|
 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 the same banks declaring
record earnings while these 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.
ARTICLES: SULTANS OF SWAP: Explaining $605 Trillion
in Derivatives!
HOW THE MONEY WILL BE MADE – Paper Assets
Exchanged for Real Assets
1-
TAKE OVER
PUBLIC SECTOR ASSETS – buildings, land, treasuries.
2-
TAKE OVER
PRIVATE SECTOR ASSETS - land and resources.
3-
TAKE OVER OF
SOVEREIGN TREASURY – transfer of sovereign treasury gold holdings
4-
MAJOR CORPORATE
CONSOLIDATIONS - reduced competition, reduced monopoly laws and
emergence of cartels
5-
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:
1-
GROWING IT
2-
MINING IT
3-
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
=> ZIRP
=> TARP & ARRA
=> HAMP, Cash for Clunkers etc.
=> Extend & Pretend Accounting
=> QE I (Buying $1.7B in
(Mortgage & Treasury Products)
=> QE II
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!!”
Sign Up for the next release in the Currency
Wars series: Currency Wars
Follow
developments in the Currency Wars daily at Tipping Points
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
Gordon T. Long
Tipping
Points
Mr. Long is a former senior group
executive with IBM & Motorola, a principle in a high tech public start-up
and founder of a private venture capital fund. He is presently involved in
private equity placements internationally along with proprietary trading
involving the development & application of Chaos Theory and Mandelbrot
Generator algorithms.
Gordon T Long is not a
registered advisor and does not give investment advice. His comments are an
expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a qualified
investment advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and barring that,
you are encouraged to confirm the facts on your own before making important
investment commitments.
© Copyright 2010 Gordon T Long. The information herein was
obtained from sources which Mr. Long believes reliable, but he does not
guarantee its accuracy. None of the information, advertisements, website
links, or any opinions expressed constitutes a solicitation of the purchase
or sale of any securities or commodities. Please note that Mr. Long may already
have invested or may from time to time invest in securities that are
recommended or otherwise covered on this website. Mr. Long does not intend to
disclose the extent of any current holdings or future transactions with
respect to any particular security. You should consider this possibility
before investing in any security based upon statements and information
contained in any report, post, comment or recommendation you receive from
him.
|
