fall.
U.S. intelligence officials, aware of other planned attacks, had arrested several Muslim American converts who returned here after "studying" in the Sudan. Most of their time was spent on terrorist training and learning from Awlaki and his advisors about the precepts of jihad and Islam. Intelligence officials believe that "hundreds" of American and European converts to Islam, along with other indigenous Muslims from Islamic countries, have trained with Awlaki, making many of them "ticking time bombs."
Awlaki lived in the southern Yemen province of Shabwa, an area beyond the reach of Yemen's military and central government. Much of Yemen is like the Wild West, with no central governing authority. The numerous tribes settle disputes among themselves. Awlaki came from the Awalik tribe.
Intelligence gathered last year from Yemeni authorities and from debriefings with several American converts who returned to the United States after training with Awlaki, helped narrow Awlaki's location to a 100 square mile area. He moved at night, often in convoys of armored SUVs in order to prevent U.S. drones and surveillance from determining which vehicle he was in. But the drones, which have advanced in the ability to recognize faces on the ground, hovered above the area where Awlaki was believed to be. Electronic intelligence – including telephone intercepts –also were used, although Awlaki was said to be careful in limiting his use of electronic communication, aware that he could be tracked that way.
In the past several months, American drone operators were confident they had identified Awlaki as he moved from among a series of underground bunkers. An initial drone missile targeting him was fired at an al-Qaida training camp but missed him.
Meanwhile, U.S. intelligence and law enforcement agents collected as much personal data about Awlaki as they could from his extended family living in western countries. For example, he had an ex-wife living in Ireland that no one knew about until a close relative living in the United States identified the family tree for agents in early January. The relative proved to be a goldmine of information about Awlaki's siblings, parents, wives, and children.
Intelligence officials learned about the American relative in January through other Yemeni expatriates living here who knew her. She agreed to cooperate and provided extensive information about close relatives living either with him, elsewhere in Yemen, or in different parts of the world. Telephone numbers belonging to a close relative living in Yemen's capital Sanaa that the American relative provided to U.S. intelligence officials proved the most critical.
The relative knew that Awlaki called that number. The National Security Agency (NSA) quickly was able to triangulate the phone numbers and determine almost exactly where Awlaki was when he called the Sanaa number. The American relative also provided information on other Awlaki relatives who apparently had direct contact with Awlaki, either through email or other electronic means. That knowledge helped track other communication and confirm Awlaki's whereabouts.
Up to a dozen additional drones were dispatched to the southern part of Yemen in a search for the exact coordinates of Awlaki's location. Drone operators felt that Awlaki was most vulnerable during the day whenever he was outside moving from one hideout to another. Officials also had recruited Yemeni informants to pose as Awlaki students to try to provide intelligence on Awlaki's location. But the drones, which could not be seen by the naked eye, hovered nonstop in a massive effort to cover large parts of southern Yemen and ensure that Awlaki had not left. He knew the United States wanted to assassinate him, as evidenced by the lawsuit brought by his father, Nasser Al-Awlaki—a U.S. citizen living in Yemen. The suit challenged the legality of a presidential order to kill Awlaki, an American citizen, without due process.
In the last month, drone operators became convinced they had identified Awlaki in various convoys. Previous strikes were considered but withheld out of concern of causing too many civilian casualties. Although the Yemen central government claims that it was in charge of the operation, the reality is that the United States acted independently.
A recent intelligence tip indicated that Awlaki was going to be traveling Thursday or Friday in a multi-SUV convoy. By early Friday afternoon Yemen time, the drones had clearly identified Awlaki's convoy—which apparently was distinct from other traveling cars in the poor region of his province—providing a clear video to drone operators in Virginia. President Obama had already given the orders to kill Awlaki if a clear shot was available.
The president was notified on Thursday about Awlaki's expected travel via convoy and that drone operators likely would have a clear shot at him. The president authorized the strike and was joined overnight by aides to monitor the video that was beamed from the drones. At one point, believed to be around 4 a.m. in Washington, the drones broadcast images of Awlaki's convoy traveling openly and without any cloud cover. Several missiles were fired. At least two of the vehicles were destroyed. Within hours, Yemen's military has secured the area and taken DNA samples from several of the remains of the bodies in the decimated vehicles. The samples were flown to Washington this morning and matched with Awlaki's relatives living here.
One source offered a slightly different version of events, saying that the relatives' DNA samples were within the U.S. Embassy in Yemen. In either case, forensic scientists compared the DNA samples and confirmed the match.
In addition, two other top lieutenants to Awlaki were also killed. One was Samir Khan, also an American, but the name of the other top assistant could not be obtained.
There was jubilation at the CIA, the Pentagon and the White House as the leading global al-Qaida recruiter had finally joined his mentor, Osama bin Laden. The FBI and Department of Homeland Security issued a warning to field offices around the country to be on guard against any revenge attacks. The charismatic English speaker and leader of al-Qaeda in the Arabian Peninsula had been eliminated
Europe’s Triple Threat
PALO ALTO – Europe is suffering from simultaneous sovereign-debt, banking, and currency crises. Severe economic distress and political pressure are buffeting relationships among citizens, sovereign states, and supranational institutions such as the European Central Bank. Calls are rampant for surrendering fiscal sovereignty; for dramatic recapitalization of the financially vulnerable banking system; and/or for Greece and possibly other distressed eurozone members to quit the euro (or for establishing an interim two-tier monetary union).
In this combustible environment, policymakers are desperately using various vehicles – including the ECB, the International Monetary Fund, and the European Financial Stability Facility – in an attempt to stem the financial panic, contagion, and risk of recession. But are officials going about it in the right way?
The sovereign debt, banking, and euro crises are closely connected. Given their large, battered holdings of peripheral eurozone countries’ sovereign debt, many of Europe’s thinly capitalized banks would be insolvent if their assets were marked to market. Their deleveraging inhibits economic recovery. And the large fiscal adjustment necessary for Greece, Ireland, and Portugal, if not Italy and Spain, will be economically and socially disruptive. Default likely would be accompanied by severe economic contraction – Argentina’s GDP fell 15% after it defaulted in 2002.
Despite stress tests, bailout funds, and continual meetings, a permanent workable fix has so far eluded European policymakers. Failure will erect a huge obstacle to European economic growth for years to come, and could threaten the survival of the euro itself. Disagreement among and between heads of state and the ECB over the Bank’s purchases of distressed sovereign debt have only added to the uncertainty.
A decent pan-European economic recovery, and successful gradual fiscal consolidation, would allow the distressed sovereign bonds to rise in value over time. Until then, the jockeying will continue over who will bear the losses, when, and how. Will it be Greek citizens? German, French, and Dutch taxpayers? Bondholders? Financial institutions’ shareholders? And the fundamental problem is that how the battle is resolved will affect the amount of the losses.
Prices of bank shares and the Euribor-OIS spread (a measure of financial stress) signal a profound lack of confidence in the sovereign debt of distressed countries, with yields on ten-year Greek bonds recently hitting 25%. The crisis affects non-Europeans too; for example, concern over the exposure of American banks and money-market funds to troubled European banks is harming US financial markets.
There are three basic approaches to resolving the banking crisis (which means resolving the fiscal adjustment, sovereign debt, and euro issues simultaneously). The first approach relies on time, profitability, and eventual workout. One estimate suggests that a 50% reduction in the value of peripheral countries’ sovereign debt (reasonable for Greece, but high for the others) would cause about $3 trillion in losses, overwhelming the capital of European banks. But the banks are profitable ongoing enterprises in the current low-interest-rate environment, because they typically engage in short-term borrowing and longer-term lending at higher rates, with leverage. Playing for time thus might enable them gradually to recapitalize themselves by retaining profits or attracting outside capital.
A strong, durable economic recovery would make such an approach workable. Most European officials hope that, when combined with substantial public money to support troubled sovereign debt, it will.
The Obama administration adopted this option, following the unpopular Troubled Asset Relief Program, which injected hundreds of billions of public dollars into the banking system (most of which has been repaid). But some US banks, including Bank of America and Citi, are still vulnerable, with considerable toxic assets (mainly related to home mortgages) on their balance sheets.
The second approach is rapid resolution. But letting questionable banks gradually recapitalize themselves and resolving the bad debt later – perhaps with European Brady Bonds (zero-coupon bonds which in the 1990’s enabled US banks and Latin American countries to agree to partial write-downs) – won’t work if the losses are too large or the recovery is too fragile. More rapid resolution may be necessary to prevent zombie banks from infecting the financial system.
The US Resolution Trust Corporation rapidly shut down 1,000 insolvent banks and Savings and Loans from 1989 to 1995 so that they would not damage healthy institutions. Scaled to today’s economy, assets worth $1.25 trillion were sold off, with 80% of the value recovered. The financial system rapidly returned to health. This approach requires judgment and resolve in separating insolvent institutions from solvent ones.
Finally, there is the path of public capital. If market-driven recapitalization is too slow, and closing failing institutions is impossible, a more extreme alternative is to inject public capital directly into the banks (rather than indirectly, as now, by propping up the value of the sovereign debt that they hold). This approach prevents bank runs, because banks with more capital are safer. But how much public capital should be used, and on what terms? Private capital, of course, is preferable, but, given the risk that it will be wiped out by future public intervention, investors will be wary. In the meantime, regulators are increasing banks’ capital ratios.
Europeans, both debtors and creditors, must address the banking problem forthrightly, and simultaneously with the euro, sovereign-debt, and fiscal-adjustment issues. Pretending that banks that passed modest stress tests can be kept open indefinitely with little collateral damage is wishful – and dangerous – thinking.
Michael Boskin, currently Professor of Economics at Stanford University and a senior fellow at the Hoover Institution, was Chairman of President George H. W. Bush’s Council of Economic Advisers, 1989-1993.
America’s Free-Trade Abdication
Evidence of anxiety outside the US has been clear to everyone for almost a year. German Chancellor Angela Merkel and British Prime Minister David Cameron were concerned enough to join with Turkey’s President Abdullah Gül and Indonesia’s President Susilo Bambang Yudhoyono in appointing Peter Sutherland and me as Co-Chairs of a High-Level Trade Experts Group in November 2010. We held a prestigious Panel at Davos with these leaders in January 2011, where, on the occasion of our Interim Report, we gave full-throated support to concluding Doha. But there was no response from the US government.
In September, former British Prime Minister Gordon Brown, former Spanish Prime Minister Felipe González, and former Mexican President Ernesto Zedillo reminded G-20 leaders that in November 2009, at their first meeting in London, they had expressed “a commitment to …conclude the Round in 2010.” And, two weeks ago, the UN met again on the Millennium Development Goals (MDGs). Goal 8 is about instruments such as trade and aid, and MDG 8A commits the UN member nations to “[d]evelop further an open, rule-based, predictable, non-discriminatory trading and financial system.”
But, while practically every country today has embraced preferential Free Trade Agreements, the recent leader in this proliferation is the US. There, Congress and the president apparently have plenty of time to discuss bilateral FTAs with South Korea, Colombia, and Panama, as well as the regional Trans-Pacific Partnership (TPP), but none for negotiating the non-discriminatory Doha Round, which is languishing in its tenth year of talks.
Indeed, it is notable that, while Obama’s State of the Union address in January 2010 at least mentioned Doha, his address in January 2011 did not. Obama confined himself to promoting the pending bilateral agreements with Colombia and other emerging-market countries.
Obama’s regrettable retreat from support for the Doha Round is the result of many factors and fallacies. These were highlighted in an “Open Letter to Obama” that I organized and released, over the signatures of nearly 50 of today’s most influential trade experts worldwide, urging a presidential shift in policy towards Doha.
America’s president is captive to the country’s labor unions, who buy the false narrative that trade with poor countries is increasing the ranks of the poor in the US by driving down wages. In fact, however, there is plenty of evidence for the rival narrative that rapid and deep labor-saving technological change is what is putting pressure on wages, and that imports of cheap labor-intensive goods that US workers consume are actually offsetting that distress.
Again, Washington lobbyists have bought into the absurd claim of trade experts such as Fred Bergsten that the gain from Doha, as it stands now, is a paltry $7 billion or so annually. This ignores the far greater losses that a failed Doha Round would entail, for example, by undermining the World Trade Organization’s credibility as the principal guarantor of rules-based trade, and by leaving trade liberalization entirely to discriminatory liberalization under preferential bilateral agreements. Again, someone needs to tell Obama that imports create jobs, too, and that his emphasis on promoting US exports alone is bad economics.
Most of all, Obama is badly served on trade by his senior colleagues. Secretary of State Hillary Clinton, for example, was opposed to trade liberalization when she ran against Obama for president, and advocated a “pause” in free-trade negotiations. She also misinterpreted the great economist Paul Samuelson as a protectionist, when he said nothing of the kind. She has never recanted.
Likewise, now that Warren Buffett is considered to be Obama’s most trusted economic adviser, it is worth recalling that back in 2003 he produced the astonishing prescription that the best way to reduce the US trade deficit was to allow no more imports than it could finance from its export earnings. An amused and alarmed Samuelson drew my attention to this nutty idea. While Buffett’s prescription of higher taxes for America’s wealthy is entirely desirable, will Obama realize that a genius in one area may be a dunce in another?
What we need today is for the world’s leading statesmen to stop pussyfooting and to unite in nudging Obama towards a successful conclusion of the Doha Round. That alone would provide the counterweight to the forces that pull him in the wrong direction. It is still not too late.
Protectionism in Argentina
Keep out
South America’s two biggest economies are imposing heavy-handed trade restrictions. Our first article looks at Argentina, our second at Brazil
BUENOS AIRES
IN RECENT years BlackBerrys have become an essential component in the young professional’s toolkit in Buenos Aires. But if you failed to buy one before the southern-hemisphere winter, you may be out of luck. “We have trouble getting them,” says an assistant at a Claro mobile-phone store in posh Recoleta. “We haven’t had them for months,” is the answer at a Personal shop in leafy Palermo. Movistar advertises the 8520 model on its home page, but the phone is in fact sold out.
At South America’s southern tip, the missing BlackBerrys are almost ready to roll off the line. On October 3rd Brightstar, a multinational manufacturer, will begin importing kits of the phones’ parts to its factory in Tierra del Fuego, the normal base for cruise ships going to Antarctica. Some 300 workers will brave the frigid austral fog to assemble the pieces and put them in locally sourced packaging.
Making BlackBerrys south of the Magellan strait will cost $23m upfront, plus $4,500-5,000 a month per worker, some 15 times more than in Asia. But the government touts the project as a triumph of its trade policy. It will help cut foreigners’ share of Argentina’s mobile-phone market from 96% in 2009 to a forecast 20% by the end of 2011. “We have a domestic market with growing demand. The goal is to supply it with local labour and production,” said Débora Giorgi, the industry minister, when the deal was announced.
Argentine manufacturers have been booming ever since the 2001 crash. Over most of that period, a cheap peso has ensured their competitiveness. But since 2005 inflation has been in double digits. As the trade surplus has dwindled, Cristina Fernández, the president, has beefed up her industrial policy. According to Global Trade Alert, a database of restrictions on international commerce, Argentina now imposes more trade limitations deemed “harmful” than any country save Russia.
Even before Ms Fernández’s late husband, Néstor Kirchner, became president in 2003, Argentina was taxing farm exports. The policy was meant to raise revenue. But the Kirchners later justified it as a way of discouraging commodity exports in favour of manufacturing. In 2008 Ms Fernández sparked protests by trying to raise taxes on soyabeans, Argentina’s chief export, and lost a congressional vote. Since then the country has restricted maize and wheat exports, leaving farmers with an estimated 4m tonnes of maize they can neither sell at home nor ship abroad. Beef exports have also been limited, which caused ranchers to stop raising cattle and led to lower leather output and beef consumption. Many foreign leather firms, such as Italy’s Italcuer, have left.
On the import side, Argentina cannot raise tariffs on its own because it belongs to the Mercosur customs union. So it is resorting to informal tools. Its main method is “non-automatic licensing”, a tactic recognised by the World Trade Organisation that lets countries delay imports for 60 days.
Argentina has made no pretence of honouring that time period. In January it expanded the list of products requiring licences from 400 to 600. It was a limit on phone imports that led Research in Motion to hire Brightstar to make BlackBerrys in Argentina (tax incentives then led the firm to Tierra del Fuego). Other affected goods include toys, pharmaceutical ingredients, tyres, fabrics, leather and farm machinery. On September 15th Argentina blocked imports of books, and over 1m piled up at the borders. Imports of Harley-Davidson motorcycles are frozen until 2012.
For firms that refuse to (or cannot) move production to Argentina, the government offers another option: deals to export goods worth at least as much as a company’s imports. In January customs officials stopped letting Nordenwagen import Porsches. Its cars languished in port for three months before the firm succumbed to a deal. Since its owners also possess Pulenta Estate, a vineyard, they agreed to launch a new line of mass-market wines for export, erasing the family’s trade deficit. They are also considering canning fruits. “It’s not the same margins as fine wines, but it takes time and investment. We’re trying to make it profitable,” says Eduardo Pulenta, the company’s export manager. “We’ll keep working to import cars. That’s what we know how to do.”
Copying from Brazil, the next target of Argentina’s new protectionism will probably be land. In April the government put forward a bill to cap total foreign landholdings at 20% of the country’s territory, and to stop any individual from acquiring over 1,000 hectares (2,471 acres). It makes no exemption for technology transfers. And it counts any firm with over 25% foreign ownership as an outside buyer, forcing the government to track every trade in the shares of public companies near the limit. Investors in mining, which many Argentines tout as the “new soyabeans”, are nervous. The bill has not been approved. But in next month’s election Ms Fernández is expected both to win again and to increase her party’s share of seats in Congress.
The net effect of these policies is hard to measure. Since 2005 imports have grown faster than exports. But that gap might have been bigger without the trade limits. The industry ministry says Argentina has substituted $5 billion of imports a year since 2009 (1.4% of GDP). Local consumers bear most of the cost, although some will fall on taxpayers now that the government is offering loans to exporters at negative real interest rates. Marcelo Elizondo, head of the UCES business school in Buenos Aires, says the interventions have affected the trade balance only slightly. “But it’s a deterrent,” he says. “It’s a general message for everyone who wants to import that it will be expensive and complicated, and you’re better off producing here.”
Climbing greenback mountain
Reserve currencies
Climbing greenback mountain
The yuan is still a long way from being a reserve currency, but its rise is overdue
AT THE FLAGSHIP store of Yue Hwa Chinese Products in Hong Kong customers can find exotic and everyday items from mainland China without having to cross the border. The offerings include silk brocades, sandalwood carvings, Sichuan peppers and traditional Chinese remedies such as ribbed antelope horns. Horn shavings, boiled in water, are said to quieten the liver and quell fevers.
Feverish visitors from the mainland can even pay for their shavings in their own currency, the yuan. The store charges 2,660 yuan ($416) for a whole horn, at an exchange rate of 1.1 Hong Kong dollar per yuan. Nearby money-changers offer a better rate, but some Chinese visitors prefer the convenience of using their own money. That way they can still get a late-night snack at the 7-Eleven after the money-changers have closed.
That is how, not long ago, the yuan set out on its career as an international currency. It crept into Hong Kong in the wallets of mainland visitors. The trickle across China’s borders quickened last year when the government allowed a broader range of Chinese firms to settle imports and exports in yuan. In the same year it set these offshore yuan free. Outside the mainland, the yuan could be transferred between banks, borrowed, lent and invested, just like any other currency.
This offshore experiment is, for many forecasters, a first tentative step towards making the yuan a fully fledged reserve currency to rival the dollar and the euro. But China’s policymakers are in two minds, as they tend to be when it comes to freeing finance. Restricting the flow of money into and out of China protects the country’s immature banking system. When Japan sanctioned the international use of the yen in the 1980s it set the stage for a damaging property bubble.
On the other hand China hates having to rely on the dollar. Officials are troubled by the Federal Reserve’s notably loose monetary policy and by America’s rapidly rising public debt. They fear that stimulus measures put in place to revive America’s flagging economy will sooner or later generate a burst of high inflation and weaken the dollar. That would hurt holders of US government bonds, including China. Around $2 trillion of its currency reserves of $3.2 trillion are in dollars, mostly in bonds. On August 5th America lost its triple-A credit rating from Standard & Poor’s because it had failed to come up with a credible plan to cap its public debt. China’s official news agency, Xinhua, immediately called for a new reserve currency.
Such calls have been made before, during bouts of dollar weakness in the late 1970s and mid-1990s, but the dollar still holds the privileged position in the world’s monetary system it has occupied since the second world war. It faces no immediate challenge to its status, notwithstanding the debt downgrade, because there are few good alternatives. Despite a long and steady decline in its value against other currencies, it still accounts for 60.7% of the world’s $9.7 trillion of currency reserves. That is around three times America’s weight in the world economy as measured by GDP. The dollar’s closest rival, the euro, accounts for 26.6% of the world’s reserves.
How does one currency maintain such dominance? Textbook economics says domestic money has three uses: as a unit of account against which the value of goods is measured; as a medium of exchange; and as a store of value used to conserve spending power for a rainy day.
The won fulfils these roles in South Korea; the yuan does the job in China; and the dollar provides these services in international markets as well as in America. It is the unit of account for commodities such as crude oil that are traded globally. Most trade that is invoiced in a currency other than those of the trading partners is quoted in dollars. And because the dollar is the benchmark for world prices and is used to settle cross-border trades, it makes sense for countries to keep stores of dollar reserves, both as a float and to bolster confidence in their own currencies.
The demand for reserve currencies is a boon to their issuers. Around $500 billion of America’s currency is used outside the country’s borders. Some of this cash is used to lubricate dollar-based international trade. But much of it greases the wheels of cross-border crime such as drug trafficking: crooks need a unit of account, a medium of exchange and a store of value just like legitimate businesspeople.
Indeed, a reserve currency might almost be defined by its appeal to criminals. Of the €900 billion-worth of euro notes in circulation, a third by value comes in the form of the pink and purple €500 note. Cynics say it was issued to capture a share of the international black market from the dollar, for which the largest denomination is $100. An illegal stash of €500 bills would be lighter, easier to conceal and easier to count. The €500 note was withdrawn by banks in Britain after police said its main use was in organised crime. That is a compliment of sorts to the euro. When Somali pirates or Russian gangsters demand payment in yuan, it will be the surest sign that economic power has shifted to China.
The cost of printing $500 billion-worth of notes is negligible compared with the value of the goods and services they can command. In order for those notes to circulate outside America, they must first have been exchanged for $500 billion-worth of goods and services. They represent a cost in real resources. The gap between the printing cost of banknotes and their face value is called seigniorage. Governments that print reserve currencies benefit from extending seigniorage beyond their own borders.
Issuers of international currencies also enjoy protection from currency volatility. A Vietnamese exporter selling to China is exposed to exchange-rate risk: he pays his workforce in dong, the local currency, but receives payment in dollars. If the dollar falls, so do his earnings, but his labour costs are unchanged. American exporters do not have to worry about currency mismatch because both their domestic costs and their export earnings are in dollars.
Nor has America had much need to acquire costly reserves of its own. Under the Bretton Woods system of fixed exchange rates that governed rich-country trade until 1971, members were constantly at risk of running short of dollars if their exports became uncompetitive, whereas America could always print more dollars. This was an “exorbitant privilege”, grumbled France’s finance minister at the time, Valéry Giscard d’Estaing.
Exorbitant privilege v original sin
The privileges of reserve-currency status were not confined to the dollar, though it enjoyed the lion’s share. They include being able to borrow cheaply. The dollars and euros (and, to a lesser extent, the pounds, Swiss francs and yen) that other central banks keep in reserve are mostly in the form of government bonds. The extra demand weighs on bond yields and sets a lower threshold for the cost of credit for businesses and consumers.
This part of the exorbitant privilege contrasts with the emerging world’s “original sin”, a term coined by Barry Eichengreen of the University of California, Berkeley, and Ricardo Hausmann of Harvard University for some countries’ inability to borrow in their own currencies. Borrowing in foreign currencies (as Brazil and other Latin American countries had done before the 1980s debt crisis) leaves original sinners at risk of default if their currency loses value. Trouble-prone countries have often had to keep interest rates high, even in a recession, to support their currencies and stave off default on foreign-currency debts. Hungary is a recent example of a country in this sort of trap. The Federal Reserve has never had to worry about such things.
The divide between the exorbitantly privileged and the original sinners was especially deep after the East Asian crisis of 1997-98. The lesson from that crisis was never to be short of reserves. The investment rate in emerging Asia fell, the saving rate stayed high and the excess saving was sent abroad. It marked the start of an unprecedented build-up of foreign exchange to insure against future balance-of-payments problems. The world’s currency reserves increased from $1.9 trillion in 2000 to $9.3 trillion in 2010. Much of the increase was in China.
The surge in demand for safe and liquid assets in dollars, euros and pounds pushed down long-term borrowing costs. The savings of the emerging world allowed the rich world to spend too freely, one of the deeper causes of the wave of crises that has afflicted the rich world since 2007. America’s financial markets met the global demand for “safe” dollar assets by repackaging the mortgages of marginal borrowers as bonds, which turned sour. But the resulting financial crisis hit mainly the rich world rather than the emerging markets.
Rich-world banks and investors seeking higher returns when interest rates were low had bought a lot of the ropy mortgage securities. That made room for reserve managers in emerging markets to buy more bonds backed by governments or issued directly by them. Investors were so anxious for yield that they barely distinguished between good and bad credits. Countries with large public debts, such as Greece and Italy, could borrow as cheaply as countries with sound public finances such as Germany. Windfall tax revenue from housing booms fuelled by cheap foreign credit made the public finances of Ireland and Spain look sound until recession (and, in Ireland’s case, the terrifying cost of bank bail-outs) caused public debt to explode.
Some believe the exorbitant privilege is really a curse that lures the reserve-currency country into too much borrowing or printing too much money. Over time this saps the economic and political strength that was the source of the privilege. This paradox was first noted in 1947 in a Federal Reserve paper written by Robert Triffin, a Belgian-born economist.
Under the Bretton Woods arrangement currencies were pegged to the dollar at fixed exchange rates. The dollar in turn was tied to gold at a fixed price. Triffin spotted a dilemma. A rising stock of dollars was needed to finance world trade. The more dollars were supplied, the more the currency’s link to gold would be questioned since America’s gold stocks would support an ever-larger pile of banknotes. This came to a head in August 1971 when heavy selling forced President Nixon to suspend the conversion of dollars into gold.
The Triffin dilemma is echoed in contemporary worries about the rich world’s public debts and its currencies. Easy access to credit lured the euro zone’s periphery into overborrowing. Greece is insolvent, Ireland and Portugal are not far off. For reserve currencies, what is safe is in conflict with what is convenient, argues Stephen Jen of SLJ Macro Partners, a hedge fund, adding that “the euro is efficient but it’s not safe.” Reliable and liquid repositories for rainy-day saving are scarce, which is why reserve managers and bond investors continue to push money into the Treasury market. But this tempts America to overextend itself, amassing debts it may one day struggle to service.
As America’s weight in the global economy drops, supplying the world with most of its reserve currency needs may become too big a job for the country. In his recent book, “Exorbitant Privilege”, Mr Eichengreen argues that a reserve-currency system will emerge in which the dollar, the euro and the yuan share the privileges and the responsibilities. That would make the world a safer place, he reckons, because each issuer would nudge the others towards financial and fiscal discipline.
It is not obvious that one currency needs to play a pre-eminent part. In its heyday, sterling was rarely as dominant as the dollar has been since it took over. On the eve of the first world war the pound accounted for only around half of all reserves: most of the rest was in French francs and German marks. By 1924 more reserves were held in dollars than in sterling.
The dollar is flawed, but so are the candidates to displace it. The euro has no single fiscal authority standing behind it. Nor is there a single issuer of sovereign debt to match the size and liquidity of the market for US Treasuries—although the bonds issued by the European Financial Stability Facility (EFSF), the euro area’s emergency bail-out fund, may foreshadow a single euro bond backed by all its members. For all its shortcomings, the euro still accounts for a quarter of the world’s reserves. Even as the region’s sovereign-debt crisis has deepened over the past year, its currency has gained ground against the greenback.
The speed at which the dollar rose to prominence suggests that the yuan might be an international currency as soon as 2020, says Mr Eichengreen. The greenback overtook sterling in reserves barely a decade after the founding of the Federal Reserve in 1913 as the backstop of dollar liquidity. The Fed pushed the dollar by fostering a liquid market for trade acceptances, the credit notes used to fund shipments. By the mid-1920s more trade was carried out in dollars than pounds and more international bonds were issued in New York than in London.
However, the obstacles to the yuan becoming a reserve currency are bigger than those faced by the dollar in 1913. At that time America was already a trusted storehouse for capital, a democracy where the rule of law was firmly established. China’s recent history is less reassuring, so it will take a while before foreigners feel secure keeping their savings in yuan. The currency would have to be fully convertible so that investors could park their yuan reserves in assets of their choosing and redeem them when needed.
This in turn would require China to allow capital to move freely across its borders, which it has been reluctant to do. In recent years it has eased restrictions on residents taking capital out of the country; for example, more foreign takeovers by big Chinese firms have been allowed to go ahead. But foreigners face formidable barriers to bringing money into China because the government is reluctant to cede control of the yuan’s value or of domestic bond yields to the ebb and flow of foreign capital.
China has taken some baby steps toward setting the yuan free. It has allowed trade in goods to be invoiced and paid in yuan. The proceeds can be put to work in a fledgling offshore yuan market in Hong Kong with restricted links to the mainland. Trade settlement in yuan has grown rapidly, reaching 600 billion in the second quarter of 2011 (around 10% of total trade), according to the People’s Bank of China.
So far such trade settlement has been a rather one-sided affair: most has been for imports (ie, Chinese firms paying foreigners in yuan for supplies). Few of China’s exporters are willing or able to demand yuan from foreign customers, though those customers should not find it hard to get hold of the currency. China’s central bank has set up swap agreements with the central banks of many of its emerging-market trading partners, ranging from Singapore to Kazakhstan, allowing foreign banks to supply yuan to their customers.
By the end of July yuan deposits in Hong Kong had swollen to 572 billion. The IMF said in July that 155 billion of yuan-denominated bonds (so-called “dim sum” bonds) had been issued in Hong Kong since the market was set up, many by branches of mainland banks. Issues by non-financial foreign companies are less common, in part because firms still need permission to bring the cash raised into China. There have been some high-profile deals, though the bonds have short duration. McDonald’s sold a three-year bond last year. Caterpillar, an American maker of earthmoving equipment, has issued a couple of two-year bonds so far. A recent sale in Hong Kong of 20 billion yuan of government debt was heavily oversubscribed.
The offshore yuan market has quickly come up from nowhere and China’s central bank has continued to strike bilateral swap deals to keep it growing. But it is a big leap from being a currency in which a chunk of your own trade is settled to being a fully fledged international currency, and a further jump to reserve-currency status. Only a small fraction of the world’s $4 trillion in foreign-exchange deals each day are for trade settlement. The bulk of currency dealing is for hedging or related to trading in stocks, bonds and other assets. The dollar is one side of 85% of all currency trades, according to the Bank for International Settlements (see chart 2). The yuan accounts for just 0.3% of turnover.
Yet the exorbitant curse will catch up with the dollar one day and the yuan is its most likely replacement. China’s economy is second only to America’s in size and is likely to overtake it soon. It is already the world’s largest exporter. And it has net foreign assets of $1.8 trillion, whereas America owes a net $2.5 trillion to foreigners. Only Japan is in a stronger position.
A global yuan?
Reserve-currency status depends on these three gauges of economic dominance—size of economy, exports and net foreign assets—says the Peterson Institute’s Arvind Subramanian. By 1918 America had the world’s biggest economy and would soon be its largest creditor and exporter; within a few years the dollar also had the lion’s share of the world’s foreign-exchange reserves. If that precedent is anything to go by, the yuan should soon become the main global reserve currency, and not merely a junior alternative to the dollar or the euro.
The rewards to China of opening up fully to foreign capital trump the risks, reckons Mr Subramanian. Turning the yuan into a reserve currency offers China a way out of its mercantilist growth model, which has run its course. Demand for yuan reserves would push up the exchange rate, discourage exports and give China’s consumers greater purchasing power. A push for reserve status for the yuan would go hand in hand with the development of China’s financial system—a necessary step to support the small- and medium-size businesses it needs to serve its domestic market, and for many other reasons. For China to escape the middle-income trap, it will have to let go of the yuan.
The rich world’s monopoly on reserve-currency privileges has given it first call on the world’s precautionary savings. For now, it is clinging on to its privileges. But rivalry from developing countries in the markets for oil and commodities is already exacting a price from the West.
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