In September 2008 the US came
to a fork in the road. The Public Policy decision to not seize the banks, to
not place them in bankruptcy court with the government acting as the
Debtor-in-Possession (DIP), to not split them up by selling off the assets to
successful and solvent entities, set the world on the path to global currency
wars.
By lowering interest rates and
effectively guaranteeing a weak dollar through undisciplined fiscal policy,
the US ignited an almost riskless global US$ Carry Trade and triggered an
uncontrolled Currency War with the mercantilist, export driven Asian
economies. We are now debasing the US dollar with reckless
spending and money printing with the policies of Quantitative Easing (QE) and
the expectations of QE II. Both are nothing more than effectively defaulting
on our obligations to sound money policy and a "strong US$".
Meanwhile with a straight face we deny that this is our
intention.
It's called debase, default
and deny.
Though prior to the 2008
financial crisis our largest banks had become casino like speculators with
public money lacking in fiduciary responsibility, our elected officials
bailed them out. Our leadership placed America and the world unknowingly
(knowingly?) on a preordained destructive path because it was politically
expedient and the easiest way out of a difficult predicament. By kicking the
can down the road our political leadership, like the banks, avoided their
fiduciary responsibility. Similar to a parent wanting to be liked and a
friend to their children they avoided the difficult discipline that is
required at certain critical moments in life. The discipline to make America
swallow a needed pill. The discipline to ask Americans to accept a period of
intense adjustment. A period that by now would be starting to show signs of
success versus the abyss we now find ourselves staring into. A future that is
now significantly worse and with potentially fatal pain still to come.
Unemployed Americans, the
casualties of the financial crisis wrought by the banks, witness these banks
declaring record earnings while the same banks refuse to lend. When the banks
once more are caught with their fingers in the cookie jar with falsified
robo-signing mortgage title fraud, they again look for the compliant parent
to look the other way. Meanwhile the US debt levels and spending associated
with protecting these failed (and still insolvent institutions) are so out of
touch with US de-industrialized productive capability that the US dollar is
falling and forcing countries around the world to devalue their currencies in
a desperate attempt to maintain competitive advantage. So much for the
"strong dollar" mantra we heard endlessly for years from every US
Secretary of the Treasury that needed foreign investment to fund our
deficits. Like second rate powers, our word is no longer our bond.
The fork in the road which we
chose has resulted in:
1) massive public debt levels
that can never realistically be expected to be paid back,
2) Financial markets that are disconnected from fundamental historical
values,
3) A global banking industry that can best be described as fragile and is
realistically insolvent if the accounting
games were to be removed.
I think most would agree that
massive public, private and consumer debt levels are a central problem to the
current global predicament. We also however need to appreciate that these
massive debt build ups have also allowed the over-building of production
capacity. We have global supply that is now outstripping demand. The output
gap in the US alone would require a theoretical -7% Fed Funds rate according
to the Taylor Rule (6).
EXCESS CAPACITY
The currency wars are being
fought because global players are being forced to fight for a piece of the
global demand pie that is growing at a slower rate (a first derivative
problem) versus the capacity presently available and coming online. The Asian
buildup of production capacity is nothing short of startling but it is premised
on a free spending and 70% consuming US economy. A slowdown in the US and a
weakening US dollar are major threats to political and social stability in
the Asian export economies. Everything in the mercantile, export led Asian
economies must be done to avoid this. The facts however are that there are no
longer sufficient jobs in America to support past and present levels of
consumptions. The middle class in America is quickly becoming extinct and
with it the ability to famously 'shop till they drop'.
What are the US politicos to
do? The well recognized Michael Hudson asserts in Why the U.S. Has
Launched a New Financial World World War:
"Finance is the new form
of warfare - without the expense of a military overhead and an occupation
against unwilling hosts. It is a competition in credit creation to buy
foreign resources, real estate, public and privatized infrastructure, bonds
and corporate stock ownership. Who needs an army when you can obtain the
usual objective (monetary wealth and asset appropriation) simply by financial
means? All that is required is for central banks to accept dollar credit of
depreciating international value in payment for local assets. Victory
promises to go to whatever economy's banking system can create the most
credit, using an army of computer keyboards to appropriate the world's
resources. The key is to persuade foreign central banks to accept this
electronic credit.
U.S. officials demonize
foreign countries as aggressive "currency manipulators" keeping
their currencies weak. But they simply are trying to protect their currencies
from being pushed up against the dollar by arbitrageurs and speculators
flooding their financial markets with dollars. Foreign central banks find
them obliged to choose between passively letting dollar inflows push up their
exchange rates - thereby pricing their exports out of global markets - or
recycling these dollar inflows into U.S. Treasury bills yielding only 1% and
whose exchange value is declining. (Longer-term bonds risk a domestic
dollar-price decline if U.S interest rates should rise.)
What is to stop U.S. banks and
their customers from creating $1 trillion, $10 trillion or even $50 trillion
on their computer keyboards to buy up all the bonds and stocks in the world,
along with all the land and other assets for sale in the hope of making
capital gains and pocketing the arbitrage spreads by debt leveraging at less
than 1 per cent interest cost? This is the game that is being played today."
The chart to the right was published
in early
spring of this year specifically spelling out that a
'Beggar-thy-Neighbor' roadmap lay ahead.
WINNERS & LOSERS IN A CURRENCY WAR
How could I have been so sure
when I put this chart together? The realistic fact about wars are that there
are winners and losers. These however are not the people on the battlefield.
Since Caesar, wars are about money. The winners are those who finance them
and the losers are those that pay for them. Rich banking families are well
documented to have financed both sides. It matters not much who wins but
rather that a war is fought so money is made.
So who actually wins in a
currency war? The answer is found by forensically following the money.
EVERY WAR COMES WITH NEW TECHNOLOGY
The most effective way of
following the money is to consider the major new innovations in the financial
world. Like all wars the winner is the one who innovates the 'combat
technology' the fastest.
We need to remember that the
financial innovations discovered during and after the financial crisis such
as: Collateralized Debt Obligations (CDOs), Credit Default Swaps (CDSs),
Structured Investment Vehicles (SIVs), Special Purpose Entities (SPE's) and a
raft of securitization products were the foundations upon which were built
the "Toxic Assets" and the reason for the global financial crisis.
The toxic assets were the catalyst which we continuously heard referred to
during the crisis which forced the government into massive public debt
government spending in an apparent attempt to avoid a financial collapse.
If we examine the latest raft
of new weaponry, we can easily see where this is headed, how the money will
flow, who wins and unfortunately who loses.
1.
FIAT PAPER BOMBERS
- Quantitative Easing
Quantitative Easing is an euphemism for printing money. The US has embarked
on a massive untested trial in recklessly printing money.
2.
CURRENCY MISSILES
- US$ Carry Trade
Like the hydrogen bomb was to the early atomic bomb, the US$ Carry Trade is
to the original pilot Japanese Carry Trade. IF QE are the bombs, then the US
dollar carry trade are the missiles that deliver the bombs. With borrowing
costs in the US approaching zero, a weakening carry currency and unlimited
money creation, we have the perfect carry trade missile that can and will hit
any economy in the world.
3.
REGULATORY
ARBITRAGE - Guarantees and Contingent Liabilities
I have written extensively
how the financial crisis has served as a vehicle to shift debt obligations from
the banking and private sector to the public sector. This has been achieved
through government guarantees, the use of balance sheet contingent
liabilities and interest rate / currency swaps. It is the battlefield
strategy of Regulatory Arbitrage.
ARTICLES:
SULTANS
OF SWAP: Smoking Guns!, SULTANS
OF SWAP: The Sting!, SULTANS
OF SWAP: The Get Away!
4.
PUBLIC PRIVATE
PARTNERSHIPS / PRIVATE FINANCE INITIATIVES - PPP/PFI
The extensive hidden use of Public Private Partnerships & Private Finance
Initiatives (PPP/PFI) recently came to light during the European Sovereign
debt crisis. This tool has become the guidance system for missile delivery
since it allows the conversion of freshly printed fiat paper into real,
unencumbered, revenue producing assets.
ARTICLES:
SULTANS
OF SWAP: Explaining $605 Trillion in Derivatives!, SULTANS
OF SWAP: Smoking Guns!
5.
AN UNREGULATED $615
TRILLION - Derivative Swaps
The unregulated, off balance sheet, offshore, non exchange traded, private
SWAP vehicle is the ideal vehicle with which to control global financial
markets. The Sultans of Swaps now operate much as the Bond Vigilantes did at
one time but with different control and much different motives. The growth of
the SWAP market in interest rate and currency swaps effectively muzzled and
obsoleted the Bond Vigilantes of yesteryear.
6.
ARTICLES: SULTANS
OF SWAP: Explaining $605 Trillion in Derivatives!
HOW THE MONEY WILL BE MADE -
Paper Assets Exchanged for Real Assets
- TAKE OVER
PUBLIC SECTOR ASSETS - buildings, land, treasuries.
- TAKE OVER
PRIVATE SECTOR ASSETS - land and resources.
- TAKE OVER OF
SOVEREIGN TREASURY - transfer of sovereign treasury gold holdings
- MAJOR
CORPORATE CONSOLIDATIONS - reduced competition, reduced monopoly laws
and emergence of cartels
- NATIONALIZATION
OF PRIVATE & PUBLIC PENSIONS - government grab of financial assets
REAL WEALTH
The financiers of the currency
wars understand that real wealth in its most simplistic essence can only be
created by:
- GROWING IT
- MINING IT
- BUILDING IT
Paper money is simply a tool
for the trading of wealth. When money is backed by a hard asset then it also
becomes a store of that wealth. However that is not the case with fiat
currencies. Though Gold is real wealth it does not grow wealth, but rather
stores it or protects it from the debasement of paper 'trading' instruments.
Ideal real wealth is wealth that continues to grow and yet maintains its
inherent value. Over the longer term it is usually better to own well
managed, unencumbered agricultural producing land, producing mines and
production facilities than just the wealth product they output. The
Rothschild banking family learned this hundreds of years ago and is the
reason why they moved from solely owning gold to energy, mining, agriculture
and selective base materials process production.
FLAWED PUBLIC POLICY DECISIONS ASSURE THE OUTCOME
One mistake after another has
been made in an attempt to 'kick the can down the road' and avoid the
inevitable necessity to restructure the debt. Unfortunately when it is
restructured it will be at the expense of the public and not the original
parties. The cost to the tax payer will be insurmountable debt and the forced
surrender of pubic assets. Public assets that in the future will be charged
for by 'Private Banking' and Special Purpose Entity (SPE) owners.
=>
BAILOUTs: Banks, AIG, GM, Fannie Mae / Freddie Mac
=> HAMP,
Cash for Clunkers etc.
=> Extend
& Pretend Accounting
=> QE I
(Buying $1.7B in Mortgage & Treasury Products)
TIMING
Like a well oiled machine the
sequence of events continue to unfold as laid out in my Extend
& Preserve article series. The implementation of Quantitative Easing
(QE I) and change in GAAP Mark-to-Market accounting treatment ignited the
initial rally leg. With further refinements (see EXTEND
& PRETEND - Manufacturing a Minsky Melt-Up) it continued until it
became evident that the US employment and GDP were not improving in any
meaningful manner despite $13T of Spend, Lend and Guarantee initiatives. Then
as the polarization of the EU wanting 'austerity' policies versus the US
wanting 'stimulus' measures, the US dollar began weakening and stocks stopped
their retracement in June. When Bernanke signaled QE II in August the
financial markets were once again ignited and the US dollar weakened further.
The financial markets are now propelled by both euphoria and fear of more
liquidity being made readily available. It will not end well as we naively get
caught in the spider's carefully laid out trap.
CONCLUSION
An interesting fact is that
the US has positioned itself for this war as a result of the spending on
previous wars. According to Michael Hudson (5):
"What destabilized the
system was war spending. War-related transactions spanning World Wars I and
II enabled the United States to accumulate some 80 per cent of the world's
monetary gold by 1950. This made the dollar a virtual proxy for gold. But
after the Korean War broke out, U.S. overseas military spending accounted for
the entire payments deficit during the 1950s and '60s and early '70s.
Private-sector trade and investment was exactly in balance.
By August 1971, war spending in
Vietnam and other foreign countries forced the United States to suspend gold
convertibility of the dollar through sales via the London Gold Pool. But
largely by inertia, central banks continued to settle their payments balances
in U.S. Treasury securities. After all, there was no other asset in
sufficient supply to form the basis for central bank monetary reserves. But
replacing gold - a pure asset - with dollar-denominated U.S. Treasury debt
transformed the global financial system. It became debt-based, not
asset-based. And geopolitically, the Treasury-bill standard made the United
States immune from the traditional balance-of-payments and financial
constraints, enabling its capital markets to become more highly
debt-leveraged and "innovative." It also enabled the U.S.
Government to wage foreign policy and military campaigns without much regard
for the balance of payments."
We don't need to go into the
additional costs of the wars in Iraq and Afghanistan, Homeland Security (War
on Terror) and military base expansion into 130 countries which have exploded
the US fiscal deficits. Suffice it to say that these and all wars since
Vietnam are wars that have been conducted without increasing taxes - a
historical first which draws little attention or concern.
The present fiat currency
system will end based on the strategy of Debase, Default and Deny! It is my
opinion that it will be replaced by a system structured on the IMF and BIS's
Strategic Drawing Rights (SDRs) partially backed by precious metals. The
question to be asked however is not what will be the replacement for fiat
currency, but who will have ownership of the assets after this war ends? Who
will pay the requisite 'tribute' that goes to the victors?
"Fiat Paper Bombers
Spotted Overhead!!"
SOURCES:
(1) 10-25-10 Trade
of the Decade: The Power Elite's Grand Strategy Of Two Minds
(2) 10-04-10 Economic
Measures Continue to Slow Hussman Funds John P Hussman Ph.D.
(3) 10-11-10 No
Margin of Safety, No Room for Error Hussman Funds John P Hussman Ph.D.
(4) 01-19-10 Bernanke's
Sorcery Will Fail Arun Motianey
(5) 10-11-10 Why
the U.S. Has Launched a New Financial World World War Michael Hudson
(6) 10-27-10 The
Fed's impending blunder Ambrose Evans-Prichard Telegraph.co.uk
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