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That didn't take long. On Monday, the Dow was down another 326 points. Overall, the Dow has now fallen more than 1000 points from the peak of the market (16,588.25) back in late December. This is the first time that we have seen the Dow drop below its 200-day moving average in more than a [...]
In Costa Rica, publicly-owned banks have been available for so long and work so well that people take for granted that any country that knows how to run an economy has a public banking option. Costa Ricans are amazed to hear there is only one public depository bank in the United States (the Bank of North Dakota), and few people have private access to it.
So says political activist Scott Bidstrup, who writes:
For the last decade, I have resided in Costa Rica, where we have had a “Public Option” for the last 64 years.
There are 29 licensed banks, mutual associations and credit unions in Costa Rica, of which four were established as national, publicly-owned banks in 1949. They have remained open and in public hands ever since—in spite of enormous pressure by the I.M.F. [International Monetary Fund] and the U.S. to privatize them along with other public assets. The Costa Ricans have resisted that pressure—because the value of a public banking option has become abundantly clear to everyone in this country.
During the last three decades, countless private banks, mutual associations (a kind of Savings and Loan) and credit unions have come and gone, and depositors in them have inevitably lost most of the value of their accounts.
But the four state banks, which compete fiercely with each other, just go on and on. Because they are stable and none have failed in 31 years, most Costa Ricans have moved the bulk of their money into them. Those four banks now account for fully 80% of all retail deposits in Costa Rica, and the 25 private institutions share among themselves the rest.
According to a 2003 report by the World Bank, the public sector banks dominating Costa Rica’s onshore banking system include three state-owned commercial banks (Banco Nacional, Banco de Costa Rica, and Banco Crédito Agrícola de Cartago) and a special-charter bank called Banco Popular, which in principle is owned by all Costa Rican workers. These banks accounted for 75 percent of total banking deposits in 2003.
In Competition Policies in Emerging Economies: Lessons and Challenges from Central America and Mexico (2008), Claudia Schatan writes that Costa Rica nationalized all of its banks and imposed a monopoly on deposits in 1949. Effectively, only state-owned banks existed in the country after that. The monopoly was loosened in the 1980s and was eliminated in 1995. But the extensive network of branches developed by the public banks and the existence of an unlimited state guarantee on their deposits has made Costa Rica the only country in the region in which public banking clearly predominates.
Scott Bidstrup comments:
By 1980, the Costa Rican economy had grown to the point where it was by far the richest nation in Latin America in per-capita terms. It was so much richer than its neighbors that Latin American economic statistics were routinely quoted with and without Costa Rica included. Growth rates were in the double digits for a generation and a half. And the prosperity was broadly shared. Costa Rica’s middle class – nonexistent before 1949 – became the dominant part of the economy during this period. Poverty was all but abolished, favelas [shanty towns] disappeared, and the economy was booming.
This was not because Costa Rica had natural resources or other natural advantages over its neighbors. To the contrary, says Bidstrup:
At the conclusion of the civil war of 1948 (which was brought on by the desperate social conditions of the masses), Costa Rica was desperately poor, the poorest nation in the hemisphere, as it had been since the Spanish Conquest.
The winner of the 1948 civil war, José “Pepe” Figueres, now a national hero, realized that it would happen again if nothing was done to relieve the crushing poverty and deprivation of the rural population. He formulated a plan in which the public sector would be financed by profits from state-owned enterprises, and the private sector would be financed by state banking.
A large number of state-owned capitalist enterprises were founded. Their profits were returned to the national treasury, and they financed dozens of major infrastructure projects. At one point, more than 240 state-owned corporations were providing so much money that Costa Rica was building infrastructure like mad and financing it largely with cash. Yet it still had the lowest taxes in the region, and it could still afford to spend 30% of its national income on health and education.
A provision of the Figueres constitution guaranteed a job to anyone who wanted one. At one point, 42% of the working population of Costa Rica was working for the government directly or in one of the state-owned corporations. Most of the rest of the economy not involved in the coffee trade was working for small mom-and-pop companies that were suppliers to the larger state-owned firms—and it was state banking, offering credit on favorable terms, that made the founding and growth of those small firms possible. Had they been forced to rely on private-sector banking, few of them would have been able to obtain the financing needed to become established and prosperous. State banking was key to the private sector growth. Lending policy was government policy and was designed to facilitate national development, not bankers’ wallets. Virtually everything the country needed was locally produced. Toilets, window glass, cement, rebar, roofing materials, window and door joinery, wire and cable, all were made by state-owned capitalist enterprises, most of them quite profitable. Costa Rica was the dominant player regionally in most consumer products and was on the move internationally.
Needless to say, this good example did not sit well with foreign business interests. It earned Figueres two coup attempts and one attempted assassination. He responded by abolishing the military (except for the Coast Guard), leaving even more revenues for social services and infrastructure.
When attempted coups and assassination failed, says Bidstrup, Costa Rica was brought down with a form of economic warfare called the “currency crisis” of 1982. Over just a few months, the cost of financing its external debt went from 3% to extremely high variable rates (27% at one point). As a result, along with every other Latin American country, Costa Rica was facing default. Bidstrup writes:
That’s when the IMF and World Bank came to town.
Privatize everything in sight, we were told. We had little choice, so we did. End your employment guarantee, we were told. So we did. Open your markets to foreign competition, we were told. So we did. Most of the former state-owned firms were sold off, mostly to foreign corporations. Many ended up shut down in a short time by foreigners who didn’t know how to run them, and unemployment appeared (and with it, poverty and crime) for the first time in a decade. Many of the local firms went broke or sold out quickly in the face of ruinous foreign competition. Very little of Costa Rica’s manufacturing economy is still locally owned. And so now, instead of earning forex [foreign exchange] through exporting locally produced goods and retaining profits locally, these firms are now forex liabilities, expatriating their profits and earning relatively little through exports. Costa Ricans now darkly joke that their economy is a wholly-owned subsidiary of the United States.
The dire effects of the IMF’s austerity measures were confirmed in a 1993 book excerpt by Karen Hansen-Kuhn titled “Structural Adjustment in Costa Rica: Sapping the Economy.” She noted that Costa Rica stood out in Central America because of its near half-century history of stable democracy and well-functioning government, featuring the region’s largest middle class and the absence of both an army and a guerrilla movement. Eliminating the military allowed the government to support a Scandinavian-type social-welfare system that still provides free health care and education, and has helped produce the lowest infant mortality rate and highest average life expectancy in all of Central America.
In the 1970s, however, the country fell into debt when coffee and other commodity prices suddenly fell, and oil prices shot up. To get the dollars to buy oil, Costa Rica had to resort to foreign borrowing; and in 1980, the U.S. Federal Reserve under Paul Volcker raised interest rates to unprecedented levels.
In The Gods of Money (2009), William Engdahl fills in the back story. In 1971, Richard Nixon took the U.S. dollar off the gold standard, causing it to drop precipitously in international markets. In 1972, US Secretary of State Henry Kissinger and President Nixon had a clandestine meeting with the Shah of Iran. In 1973, a group of powerful financiers and politicians met secretly in Sweden and discussed effectively “backing” the dollar with oil. An arrangement was then finalized in which the oil-producing countries of OPEC would sell their oil only in U.S. dollars. The quid pro quo was military protection and a strategic boost in oil prices. The dollars would wind up in Wall Street and London banks, where they would fund the burgeoning U.S. debt. In 1974, an oil embargo conveniently caused the price of oil to quadruple. Countries without sufficient dollar reserves had to borrow from Wall Street and London banks to buy the oil they needed. Increased costs then drove up prices worldwide.
By late 1981, says Hansen-Kuhn, Costa Rica had one of the world’s highest levels of debt per capita, with debt-service payments amounting to 60 percent of export earnings. When the government had to choose between defending its stellar social-service system or bowing to its creditors, it chose the social services. It suspended debt payments to nearly all its creditors, predominately commercial banks. But that left it without foreign exchange. That was when it resorted to borrowing from the World Bank and IMF, which imposed “austerity measures” as a required condition. The result was to increase poverty levels dramatically.
Bidstrup writes of subsequent developments:
Indebted to the IMF, the Costa Rican government had to sell off its state-owned enterprises, depriving it of most of its revenue, and the country has since been forced to eat its seed corn. No major infrastructure projects have been conceived and built to completion out of tax revenues, and maintenance of existing infrastructure built during that era must wait in line for funding, with predictable results.
About every year, there has been a closure of one of the private banks or major savings coöps. In every case, there has been a corruption or embezzlement scandal, proving the old saying that the best way to rob a bank is to own one. This is why about 80% of retail deposits in Costa Rica are now held by the four state banks. They’re trusted.
Costa Rica still has a robust economy, and is much less affected by the vicissitudes of rising and falling international economic tides than enterprises in neighboring countries, because local businesses can get money when they need it. During the credit freezeup of 2009, things went on in Costa Rica pretty much as normal. Yes, there was a contraction in the economy, mostly as a result of a huge drop in foreign tourism, but it would have been far worse if local business had not been able to obtain financing when it was needed. It was available because most lending activity is set by government policy, not by a local banker’s fear index.
Stability of the local economy is one of the reasons that Costa Rica has never had much difficulty in attracting direct foreign investment, and is still the leader in the region in that regard. And it is clear to me that state banking is one of the principal reasons why.
The value and importance of a public banking sector to the overall stability and health of an economy has been well proven by the Costa Rican experience. Meanwhile, our neighbors, with their fully privatized banking systems have, de facto, encouraged people to keep their money in Mattress First National, and as a result, the financial sectors in neighboring countries have not prospered. Here, they have—because most money is kept in banks that carry the full faith and credit of the Republic of Costa Rica, so the money is in the banks and available for lending. While our neighbors’ financial systems lurch from crisis to crisis, and suffer frequent resulting bank failures, the Costa Rican public system just keeps chugging along. And so does the Costa Rican economy.
My dream scenario for any third world country wishing to develop, is to do exactly what Costa Rica did so successfully for so many years. Invest in the Holy Trinity of national development—health, education and infrastructure. Pay for it with the earnings of state capitalist enterprises that are profitable because they are protected from ruinous foreign competition; and help out local private enterprise get started and grow, and become major exporters, with stable state-owned banks that prioritize national development over making bankers rich. It worked well for Costa Rica for a generation and a half. It can work for any other country as well. Including the United States.
The new Happy Planet Index, which rates countries based on how many long and happy lives they produce per unit of environmental output, has ranked Costa Rica #1 globally. The Costa Rican model is particularly instructive at a time when US citizens are groaning under the twin burdens of taxes and increased health insurance costs. Like the Costa Ricans, we could reduce taxes while increasing social services and rebuilding infrastructure, if we were to allow the government to make some money itself; and a giant first step would be for it to establish some publicly-owned banks.
Ellen Brown is an attorney, president of the Public Banking Institute, and author of twelve books, including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her blog articles are at EllenBrown.com.
Filed under: Ellen Brown Articles/Commentary
On the global financial stage, China is playing chess while the U.S. is playing checkers, and the Chinese are now accelerating their long-term plan to dethrone the U.S. dollar. You see, the truth is that China does not plan to allow the U.S. financial system to dominate the world indefinitely. Right now, China is the number one exporter on the globe and China will have the largest economy on the planet at some point in the coming years. The Chinese would like to see global currency usage reflect this shift in global economic power. At the moment, most global trade is conducted in U.S. dollars and more than 60 percent of all global foreign exchange reserves are held in U.S. dollars. This gives the United States an enormous built-in advantage, but thanks to decades of incredibly bad decisions this advantage is starting to erode. And due to the recent political instability in Washington D.C., the Chinese sense vulnerability. China has begun to publicly mock the level of U.S. debt, Chinese officials have publicly threatened to stop buying any more U.S. debt, the Chinese have started to aggressively make currency swap agreements with other major global powers, and China has been accumulating unprecedented amounts of gold. All of these moves are setting up the moment in the future when China will completely pull the rug out from under the U.S. dollar.
Today, the U.S. financial system is the core of the global financial system. Because nearly everybody uses the U.S. dollar to buy oil and to trade with one another, this creates a tremendous demand for U.S. dollars around the planet. So other nations are generally very happy to take our dollars in exchange for oil, cheap plastic gadgets and other things that U.S. consumers "need".
Major exporting nations accumulate huge piles of our dollars, but instead of just letting all of that money sit there, they often invest large portions of their currency reserves into U.S. Treasury bonds which can easily be liquidated if needed.
So if the U.S. financial system is the core of the global financial system, then U.S. debt is "the core of the core" as some people put it. U.S. Treasury bonds fuel the print, borrow, spend cycle that the global economy depends upon.
That is why a U.S. debt default would be such a big deal. A default would cause interest rates to skyrocket and the entire global economic system to go haywire.
Unfortunately for us, the U.S. debt spiral cannot go on indefinitely. Our debt is growing far, far more rapidly than our GDP is, and therefore our debt is completely and totally unsustainable.
The Chinese understand what is going on, and when the dust settles they plan to be the last ones standing. In the aftermath of a U.S. collapse, China anticipates having the largest economy on the planet, more gold than anyone else, and a respected international currency that the rest of the globe will be able to use to conduct international trade.
And China is not just going to sit back and wait for all of this to happen. In fact, they are already doing lots of things to get the ball moving. The following are 9 signs that China is making a move against the U.S. dollar...
#1 Chinese credit rating agency Dagong has downgraded U.S. debt from A to A- and has indicated that further downgrades are possible.
#2 China has just entered into a very large currency swap agreement with the eurozone that is considered a huge step toward establishing the yuan as a major world currency. This agreement will result in a lot less U.S. dollars being used in trade between China and Europe...
The swap deal will allow more trade and investment between the regions to be conducted in euros and yuan, without having to convert into another currency such as the U.S. dollar first, said Kathleen Brooks, a research director at FOREX.com.
"It's a way of promoting European and Chinese trade, but not doing it with the U.S. dollar," said Brooks. "It's a bit like cutting out the middleman, all of a sudden there's potentially no U.S. dollar risk."
#3 Back in June, China signed a major currency swap agreement with the United Kingdom. This was another very important step toward internationalizing the yuan.
#4 China currently owns about 1.3 trillion dollars of U.S. debt, and this enormous exposure to U.S. debt is starting to become a major political issue within China.
#5 Mei Xinyu, Commerce Minister adviser to the Chinese government, warned this week that if the U.S. government ever does default that China may decide to completely stop buying U.S. Treasury bonds.
#6 According to Yahoo News, China has already been looking for ways to diversify away from the U.S. dollar...
There have been media reports this week that China's State Administration of Foreign Exchange, the body that handles the country's $3.66 trillion of foreign exchange reserve, is looking to diversify into real estate investments in Europe.
#7 Xinhua, the official news agency of China, called for a "de-Americanized world" this week, and also made the following statement about the political turmoil in Washington: "The cyclical stagnation in Washington for a viable bipartisan solution over a federal budget and an approval for raising debt ceiling has again left many nations' tremendous dollar assets in jeopardy and the international community highly agonized."
#8 Xinhua also said the following about the U.S. debt deal on Thursday: "[P]oliticians in Washington have done nothing substantial but postponing once again the final bankruptcy of global confidence in the U.S. financial system". The commentary in the government-run publication also declared that the debt deal "was no more than prolonging the fuse of the U.S. debt bomb one inch longer."
#9 China is the largest producer of gold in the world, and it has also been importing an absolutely massive amount of gold from other nations. But instead of slowing down, the Chinese appear to be accelerating their gold buying. In fact, money manager Stephen Leeb says that his sources are telling him that China plans to buy another 5,000 tons of gold. There are many that are convinced that China eventually plans to back the yuan with gold and try to make it the number one alternative to the U.S. dollar.
So exactly what would happen if the Chinese announced someday that they were going to back their currency with gold and would no longer be using the U.S. dollar in international trade?
It would change the face of the global economy almost overnight. In a previous article, I described some of the things that we could expect to see happen...
If China does decide to back the yuan with gold and no longer use the U.S. dollar in international trade, it will have devastating effects on the U.S. economy. Demand for the U.S. dollar and U.S. debt would drop like a rock, and prices on the things that we buy every day would soar. At that point you could forget about cheap gasoline or cheap Chinese imports. Our entire way of life depends on the U.S. dollar being the primary reserve currency of the world and being able to import things very inexpensively. If the rest of the world (led by China) starts to reject the U.S. dollar, it would result in a massive tsunami of currency coming back to our shores and a very painful adjustment in our standard of living. Today, most U.S. currency is actually used outside of the United States. If someday that changes and we are no longer able to export our inflation that is going to mean big trouble for us.
The fact that we get to print up giant mountains of money and virtually everyone around the world uses it has been a huge boon for the U.S. economy.
When that changes, the word "catastrophic" is not going to be nearly strong enough to describe what is going to happen.
According to a Rasmussen Reports survey that was released this week, only 13 percent of all Americans believe that the country is on the right track. But the truth is that these are the good times. The American people haven't seen anything yet.
Someday people will look back and desperately wish that they could go back to the "good old days" of 2012 and 2013. This is about as good as things are going to get, and it is only downhill from here.
The Speculative Endgame: The Government “Shutdown” and “Debt Default”, A Multibillion Bonanza for Wall...
As failure analysis engineers for companies, our job is to find the root cause of failure and recommend changes in design, process, tests, etc. to fix the problem. This type of analysis has become an important part of semiconductor mass production, which makes electronics cheaper and affordable for consumers. At the same time, mass production helps the manufacturer / producer of parts by increasing their profits.
“Workers should be able to work for fewer hours to achieve their production target. They could use their spare time to pursue higher education, leisure, hobbies, vocational training, etc.”
What we need to recognize is that both producers and consumers are vital for the semiconductor industry. Without a healthy demand for the latest electronic gadgets such as smartphones, tablet PCs, hybrid cars, etc. there would be no incentive for global semiconductor firms to keep investing in the research and development of new technologies that improve the quality of life. While we make a living through the failure analysis of modern-day electronics and keep our jobs, pay for mortgages, groceries, utilities, cars, etc., we also contribute to the demand for other goods by spending our wages. We are workers on one side and consumers on the other. Consumer spending helps create jobs for other services and 70% of the US economy depends on consumer spending . It is the consumer’s purchasing capacity that is the best metric of economic performance.
Common Sense Macroeconomics
Producers and Consumers are like two wings of a bird. If either of the wings gets hurt, the bird will no longer be able to fly. If that bird is not nursed quickly and properly, it would be disabled and either die from hunger or fall prey to a predator. With the same analogy, both producers and consumers have to prosper for a robust economy.
Before we get into more details of macro-economics, let us see where the economic profession stands at this juncture. In a recent article in The New York Times, Professor Robert J. Shiller of Yale University and a best-selling author argues that even now we don’t understand what really causes a recession and layoffs . But another best-selling economist, Professor Ravi Batra, seems to have solved the puzzle of recessions by offering a new theory of unemployment. His theory relies on common sense as he argues that recessions and depressions occur when worker productivity keeps rising faster than the economy’s average real wage. He demonstrates that this happened in the 1920s, which were followed by a depression. The same thing also occurred during the 2000s and the world has been in The Great Recession since 2007.
Batra argues that worker productivity is the main source of supply while wages are the main source of demand. If productivity rises faster than wages, then supply rises faster than demand. This results in overproduction and forces the manufacturer to fire workers. Producers are the suppliers of goods, and consumers generate the demand for these goods. Consumer demand, being dependent on wages, is sustainable only if the consumers as workers earn higher salaries. If the wages of consumers do not catch up with increased supply of goods, the supplier of goods is unable to sell all that he/she has manufactured.
Let us take an example of the semiconductor industry where the semiconductor wafer foundries manufacture tens of thousands of wafers per month. These facilities supply silicon for the semiconductor industry. For a wafer fabrication facility to be profitable, it has to be able to produce as many wafers as possible that meet the Statistical Process Control (SPC) stability metrics and customers’ quality requirements when it comes to DPPM (Defective Parts per Million). This ability to mass produce is measured by the productivity of the work force. A wafer foundry, like every other company, wants its employees to be highly productive to maintain a high supply of wafers for its customers. The wafer fab management pays incentives based on productivity.
Now, where does the need come for wafer fab to hire more workers? This occurs only if wafer fab customers demand more goods. Where does the customer demand come from? It comes from the wages of the people. When we have an economy where employed people have high wages or high purchasing capacity, they are able to generate a high demand for goods. Hence, the wages of the workers have to catch up with their productivity. If employees are very productive, that is they work hard and efficiently, they are able to increase the supply of goods into economy with their productivity. Now, what happens if the wages of the productive workers fail to catch up with their productivity? As a result of the growing gap between wages and productivity, eventually the purchasing capacity of the workers is not able to catch up with the amount of goods that are being manufactured by them. Hence this correlates to a gap between the supply of goods and the sustainable demand for them. In other words, the wage-productivity gap causes a supply-demand gap.
In my previous analogy, this hurts one of the two wings of a bird. In other words, the imbalance between oversupply of goods and weak demand for them leads to layoffs at the wafer fabrication facility. This is how an economy is so closely connected to maintaining a sustainable supply and demand of goods. Thus layoffs occur when people’s purchasing capacity falls short of the goods that workers produce due to their high productivity.
Consumer and National Debt
Some brilliant minds have devised a way to keep the wages of workers to remain the same or even fall, i.e. not letting wages catch up with their high productivity, but still maintain a high consumer demand. They do this by creating ‘consumer debt’. When a consumer is unable to buy much out of their real salary or wage, he/she can buy it using a credit card or by going into debt with a loan from financial institutions. While relatively stable consumer debt is good for the economy as long as the borrower is able to repay his/her debt within the allotted time frame with interest, what can consumers do when they lose their jobs in a recession, and are not able to find other employment soon? If the consumer is not able to repay his/her debt in time, the increase in interest on the credit card loan wipes out his/her savings, thereby resulting in bankruptcy.
It should be clear that when wages trail productivity, the overall economy suffers because of the reduced purchasing capacity of unemployed workers. If you follow this logic, then it is evident that consumer’s purchasing capacity is critical for sustainable demand. Hence, I consider a strong consumer purchasing capacity to be the chief source of high consumer demand, which acts as an engine for economic growth. Thus, the real job creators in a free market economy are not only the producers of goods but also the consumers of goods. Every company estimates its consumer base prior to manufacturing in order to avoid the over-production of goods. Hence, if consumer demand keeps on weakening, then the economy goes into a recession. In that case to avoid a depression, the government has to step in and increase its own spending that makes up for the loss in demand due to lost wages of the laid off workers. The government may also cut tax rates to boost consumer demand. In either case, the budget deficit rises, and may rise very sharply if the wage-productivity gap and hence the supply-demand gap are very high. This is the main reason why the budget deficit rocketed after 2007, so much so that it almost tripled from about $500 billion in 2007 to $1.3 trillion in 2011.
Now, if government spending creates jobs, then these workers can jump start the engine of economic growth by paying off their debts and boosting consumer demand through their real wages. The higher the wages of these workers, the higher will be their purchasing capacity and the higher the consumer demand. This would act as an incentive to the producers/manufacturers to make further investments.
However, if increased government spending does not boost consumer demand and instead goes into the pockets of manufacturers, the manufacturing sector may hire a few more workers because of the extra money it receives from the government stimulus, but that growth will not be sustainable. In fact, a case can be made that the high budget deficit of recent years has mainly helped the manufacturer. For instance, in 2011 the economy generated 1 million new jobs with the help of a budget deficit of $1.3 trillion. If you divide 1.3 trillion with 1 million, you get 1.3 million. In other words, the government spent an extra $1.3 million to create one job in the economy. Is this not absurd, given the fact that the average wage is only $50,000 per year? Thus, the government deficit is now mainly helping the manufacturers, who must be getting the difference between $1.3 million and $50,000 for each person they hire.
As Batra shows, this is what the continued rise in the wage-productivity gap does to an economy. Just 15 years ago, in 1999, we had a budget surplus along with an unemployment rate of less than 5 percent. Today, we have a trillion dollar deficit along with an unemployment rate close to 8 percent.
Free Trade vs Fair Trade
An economy is sustainable when it is able to balance its trade and budget. If any country has a trade deficit (where imports are larger than exports), it leads to a fall in the country’s FOREX (FOREign eXchange) reserves (which eventually depreciates its currency). The value of a country’s currency is a deciding factor in the standard of living. Hence, a country cannot run year-over-year trade deficits if it wishes to maintain the standard of living of its citizens. Also, high trade deficits result in loss of FOREX reserves, which are important as they determine the buying power of the country’s currency.
Let us take an example of a country ‘A’ where its population has sufficient purchasing power and can buy everything produced in the nation. But there are some products that are not produced at home and have to be imported from another country ‘B’. Hence country ‘A’ has to pay money [its currency] to buy country B’s goods. Either country ‘A’ has to balance its trade by getting country ‘B’ currency from a third country ‘C’, or go on printing its own currency. But there is a limit that country ‘B’ will accept country ‘A”s money. After that country ‘A’ will have to produce the items within the country, causing huge inflation due to depreciated value of its currency resulting from excess money printing. It is possible to avoid trade deficits through balanced trade policies. Fair trade is more important than Free trade. Free trade implies no import duties imposed by a country on its imported goods. While Free trade works great when trading with countries having nearly similar value of their monetary currencies, it results in high trade deficits when multinational corporations (MNCs) from a rich country make goods for cheap in another country with a significantly lower value of its currency. The MNCs in the United States prefer to manufacture things in low wage countries with cheap currencies, as it is highly profitable. However, in addition to increasing trade deficits, this practice also leads to massive job losses in the home country, especially when jobs are also outsourced.
As a result of this free trade policy, the U.S. economy has been running over half a trillion dollar trade deficit for the past four years .While such a deficit results in higher corporate profits for MNCs in the United States, it results in depreciating FOREX reserves. This threatens the economic independence of the U.S. as a country.
Figure 1 below shows the FOREX reserves of BRIC (Brazil, Russia, India and China) in USD over ten years. According to Dr. Richard Haas, Chairman of the Council of Foreign Relations, China’s ownership of trillions in FOREX is a great threat to the United States, as China, with vast FOREX reserves, is in a position to influence US foreign policies through its control over the value of US currency .This is similar to the way the United States was able to dominate the foreign policies of Britain and France after World War II and forced their troop withdrawal during the Suez crisis purely because of its ownership of British and French debt .
Figure 1: World Forex reserves in billions of USD as per International Monetary Fund (IMF), April 2009 
During the Reagan years, the trade deficit started to increase at a rate not seen in the last 60-70 years . The Reagan administration then had to pressure Japan to sign the 1985 Plaza Accord to devalue the U.S. dollar at the expense of the Japanese yen in order to increase U.S. exports . As a result of yen’s appreciation, Japan experienced an economic crash and lost a decade of growth. The Nikkei average went up to about 39,000 in December 1989, but after the crash it hovered around 15,000 during the lost decade of the 1990s. In the last several years it has dropped even more, hovering around 10,000 .
Looking at the fate of what happened to Japan as a result of the yen appreciation; China has refused to appreciate its currency significantly in spite of the pressure by the Obama administration, which hopes to boost U.S. exports to China . This should be a great concern for the United States because it would not be able to export significant amount of goods to China to balance its trade.
Counterfeit Electronics as a Threat to US National Security
In addition to nearly 600 billion dollars in trade deficit due to free trade policies, the counterfeit electronics from China entering into the U.S. supply chain have become a national security threat . Initially, the United States manufactured all defense-related products at home. However, consumer electronics were being built in China due to its low cost of labor. As technology progressed to advanced transistor technology, it required a large investment from defense contractors, who work for profit, to manufacture semiconductor wafers in the United States. Hence, several defense contractors started to use Chinese built ICs for military weapons like missiles and machine guns. Along with the state-of-the-art infrastructure, the technical know-how to make advanced technology products has also been transferred to China.
So now China is flooding the U.S. defense supply chain with counterfeit ICs . It has become very costly to prevent this, which is also eating away profits of U.S. defense contractors. The free trade policies of the United States are creating a perfect storm for its semiconductor industry. According to Professor Ravi Batra, “Free trade has done to the United States what Hitler and Imperial Japan could not do during the war.” He characterizes free trade as the ‘Agrification syndrome’ by which Americans continue to lose manufacturing jobs, and continue to work harder at the jobs they do have, but suffer declining wages, despite increases to their productivity .
If the United States had adopted fair trade instead of free trade, it would have imposed tariffs on the cheap goods that are dumped in this country by China. As people prefer to get the best value for their money, U.S. consumers would have preferred to buy U.S. made goods as tariffs would make them competitive with Chinese goods. This way manufacturing jobs would have been preserved. Simple math shows that by just eliminating the 600 billion dollar annual trade deficit would create 6 million jobs paying a $100,000 salary every year. This is a simple job creation strategy, as the country faces the highest unemployment rate since the Great Depression.
Figure 2: BLS, BEA Census- Productivity and real income index from 1964-2008 relative to 1970 (Source: David Ruccio: Graph of the week: USA productivity and real hourly wages 1964-2008 )
If you observe Fig. 2 above, real wages have failed to keep up with productivity since the 1970s. The productivity of American workers has been consistently increasing. However, the average household median income has not increased at the rate at which productivity has increased. The real hourly wages have remained fairly constant. The United States needs to reform its current economic model so that wages keep track with the productivity of workers . Professor Batra argues that this can happen only in a free market system, where companies are small and unable to control prices. In such a system, there would be no need for the government budget deficit, and it would raise the living standard for every individual in society.
Under this system, the majority of shares of corporations would be owned by its employees rather than by a few investors on Wall Street. When workers become majority shareholders, they know that they are part owners of the company and will be fairly rewarded for hard work. By being highly productive, these workers would receive a fair share of corporate profits.
The system would still preserve the incentive for growth because hard work would bring higher incomes. At the same time, it would avoid severe recessions and depressions caused by poor consumer demand (due to a huge gap between wages and productivity resulting in poor purchasing capacity of the majority of consumers). Also, in economic downturns, it will be possible to cut back the working hours of the workers and reduce their wages across the board rather than lay off some workers. This would minimize, if not eliminate, the problem of high unemployment .
Modern economic thinkers blame automation as a major cause of job losses. Technology could be productively utilized in such a way that the manufacturing sector could cut back on work hours while paying workers a high wage due to their high productivity. This is because automation enables a worker to be very productive through use of machines to manufacture products. High worker productivity significantly increases the supply of goods in an economy. As a result workers would be able to work for fewer hours to achieve their production target. They could use their spare time to pursue higher education, leisure, hobbies, vocational training, etc. This way it is also possible to minimize, if not eliminate, the problem of high unemployment resulting from automation while still keeping the supply of goods proportionate to consumer demand.
Employee guided firms will also be able provide health insurance and pension benefits to workers and the government would not need to spend money for this purpose. This way the budget deficit would fall to zero and the national debt could be retired over time.
Additionally, it would also avoid undue pressure from Wall Street to ship jobs overseas under pressure of delivering maximum profits to Wall Street investors. This would minimize speculation, malpractices and economic bubbles through economic self-regulation with minimal government interference.
2. Robert J. Shiller: “The Mystery of Economic Recessions”, New York Times, 4 February 2001. p. 17 http://cowles.econ.yale.edu/news/shiller/rjs_01-02-01_nyt_mystery.htm
3. Martin Crutsinger: “US deficit tops $1 trillion for fourth year,” Associated Press, 12 October 2012. http://finance.yahoo.com/news/us-deficit-tops-1-trillion-fourth-011445884–finance.html
4. Justin Webb, “Don’t be distracted by Greece : Americans must also face financial facts, ” Telegraph (UK), 25 June 2011. http://www.telegraph.co.uk/news/worldnews/us-politics/8598451/Dont-be-distracted-by-Greece-Americans-must-also-face-financial-facts.html
5. Laurie Milner, The Suez Crisis, 03 March 2011. http://www.bbc.co.uk/history/british/modern/suez_01.shtml
7. Alex Seitz-Wald: 10 Things Conservatives Don’t Want You To Know About Ronald Reagan, 5 February 2011. http://thinkprogress.org/politics/2011/02/05/142288/reagan-centennial/?mobile=nc
10. China seeks to learn from mistakes of 1985 Plaza Accord, The Japan Times, 9 September 2006. http://www.japantimes.co.jp/text/nb20060909a3.html
11. Richard Dudley: Counterfeit Electronics in DoD are Widespread and Threaten National Security, 3 June 2012. http://defense-update.com/20120603_counterfeit-electronics-in-dod-are-widespread-and-threaten-national-security.html
12. Joseph Farah: Fake Chinese electronics threaten U.S. Defense. 29 May 2012. http://www.wnd.com/2012/05/fake-electronics-feared-undermining-u-s-defense/
13. Sean Fenley: Barack Obama, What’s Wrong with Protectionism?, 21 September 2008. http://www.opednews.com/articles/Barack-Obama-What-s-Wrong-by-Sean-Fenley-080918-200.html
14. David Ruccio: Graph of the week: USA productivity and real hourly wages 1964-2008. http://rwer.wordpress.com/2010/11/20/graph-of-the-week-usa-productivity-and-real-hourly-wages-1964-2008/
Over the last decade Russia’s Central Bank acquired 570 metric tonnes of gold. The amount is almost triple the weight of the American Statue of Liberty and makes Russia the world’s biggest buyer of gold.
The amount is a quarter more than runner-up China, Bloomberg reported on Monday.
Countries like Russia and China use such stockpiles as an economic buffer against another wave of economic crisis or US dollar devaluation, as both remain weary of the US Federal Reserve’s stability and prefer to edge their bets on gold.
It’s also proven a sound investment and opportunity for the Russian state to make money, with gold prices crawling upwards over the past 12 years, gaining 12% in 2012 alone. On Monday gold traded at $1650 per ounce and analysts expect the price to keep growing in 2013 to reach $1825 by the end of the year. However French investment bank Natixis dampened the outlook by forecasting a drop in price to $1500 by 2014, Finmarket.ru reports.
But the link between high gold prices and falling crude has plagued Russia in the past. In 1998, when Russia defaulted on $40 billion of domestic debt, it took 28 barrels of crude to buy an ounce of gold, according to Bloomberg research. Two years later, when Vladimir Putin came to power, an ounce was worth 11.5 barrels. By 2005 the ratio had dropped to 6.5 and that is when President Putin ordered his Central Bank to buy. In just a month the proportion of gold in Russia’s total reserve rose from 2.2% to 3.5%.
In 2000 Vladimir Putin inherited a country with 384 metric tons of gold and more than doubled its gold reserve in 12 years – according to official data from World Gold Council, in October 2012 gold made up 9.6% of Russia’s national forex reserve and stood at 936.7 metric tons.
However it is still far from its historic high – in 1941 Russia held a record 2800 tons of the precious metal and thanks to these reserves successfully recovered after World War II.
Russia’s gold rush still doesn’t mean it tops the list of global gold owners. The United States holds the leading position with 8133.5 tons of gold which make 75.4% of country’s total reserve. Germany runs second with 3391.3 tons and the IMF third with 2814 tons. China and Russia are sitting in sixth and eighth place respectively.
China however is suspected of downplaying its actual volume of gold by 3-4 times, Zerohedge news website reports, and prepares to introduce Yuan as world’s reserve currency. Back in 2009 China set a goal to overtake the US in the rankings. When the Chinese Central bank is ready to officially declare its actual gold reserve volume, world markets will experience serious problems, Zerohedge.com believes.
Major global investor and consulting adviser to the Obama administration, George Soros also appears to have a golden investment streak. In August 2012 it was reported, Mr. Soros offloaded over a million shares in financial companies and banks and purchased $130 million in gold. His move to sell stocks and beef up on gold, is being interpreted by some as a sign of changing investment strategy in the world market.
- The Man Who Killed Osama bin Laden... Is Screwed (Esquire)
- G7 fires currency warning shot, Japan sanguine (Reuters)
- North Korea Confirms It Conducted 3rd Nuclear Test (NYT)
- Italian Police Arrest Finmeccanica CEO (WSJ)
- Legacy, political calendar frame Obama's State of the Union address (Reuters)
- China joins U.S., Japan, EU in condemning North Korea nuclear test (Reuters)
- Wall Street Fading as Emerging-Market Banks Gain Share (BBG)
- Berlin Conference 2.0: Drugmakers eye Africa's middle classes as next growth market (Reuters)
- Barclays to Cut 3,700 Jobs After Full-Year Loss (BBG)
- US Treasury comment triggers fall in yen (FT)
- ECB Ready to Offset Banks’ Accelerated LTRO Payback (BBG)
- Fed's Yellen Supports Stimulus to Spur Jobs (WSJ)
- Libor Scrutiny Turns to Middlemen (WSJ)
- Samsung Girds for Life After Apple in Disruption Devotion (BBG)
Overnight Media Digest
* North Korea appeared to have exploded a nuclear device Tuesday, its third experimental detonation in a long effort to build weapons of mass destruction that the U.S. and other countries consider a serious threat.
* Pope Benedict XVI will become the first pontiff in six centuries to resign, marking the end of a transitional papacy that focused more on theological and internal renewal and less on the broader challenges that face the Roman Catholic church at the start of its 21st century of existence.
* U.S. regulators are widening their probe of global interest-rate-rigging by scrutinizing what they claim is a pivotal role of two U.K. brokerage firms in the scandal, people close to the investigation say.
* The regulator that oversees the professional conduct of Britain's accountants has launched a probe into the past financial reports of Autonomy Corp, the U.K. software company that Hewlett-Packard Co purchased for $11 billion in 2011 and later accused of having made outright financial misrepresentations ahead of the deal.
* Hedge-fund manager David Einhorn has proposed that Apple Inc issue a special class of stock that would carry a high dividend yield.
* Nasdaq OMX Group Inc, long on the hunt for a partner, has ramped up its conversations about strategic options ranging from joint ventures to a sale, according to people familiar with the talks, as rival NYSE Euronext moves ahead with a merger that will form an even-bigger competitor.
* U.S. regulators told the world's biggest maker of insulin, Denmark's Novo Nordisk, that they couldn't approve a potential blockbuster diabetes drug, delaying its U.S. introduction and sending the company's shares tumbling.
* Hostess Brands Inc won permission to place a selection of its cake and bread assets, including the Twinkie brand, on the auction block as the baking company continues to sell off its business piece by piece.
EDF Energy is seeking state support to guarantee the new nuclear reactors it plans to build in the UK. EDF is asking the government to underwrite some of the project's financing. Nasdaq OMX Group was in talks with private equity firm Carlyle Group about taking the trans-Atlantic exchange operator private, but the talks broke down because of disagreements over valuation.
Britain's accountancy regulator said it was investigating the financial reports of British software firm Autonomy before it was bought by Hewlett-Packard, a deal that was later subject to accusations of fraud. Goldman Sachs has promoted Gregg Lemkau to jointly head its global mergers and acquisitions (M&A) team.
Telefonica has put off plans to list its Latin American business.
BlackRock sold a large stake in oil services group Saipem - a unit of Italy's Eni, in deal that is under the scrutiny of Italian and British regulators.
Lion Capital, a big investor in Findus - the UK-based frozen food company engulfed in the horse meat scandal, has called on management to explain how the adulteration took place.
Dutch retailer Ahold sold its 60 percent stake in its Nordic joint venture - ICA - to co-owner Hakon Invest for 2.5 billion euros ($3.34 billion) in cash.
* British accounting regulators said on Monday that they would investigate the financial reporting at the British software maker Autonomy before its $11.1 billion acquisition by Hewlett-Packard Co in 2011.
* Concern over the euro moved to the forefront Monday as finance ministers of the countries using the currency held their monthly meeting. But this time, with the European Union's recession continuing, the topic was the strength of the euro rather than its many weaknesses.
* The Swedish investment company Hakon Invest agreed on Monday to buy the remaining stake in the Nordic retailer ICA it did not already own for $3.1 billion.
* A new 24-hour news and entertainment channel, Fusion, has powerful backers in Univision and ABC News, a unit of the Walt Disney Co, and underscores the growing influence of the burgeoning Hispanic audience.
* Mary Jo White, who has been nominated to run the U.S. Securities and Exchange Commission, has also disclosed that her husband would relinquish his partnership at Cravath, Swaine & Moore, converting his interest in the firm from an equity to non-equity status.
* Pope Benedict XVI's surprise announcement on Monday that he will resign on Feb. 28 sets the stage for a succession battle that is likely to determine the future course of a church troubled by scandal and declining faith in its traditional strongholds around the world.
* It will be four years on Tuesday since the last fatal crash in the United States, a record unmatched since propeller planes gave way to the jet age more than half a century ago. Globally, last year was the safest since 1945, with 23 deadly accidents and 475 fatalities, according to the Aviation Safety Network, an accident researcher.
THE GLOBE AND MAIL
* The Harper government will not resurrect its controversial Internet surveillance bill, and will not introduce new legislation to monitor the activities of people on the web.
* Former school trustee Liz Sandals inherited one of Ontario's most difficult files Monday, taking on the post of Education Minister and the ambitious task of resolving a dispute with Ontario's teachers and restoring sports teams, clubs and other after-school activities.
Reports in the business section:
* Genivar Inc, one of Quebec's biggest engineering firms, uncovered "inappropriate conduct" after investigating the company's role in financing political parties and bidding on municipal contracts, another sign of corruption in the province's engineering and construction industry.
* A federal report on military procurement to be released Tuesday will recommend bidders be required to explicitly outline how they will spur innovation and long-term economic growth in Canada, a source familiar with the file told the National Post.
* WestJet Airlines Ltd will launch its new regional carrier Encore in Western Canada this summer starting on June 24, the company said Monday.
* Following the grilling in London last week, outgoing Bank of Canada governor Mark Carney may be in for a second round of tough questioning Tuesday, this time from Canadian Ministers of Parliament.
Fly On The Wall 7:00 AM Market Snapshot
Alexandria Real Estate (ARE) upgraded to Overweight from Equal Weight at Evercore
Boston Properties (BXP) upgraded to Outperform from Sector Perform at RBC Capital
DCT Industrial (DCT) upgraded to Market Perform from Underperform at Wells Fargo
Digital Realty (DLR) upgraded to Overweight from Equal Weight at Evercore
Gold Fields (GFI) upgraded to Neutral from Sell at Citigroup
J.M. Smucker (SJM) upgraded to Outperform from Market Perform at Bernstein
Nortel NetApp (NTAP) upgraded to Buy from Hold at Brean Capital
Novo Nordisk (NVO) upgraded to Buy from Neutral at Nomura
Royal Gold (RGLD) upgraded to Buy from Neutral at UBS
Suburban Propane (SPH) upgraded to Buy from Neutral at BofA/Merrill
Walgreen (WAG) upgraded to Buy from Neutral at Mizuho
Boyd Gaming (BYD) downgraded to Sell from Neutral at Goldman
Capstead Mortgage (CMO) downgraded to Market Perform from Outperform at JMP Securities
Corporate Office (OFC) downgraded to Equal Weight from Overweight at Evercore
Cubic (CUB) downgraded to Hold from Buy at Benchmark Co.
Facebook (FB) downgraded to Market Perform from Outperform at Bernstein
General Growth (GGP) downgraded to Underperform from Sector Perform at RBC Capital
Macerich (MAC) downgraded to Sector Perform from Outperform at RBC Capital
Piedmont Office (PDM) downgraded to Underperform from Outperform at RBC Capital
Qualcomm (QCOM) downgraded to Neutral from Overweight at JPMorgan
Questar (STR) downgraded to Neutral from Buy at UBS
Cincinnati Bell (CBB) initiated with a Hold at Deutsche Bank
CyrusOne (CONE) initiated with a Buy at Deutsche Bank
CyrusOne (CONE) initiated with a Neutral at BofA/Merrill
Idenix (IDIX) initiated with a Neutral at RW Baird
Legacy Reserves (LGCY) initiated with an Overweight at Barclays
Manchester United (MANU) initiated with an Outperform at Raymond James
Navios Maritime Partners (NMM) initiated with a Buy at Citigroup
Theravance (THRX) initiated with an Outperform at RW Baird
Barclays (BCS) to reduce headcount by at least 3,700 this year
Rexnord (RXN) hired Goldman Sachs (GS) to explore possible sale
JANA Partners rejected Agrium's (AGU) settlement offer, director appointments
Arris (ARRS), Google (GOOG) received second DOJ request for more information about Arris' proposed acquisition of Motorola Home business from Google
American Express (AXP), Twitter signed online purchasing agreement
Procter & Gamble (PG), Verix Business initiated strategic partnership
VMware (VMW) acquired Virsto, terms not disclosed
Groupon (GRPN) acquired MashLogic, terms not disclosed
Laclede Group (LG) announced sale of New England Gas Co. (SUG) to Algonquin Power
Masco (MAS) sees “repair and remodel” to grow modestly in FY13
Titan International (TWI) announced offer for Wheels of India
Nielsen (NLSN) initiated dividend policy, declared 16c per share dividend
Companies that beat consensus earnings expectations last night and today include:
Otter Tail (OTTR), American Financial Group (AFG), Masco (MAS), Nielsen (NLSN), Tesoro Logistics (TLLP), Lionsgate (LGF)
Companies that missed consensus earnings expectations include:
Owens & Minor (OMI), Dun & Bradstreet (DNB), Rexnord (RXN), Danaos (DAC), tw telecom (TWTC), Cubic (CUB)
Companies that matched consensus earnings expectations include:
- Fed Vice-Chairwoman Janet Yellen offered a vigorous defense of the central bank's easy-money policies, suggesting she favors continuing them amid a slow economic recovery and disappointing job market, the Wall Street Journal reports
- Behind David Einhorn's protestations on Apple (AAPL) is a novel way to return cash to shareholders. Einhorn, of hedge fund Greenlight Capital, proposed that Apple issue a special class of stock, which he called "perpetual preferred," that would carry a high dividend yield. But with some investors feeling more confident about the future, shareholder pressure is growing to put that cash to work, the Wall Street Journal reports
- The NTSB is investigating whether tiny fiber-like formations, known as dendrites, inside lithium-ion batteries could have played a role in battery failures on two Boeing (BA) 787 Dreamliners last month, Reuters reports
- The shifting nature of Africa’s disease burden is luring Big Pharma (SNY, GSK) as new opportunities open up for treating chronic diseases afflicting the middle classes, rather than just fire-fighting infection.European companies, in particular, hope to reap rewards by investing early in a region where many of them already have historic commercial ties, Reuters reports
- Global investment banks based in Europe and the U.S., facing regulatory and cost-cutting pressures at home, are losing market share (CS, MS, C) in emerging economies to smaller domestic competitors, Bloomberg reports
- In 2007, Wal-Mart Stores (WMT) planned to open as many as 2,000 in-house medical clinics by mid-2012. Today, they have fewer than 130 clinics and is closing locations faster than it’s opening them. CVS Caremark (CVS) has about 630 MinuteClinics and aims to have 1,500 within four years, Bloomberg reports
ARCA Biopharma (ABIO) files to sell 3.48M shares of common stock for holders
American Capital Mortgage (MTGE) to offer 18M shares of common stock
ConnectOne Bancorp (CNOB) 1.6M share IPO priced at $28.00
DryShips (DRYS) announces offering of 5M common shares of Ocean Rig UDW
Gulfport Energy (GPOR) 7.75M share Secondary priced at $38.00
HCA Holdings (HCA) files to sell 50M shares of common stock for holders
Kosmos (KOS) commences offering of 30M shares of common stock
Motricity (MOTR) requests withdrawal of registration statement
Newcastle Investment (NCT) files to sell 20M shares of common stock
Team Health (TMH) files to sell 9.63M shares of common stock for holders
Warburg Pincus agrees to sell 2.5M shares of Primerica (PRI)
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The Auditing Chamber of the Russian Federation (RIA Novosti/Dmitry Korobeinikov)
Every Russian citizen owes the equivalent of $4,200 after the country’s external debt skyrocketed to $215 billion during the last year, according to official data.
It appears that Russia is good at amassing not only its gold reserves, but also debts. The country’s external debt reached a new height of $215 billion in 2012, or 10.5% of country’s GDP, Russia’s Audits Chamber’s report says. Debt servicing in 2012 amounted to over $1 billion.
This amount is equal to what Russia spends on housing and public utilities, culture and filmmaking combined, according to the Audits Chamber’s Chairman Sergey Stepashin.
The Audits Chamber is concerned about the country’s corporate debt, with also grew significantly. By the end of 2012 the joint external debt reached $624 billion. This is 16.1% more than the country’s gold and foreign currency reserves.
In 2013 eleven companies with state participation will be subjected to a check on the effectiveness of their debt policies, according to an auditor at the Audits Chamber Nikolay Beskhmelnitsyn, Novaya Gazeta daily reports.
However, some experts believe the new corporate debt figures are not something to be afraid of.
“We could start to worry if the cumulative credit volume gets more than 80-100% of Russia’s GDP. But the current volume is 30%, it’s not much by international standards,” head of investment division at Solid company, Mikhail Korolyuk, told Novaya Gazeta.
The debt of $624 billion is insignificant for the scale of Russian economy, it’s less than 20% of GDP, believes analyst from Aforex Narek Avakyan.
“To compare, government foreign debt of Germany is around 65% of its GDP. China, which has over $3.5 trillion in gold and foreign currency reserves, has the debt of 22% of its GDP. In France this figure is more than 100%, and this is without corporate debts,” Avakyan told Novaya Gazeta.
The world’s leaders by external debt (the total public and private debt) are the European Union and the United States with over $16 trillion debt each. As of September 20, 2012, US Treasury said the debt reached $15.85 trillion. Russia currently occupies 20th place by the amount of debt.
Submitted by Brandon Smith from Alt-Market
China Surpasses U.S. As Number One Global Trading Power
Back in 2008, at the onset of the derivatives and credit collapse, I wrote several economic editorials discussing what I saw as the single most vital trend in the global fiscal system, and how it would cause a disastrous upheaval that would leave the U.S. and the dollar financially sunk. This trend, which seemed to take serious root in 2005, was the massive shift by China from an export dependent source of cheap manufacturing and labor, into a moderate exporter, and consumer hub, and currency powerhouse. In my view at the time, the evidence suggested that China was positioning itself to decouple from its dependence on U.S. markets and the dollar. I was, of course, attacked as a “doom monger” and “conspiracy theorist”. Five years later, the critics have changed their tune…
For the past decade, China has been slowly but surely issuing Yuan denominated bonds and securities around the globe, while simultaneously forming bilateral trade agreements with multiple nations and cutting out the U.S. dollar as the world reserve currency. This process has gone mostly ignored by the mainstream financial media. However, I and many other independent analysts could not overlook the red flags. I tried to summarize as much of the situation and facts as I could in my article ‘How The U.S. Dollar Will Be Replaced’, which was published in May of last year:
The biggest question for me was, if China is one of the largest holders of Forex reserves on the planet, and had the largest savings of any nation, WHY did they feel the need or desire in 2005 to begin issuing Yuan denominated debt? Why begin borrowing capital from foreign creditors? They certainly didn’t need the money. Why were they moving away from export dependency and building a consumer base? And why attempt to proliferate their currency? Wouldn’t the pursuit of global Yuan circulation lead to an eventual increase in valuation? Didn’t the Chinese want their currency cheap so that they could maintain export superiority? What did the Chinese know in 2005 that we didn’t?
Well, apparently they were either psychic, or SOMEONE gave them advanced warning. They knew that there would be a crisis in American consumption and that this would lead to severe reduction in imports, which is why they began building trade deals within the ASEAN trading bloc to insulate themselves. They knew that there would be considerable devaluation in the dollar, which is why they converted much of their long term treasury holdings to short term treasury bonds that they could dump with far more ease, and they knew that the IMF would be promoting Special Drawing Rights as a new reserve replacing the dollar, which is why they have been spreading the Yuan everywhere, earning them favor with the global banksters and inclusion in the basket currency. In fact, China has been pumping Yuan into global markets even faster than the Federal Reserve has been printing the dollar:
China is flooding the system with Yuan! This means only one thing; China is no longer seeking to maintain the traditional trade relationship it has had with the U.S.
To make my case even more clear, I would point out that China has not only become the world’s largest gold producer, but also its largest BUYER, recently surpassing India. Official estimates place Chinese gold purchases in 2012 at around 800 tons; an astonishing increase in their stockpile.
The U.S. and the Federal Reserve can’t even deliver gold it is supposed to be holding for others, including Germany.
China has also recently quadrupled imports of rice and tripled wheat and corn imports in only one year. Why? Again, I ask, what do they know that we are not being told?
As I have stated for many years, China is being groomed as an alternative economic engine in opposition to the U.S., and that this will lead to an eventual dump by them of the Greenback. This scenario is not only based on my opinion, it has also been spoken of openly by elitist financiers, including George Soros:
This past month, the same plan has been reiterated by Zhu Min, the deputy managing director of the IMF. In his statement, he proclaimed that the shift by China into a more consumer based system had been successful, and that the Yuan or RMB, was on the way to becoming a world reserve currency:
I believe that the moment for the epic changeover, and all the political and financial conflict that comes with it, has begun…
It has been announced this week that China surpassed the U.S. for the first time ever as the number one trading power in the world:
U.S. exports and imports last year totaled $3.82 trillion, the U.S. Commerce Department said last week. China’s customs administration reported last month that the country’s total trade in 2012 amounted to $3.87 trillion. China had a $231.1 billion annual trade surplus while the U.S. had a trade deficit of $727.9 billion:
“It is remarkable that an economy that is only a fraction of the size of the U.S. economy has a larger trading volume,” Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington, said in an e-mail. “The surpassing of the U.S. is not because of a substantially undervalued currency that has led to an export boom,” said Lardy, noting that Chinese imports have grown more rapidly than exports since 2007.”
“According to O’Neill (Goldman Sachs Jim O’Neill), the trade figures underscore the need to draw China further into the global financial and trading architecture that the U.S. helped create.
“One way or another we have to get China more involved in the global organizations of today and the future despite some of their own reluctance,” O’Neill said, mentioning China’s inclusion in the International Monetary Fund’s Special Drawing Rights currency basket. “To not have China more symbolically and more importantly actually central to all these things is just increasingly silly.”
For those who are still not aware of why this is such a big deal, it is essentially a turning point moment in global trade. There is no doubt that China will now be inducted into the SDR, and that their importance as a trade and consumption center will quickly lead to a move away from the dollar. To put it simply, the dollar is going to lose its world reserve status VERY soon. Many will cheer this change as necessary progress towards a more “globally conscious” economic system. However, it’s not that simple. Total centralization is first and foremost the dream of idiots, and in any mutation (or amputation) there is always considerable pain involved. The proponents of this “New World Order” (their words, not mine) seem to have placed the U.S. squarely in their crosshairs as the primary recipient of this fiscal pain.
In my early analysis, I felt it possible that Japan would be inducted willingly into the new ASEAN trading bloc and that they would swiftly fall in line with a dump of the dollar, mainly because their export markets were suffering greatly due to the decline in American purchases. Now it appears that Japan has not been as pliable as the globalists wanted, and so, a war may be on the table in the Pacific.
Rhetoric in Chinese newspapers has been very heated and provocative, and the tensions surrounding the Senkaku/Diaoyu Islands is reaching a boiling point. The two countries have done everything so far EXCEPT shoot at each other, and that will be happening in due course now that China is allegedly locking offensive radar onto Japanese ships. Even Chinese films released in the past two years have been soaked with anti-Japan propaganda, most of them usually set during WWII around the brutal invasion and subjugation by the Japanese in Chinese provinces.
The recipe is one of inevitable disaster, with the U.S. at the center of a boiling pot. As I pointed in my last economic piece, we must now look to events rather than numbers to gain insight into where we are headed. The time has come. China is nearly ready for IMF inclusion. Volatility around the world is high. Our government has a final decision to make on the Fiscal Cliff in March, not to mention the sudden push for possible gun registration and confiscation. My instincts tell me that so many explosive aspects coalescing together at the same tenuous moment is not a coincidence. The next few months call for hyper-vigilance and every ounce of energy we can muster to educate as many people as possible in as short a time as possible.
I say again, China has surpassed the U.S. in global trade. A drop of the dollar is the obvious next step…
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From Rodrigo Serrano of Rational Capitalist Speculator,
This objective report concisely summarizes important macro events over the past week. It is not geared to push an agenda. Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases.
+ The service sector, which accounts for almost 80% of the U.S. economy, remains in growth mode. The Institute of Supply Management’s Non-Manufacturing survey reports a healthy 55.2 composite reading and an extremely bullish Employment subindicator of 57.5, its strongest reading since February 2006. Furthermore, Export New Orders crossed into expansion territory and imply improving global trade conditions. Indeed, today’s U.S. International Trade report “suggests exports — a key engine of the U.S. recovery — are finding their footing after stalling last year…”
+ The global expansion thesis is further boosted by Singaporean manufacturing ending its spell of contraction, German Factory Orders showing signs of bottoming (mirroring improvement in recent Ifo surveys), and Japanese Machinery Orders increasing for the 3rd consecutive month.
+ The bears have severely erred on their assumption that China wouldn’t be able to execute a soft landing. In addition to improving manufacturing surveys, HSBC’s Services PMI survey is now solidly in expansion territory, notching a reading of 54 from 51.7 in December. China is in position to lead the global recovery again.
+ The U.S. consumer remains quite resilient. Chain Store sales surge the most since September 2011 and are much better than expected, while Gallup’s Consumer Spending report shows a 4-week average YoY gain of almost 30%.
+ Fed officials are optimistic that a positive wealth effect has taken hold and Q4 GDP numbers reflect only a transitory blip (due to weather-related events) towards continued recovery (Q4 GDP will be positive when the second revision is published). Rising home values as well as gains in U.S. stock markets have improved consumer psychology. Furthermore, investors can take solace that the FOMC won’t be backtracking on its promise to continue providing monetary stimulus even in the face of improving economic conditions.
+ The U.K. has seen a string of improving economic numbers this week: the Services Purchasing Manager’s Index swings into expansion in January; Same Store Sales improve 1.9% as well; and Industrial Production for December prints better than expected. In addition, investors are nodding at recent economic improvement in Europe.
The European political and economic storm looks to pick up strength in the months ahead:
- On the political front, Spain’s “Gürtel Scandal” is dampening confidence in the government’s ability to continue its EU-mandated austerity policies. As a result, Spanish 10-yr yields are back on the rise, advancing 2.3% for the week. Meanwhile, in addition to a festering bank scandal, February 24-25 will market an important day for Italy and global markets as Silvio Berlusconi’s shocking surge in the polls have already begun to unnerve investors. Since Jan. 28, Italy’s FTSE MIB has declined more than 7%.
- On the economic front, Spain posts some depressing Industrial Production numbers for January, while European Retail Sales plunged in December by the most since February 2009 on a YoY basis. France looks to downgrade its 2013 growth forecast placing Mr. Hollande in a pickle, indeed he’s now asking for a lower Euro. Pressure on the ECB to join central bankers worldwide in weakening their respective currencies marks an end to the cease fire in the “Global Currency War.”
- Inter-market trends are deteriorating. A look at the XLF/XLU ratio indicates that deflation fears may resurface soon and would be a negative for equity markets and bullish for Treasury bonds. In fact, 10-yr Treasury yields are showing a negative divergence vs. equity markets and is a red flag. Furthermore, equity markets are at long-term resistance, all the while investor sentiment is very bullish. The stage is set for a correction over the coming weeks.
- U.S. Weekly sales metrics (Goldman ICSC and Redbook) show continued weakening consumption trends. Tepid growth readings over the course of January, in addition to a third consecutive weak reading from Discover’s U.S. Spending Monitor, are a shot across the bow for a subpar January Retail Sales report, due on Feb. 13. Perhaps this is because job creation has stalled according to Gallup’s Job Creation indicator, which just slumped to an 11-month low. Or perhaps it’s because the nation’s average gas price has risen 17 cents from a week ago.
- Q4’s Productivity and Unit Labor Cost report portends deteriorating earnings trends for corporations. Productivity (output per worker) declined 2.0% and was more than expected; meanwhile, unit labor costs surged 4.5% vs. market expectations of a 3.1% increase. Real wages, vs. nominal, continue to shrink. ”Hourly pay for American workers fell for the second straight year after factoring out inflation, marking the worst two-year stretch in the U.S. since World War Two.”
- Does Canada have a popping housing bubble? Canadian building permits in December plunged 11.2%, after a 17.9% drubbing the month before. Meanwhile housing starts crater 18.5%.
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Germany is repatriating its gold reserves from the New York Federal Reserve. This decision has created a frenzy in the gold market. But that is just the tip of the iceberg.
According to the NY Fed, there are (2012) approximately 530,000 gold bars, with a combined weight of circa 6,700 metric tonnes stashed away in the Fed’s Lower Manhattan vaults.
These are official figures which are impossible to verify.
The gold is stored in the fifth sub-floor of the New York Fed building on Liberty Street. The vaults on the bedrock of Manhattan Island are located 80 feet below street level.
Each of the 530,000 gold bars weighs 400 troy ounces, or about 12.44kg.
At today’s market value of approximately US$1700 dollars a troy ounce, the New York Fed has within its vaults a multi-billion dollar treasure trove.
The 400-ounce gold bar is quoted at $677,640.
A 1kg gold bar is quoted at about $55,000. (purchase price)
Each metric tonne of gold is worth approximately $55 million.
The total value of the New York Federal Reserve’s gold bullion trove of 6700 tonnes is a staggering $368.5 billion.
But according to the New York Federal Reserve: “We do not own the gold. We are mere custodians.”
A wall of gold bricks in the globally owned collection at the Federal Reserve Bank of New York. (Photo courtesy of the New York Fed’s press center)
The gold is in “safe-keeping” on behalf of more than 60 sovereign countries and a few organizations. Close to 98 per cent of the gold bullion stored in the NY Fed’s lower Manhattan vaults, according to the Fed, belongs to central banks of foreign countries.
The remaining 2 per cent “is owned by the United States and international organizations such as the IMF.”
Germany’s central bank owns a total of 3400 tonnes of gold. According to recent reports, a staggering 69 per cent of its gold bullion bars (namely 2346 tonnes) are held in custody at the New York Federal Reserve, the Bank of England and the Banque de France.
The NY Federal Reserve Bank holds in custody 1536 metric tonnes of gold owned by the Bundesbank of the Federal Republic of Germany, 22.9 per cent of its total gold holdings in custody (6700 tonnes).
The Bundesbank has announced that it will repatriate “all of its 374 metric tonnes stored at the Banque de France (11 per cent of its total reserves), and 300 metric tonnes held in the vault of the New York Fed, reducing its share in the US from 45 per cent to 37 per cent.” .
Two other European countries, namely Italy and the Netherlands, have significant yet undisclosed gold bullion reserves held in custody in the vaults of the NY Federal Reserve Bank. There are no immediate plans to repatriate this bullion.
While the NY Federal Reserve Bank does not actually own the gold, it is guardian of a multibillion-dollar gold treasure, which indelibly provides ‘collateral’ (at virtually no cost) as well as ‘leverage’ in its multibillion-dollar central banking operations, often at the expense of its European partners.
The New York Fed’s gold vault on the basement floor of its main office building in Manhattan provides account holders with a secure location to store their monetary gold reserves.
None of the gold stored in the vault belongs to the New York Fed or the Federal Reserve System. The New York Fed acts as the guardian and custodian of the gold riches on behalf of account holders, which include the US government, foreign governments, other central banks and official international organizations.
In other words, the Fed runs its operation ‘with other people’s gold’, using this huge treasure as ‘collateral’ to back its various financial undertakings.
Foreign countries around the world were pressured after World War II into depositing their gold reserves, not within the vaults of their own central banks, but in that of the world’s foremost imperial power.
According to the NY Federal Reserve:
“Much of the gold in the vault arrived during and after World War II as many countries wanted to store their gold reserves in a safe location. Holdings in the gold vault continued to increase and peaked in 1973, shortly after the United States suspended convertibility of dollars into gold for foreign governments.” (emphasis added)
For many countries, part of the US dollar proceeds of commodities sold to the US, were converted into gold at 32 dollars an ounce (1946-71) and then ‘returned’ – so to speak – to the US for deposit in the vaults of the NY Federal Reserve.
Germany’s decision to repatriate part of its gold has sent a cold shiver into the gold and forex markets.
The German Federal Court of Auditors has recently called for an official inspection of German gold reserves stored at the New York Federal Reserve, “because they have never been fully checked.”
Are these German bullion reserves held in the vaults of Lower Manhattan ‘separate’ or are they part of the Federal Reserve’s fungible ‘big pot’ of gold assets.
According to the Fed, “the gold is not commingled between account holders.”
Does the New York Federal Reserve Bank have “Fungible Gold Assets to the Degree Claimed”?
Could the Fed reasonably handle a process of homeland repatriation of gold assets initiated by several countries simultaneously?
According to the Fed, there are 122 separate gold accounts mainly held by the central banks of foreign countries, as well as a few organizations including the International Monetary Fund.
Following the verification process, the gold is moved to one of the vault’s 122 compartments, where each compartment contains gold held by a single account holder. In rare cases, small deposits are placed on separately numbered spaces on shelves in a ‘library’ compartment shared by several account holders. Each compartment is secured by a padlock, two combination locks and an auditor’s seal. Compartments are numbered rather than named to maintain confidentiality of the account holders.
The New York Fed does not indicate in any of its reports, including its annual financial statements, the names of the countries and account holders.
Most of the 122 accounts are held by the central banks of sovereign countries, which in addition to their gold accounts have statutory agreements with the NY Federal Reserve.
Money and national sovereignty
America’s Unipolar World hinges on sustaining the US dollar as a global reserve currency. US hegemony in monetary matters is supported by the custody in the USA of gold bullion reserves on behalf of more than 60 countries.
Instead of gold bullion, national central banks (with the exception of the US) hold US dollar paper instruments as ‘reserves’. Gold reserves under national jurisdiction are central to establishing sovereignty in monetary policy, without depending on the Federal Reserve which holds a nation’s gold bullion in safe-keeping in its Lower Manhattan vault.
National sovereignty requires the repatriation of the gold bullion deposited in custody with the NY Fed. The leverage and collateral in all monetary transactions largely accrues to the NY Federal Reserve Bank rather than to the owners of the bullion deposited in custody.
Follow the example of Germany. Repatriate your gold.
In a related development, both China and Russia are dumping their US dollars and building up their gold reserves.
In turn, both China and Russia have boosted domestic production of gold, a large share of which is being purchased by their central banks.
Michel Chossudovsky for RT
Both the US dollar and the Euro currency systems are in crisis. During a period of waning currencies, where the value of money (in paper and/or electronic form) is tumbling, the strategic control over gold reserves and gold production is of paramount importance.
The issue is not only who controls the stock of central bank gold reserves, but who, namely which countries, control the production of mine gold.
While the US has the largest official gold reserves, China has become the World’s largest producer of mine gold.
The main players with regard to mine gold are China, Australia, Russia, South Africa, the US and Canada.
Anglo-American corporate interests exert a dominant control over mine gold. The World’s largest gold mining companies are Barrick Gold (Canada), GoldCorp Inc. (Canada), Newmont Mining, (USA).
Below are the official country level central bank holdings of gold (scroll down) as well as estimates of mine production of gold by major gold producing countries.
The figures on gold holdings pertain to central bank holdings. They do not include private holdings of gold by individuals and financial institutions.
The official central bank figures cannot be verified, nor can the total amount of gold derivatives transacted in financial markets. There is no reliable data on private gold holdings, which have developed over several centuries.
With regard to official US gold holdings at Fort Knox, there has been no independent audit of official holdings. According to Rep. Ron Paul: “Our Federal Reserve admits to nothing, and they should prove all the gold is there. There is a reason to be suspicious, and even if you are not suspicious, why wouldn’t you have an audit?” (Ron Paul calls for audit of US Gold Reserves, quoted in The New American, August 30, 2010).
“The last and only time that an audit was performed on the gold held in Fort Knox was issued within hours of President Dwight Eisenhower’s inauguration on January 20, 1953.” (New American, op.cit. emphasis added)
Physical gold holdings constitute a crucial geopolitical variable in the confrontation between competing economic powers. They are also central to an understanding of the debt crisis.
Both Russia and China have significantly increased their gold holdings in recent years. Large amounts of US dollar denominated debt instruments have been converted into gold.
The official figures for China are based on released data by the People’s Bank of China. There is reason to believe that only part of the official purchases are made public, to the extent that the People’s Bank of China reserves may be much higher those recorded in official statistics. Conversely, there is reason to believe that US holdings at Fort Knox may be significantly lower than what is conveyed in official figures.
“China is on a gold buying spree these days. The Chinese central bank-the People’s Bank of China-is taking a series of steps to increase its gold reserves to ensure that the precious yellow metal replaces forex reserves held in the US dollar. In the last few months, there have been talks of China following India in buying gold reserves from the International Monetary Fund (IMF). So when IMF announced that it would be selling its remaining 191 tonnes of gold in the open market, several bullion analysts predicted that China would somehow jump into the fray and buy IMF gold. Both China and India are competing in the global bullion markets to be the largest consumers and importers of gold.” (See ibtimes.com).
Both China and Russia are major producers of gold. Of geopolitical significance, China is the World’s largest producer of physical gold.
According to 2009 figures, China is the World’s largest gold producer; 313.98 metric tons,
representing 11.8 percent of global gold production.
1. China: 313.98 mt
2. Australia: 227.00 mt
3. United States: 216.00 mt
4. South Africa: 204.92 mt
5. Russia: 205.00 mt
6. Peru: 180mt (estimate)
7. Indonesia: 90.00 mt
8. Canada: 95.00 mt (estimate)
9. Ghana 90.20 mt
10. Uzbekistan 80mt (estimate)
OFFICIAL GOLD HOLDINGS BY COUNTRY IN METRIC TONS (2011)
* A tonne, also referred to as a metric ton, has a unit of mass equal to 1,000 kg
Statistics acquired from: “World Official Gold Holdings.” World Gold Council.
World Gold Council, Jan 2011. Web. 1 Feb 2011.
Michel Chossudovsky and Andrew Gavin Marshall, Editors
Until now the course of the crisis has been accurately described according to the five phases identified by our team from May 2006 (GEAB n°5) and completed in February 2009 (GEAB n°32): release, acceleration, impact, decanting and global geopolitical dislocation, the last two stages developing simultaneously. In the last issues and in particular the GEAB n°70 (December 2012), we commented extensively on the ongoing processes of the two last phases, a decantation from which the world-after painfully emerges on the rubble of world geopolitical dislocation.
But we had underestimated the decanting period’s duration which we have gone through for more than four years, a period during which all the crisis’ players have worked to a common goal, to gain time: the United States, whilst making every effort to prevent the appearance of alternative solutions to the dollar, in spite of the catastrophic situation of all its systemic fundamentals, to prevent its creditors from abandoning it (discrediting other currencies including the Yen from now on, tenacity against the attempts to disconnect oil from the dollar, etc…); the rest of the world, in setting up skilful strategies consisting of maintaining its assistance towards the United States to avoid a sudden collapse from which it would be the first to suffer, and at the same time constructing alternative and of decoupling solutions.At the end of this long period of the system’s apparent “anaesthesia”, we consider it necessary to add a sixth phase to our description of the crisis: the last impact phase which will occur in 2013.
The United States certainly believed that the rest of the world would have an interest in keeping its economy on artificial respiratory assistance ad infinitum but it is likely that they don’t believe it any more today. As regards the rest of the world, the final chapters of the US crisis (major political crisis, decisional paralysis, near miss of the fiscal cliff, perspective of a payment default in March, and always the incapacity to implement the least structural solution) convinced it of the imminence of a collapse, and all the players are on the look-out for the least sign of a swing to extricate themselves, conscious that by doing so they will precipitate the final collapse.
Our team considers that in the context of the extreme tensions – both domestic political and world financial tensions – induced by the next raising of the US debt ceiling in March 2013, the signs will not be lacking to cause the disappearance of US treasury bonds’ last purchasers, a disappearance which the Fed will no longer be able to compensate for, resulting in an increase in interest rates which will propel American indebtedness to astronomical levels, leaving no hope of ever being repaid to creditors who will prefer to throw in the towel and let the dollar collapse… a collapse of the dollar which will de facto correspond to the first genuine solution, painful certainly but real, for US indebtedness.
It’s for this reason also that our team anticipates that 2013, the first year of the World-Afterwards, will see a setting up of this “purifying” of US and world accounts. All the players are tending towards this step whose consequences are very difficult to predict but which is also an unavoidable solution to the crisis taking into account the United States structural incapacity to set up genuine debt-reduction strategies.But in order to take the measure of the causes and consequences of this last impact phase, let’s reconsider the reasons for which the system lasted for so long. Our team will then analyze the reasons for which the shock will take place in 2013 afterwards.
Saving time: When the world rejoices at the US status-quo
Since 2009 and the temporary measures to save the global economy, the world has been waiting for the famous “double dip”, the relapse, as the situation continues to worsen day by day for the United States: breathtakingly high national debt, mass unemployment and poverty, political paralysis, loss of influence, etc. However, this relapse still hasn’t arrived. Admittedly, the “exceptional measures” of assistance to the economy (lowest interest rates, public expenditure, debt repurchase, etc.) are still in force. But against all expectations and contrary to any objective and rational judgment, the markets still seem to have confidence in the United States.
Actually, the system isn’t based on confidence any more but on calculating the best moment to extricate themselves and the means of hanging on until then.The time has passed when China challenged the United States to implement a second round of quantitative easing (1): the world seems to have adapted itself to the fact that this country is still growing its debt and is inescapably turning towards a payment default, provided that it’s still standing and doesn’t make too many waves again. Why don’t the other countries press the United States to reduce its deficit, but on the contrary are delighted (2) when agreement on the fiscal cliff keeps the status-quo? However nobody is fooled, the situation cannot last indefinitely, and the world economy’s main problem is really the United States and its dollar (3).
Countries’ public debt by the number of months tax receipts (4) – Source: LEAP / European Commission, ONS, FRB
According to the LEAP/E2020 team, the various players are seeking to gain time. For the markets, it is a question of gaining maximum benefit from the Fed and the US government’s largesse in order to make easy money; for the foreign countries, it’s a question of extracting their economies to the maximum from that of the United States in order to be able to shelter themselves at the time of the coming shock. Thus, for example, it’s how Euroland makes the most of it in order to strengthen itself and China takes advantage of it to sink its dollars in foreign infrastructures (5) which will always be better value than dollars when that currency is on the floor.
Acceleration of the tempo and a build-up of challenges
But this period of complicit leniency is coming to an end because of intense pressures. It is interesting to note that the pressures don’t really come from abroad, confirming our analysis above; those are rather of two sorts, internal and financial-economic.On the one hand, it’s the internal political battle which threatens the house of cards. If Obama appears to be traversing a period of political grace facing a seemingly subjugated republican camp, the battle will begin again even more violently than ever starting from March. Indeed, if the republican representatives will be undoubtedly obliged to vote the increase in the debt ceiling, they will make Obama pay dearly for this “capitulation”, pushed here by their electoral base half of which in fact wants a US default considered by them as the only solution to free them from the country’s pathological debt (6). The republicans thus hope to do battle on the many issues and challenges which are shaping up: on the social side, firearms regulation (7), taking a new look at immigration and the legalization of 11 million illegal immigrants (8), health care reform, and more generally questioning the Federal state’s role; on the economic side, lowering expenditure, debt settlement (9), fiscal cliff « redux » (10), etc… All these issues are on the next few months’ agenda and the least hitch can prove to be fatal. Given the republicans’ pugnacity and their supporters’ even more so, it’s rather the hope that there is no hitch which is utopian.On the other hand, it’s the international markets, Wall Street at the forefront, which threaten not to extend their confidence in the US economy. Since Hurricane Sandy and especially since the episode of the fiscal cliff which hasn’t fixed any problems, the pessimistic analyses and doubts are becoming increasingly strong (11). It’s necessary to keep in mind that the stock markets are stateless and, even domiciled in New York, have only one goal, profits. In 2013, the world is sufficiently extensive so that investors and their capital, just like a flight of sparrows, slip away to other skies on the slightest warning (12).Whereas agreement on the debt ceiling in 2011 settled the question for 18 months (13), that on the fiscal cliff defers the problem for only two months. Whilst one felt the effects of QE1 for a year, QE3 had an effect for only a few weeks (14). Besides, with a diary loaded with negotiations to come, one sees the tempo accelerate significantly, a sign that the abyss is approaching and players’ nervousness along with it.
S&P performance during each quantitative easing action – Source: ZeroHedge/SocGen
March-June 2013, extreme tension: the least spark lights the blue touch-paper
In addition to these US challenges, the whole world also has many tests to pass, here again its economic challenges above all. In particular it’s Japan and the United Kingdom, key elements in the US sphere of influence, which are fighting for their survival, both in recession, with insupportable debts, household savings on the deck and with no prospect of a short-term solution. We will examine these two countries in detail later in this issue. But it’s also a Brazilian economy which is just ticking over (15); difficulty to manage inflation rates in the emerging powers; the deflation of the Canadian, Chinese and European real estate bubbles (16), etc…
The challenges are also of a geopolitical nature: to quote only three examples, African conflicts among which of course France’s intervention in Mali, conflicts and indirect confrontation of the Middle Eastern powers around Syria, Israel and Iran, as well as the territorial tensions around China which we will examine during our following analysis on Japan.All these factors, economic, geopolitical, American, global, are coming together at the same moment in time: the second quarter of 2013.
Our team has identified the period running from March to June 2013 as being explosive, in particular at the conclusion of the negotiations in the United States on the debt ceiling and the fiscal cliff. The least spark will light the blue touch-paper, unleashing the second impact phase of the global systemic crisis. \
And there are many opportunities to create sparks, as we have seen.So what are the consequences of and the calendar for this second impact phase? On the markets initially, a significant fall will spread out until the end of 2013. All economies being inter-connected, the impact will spread throughout the whole planet and will drag the global economy into recession. Nevertheless, thanks to other countries’ decoupling which we mentioned previously, all countries won’t be affected in the same way. Because, more so than in 2008, opportunities exist for capital in Asia, Europe and Latin America, in particular.
In addition to the United States, the countries the most affected will be those in the US sphere, namely the United Kingdom and Japan primarily. And, while these countries will still struggle in 2014 with the social and political consequences of the impact, the other regions, BRICS and Euroland at the forefront, will finally see the end of the tunnel at that time.In order to understand the formation of this second impact phase, we next review the “suicidal tendencies” of four powers of the world before: the United States, the United Kingdom, Japan and Israel.
Then we will present the traditional January “Ups & Downs”, rising and falling trends for 2013, also serving as recommendations for this New Year. Finally, as in each month, our readers will also find the GlobalEurometre.
(3) As identified by LEAP/E2020 since 2006 from the GEAB n°2.
(4) The banks’ public reflation is included in the United Kingdom’s debt.
(5) The Chinese being very active in this arena; one has numerous examples such as the port of Piraeus in Greece, Heathrow airport in the UK, in Africa, but also the takeover of industrial jewels (Volvo for example) etc. See, for example Emerging Money (China to invest in Western infrastructure, 28/11/2011).
(6) Read, for example, ZeroHedge, 14/01/2013.
(7) Source: Fox News, 30/12/2012.
(8) Source: New York Times, 12/01/2013.
(9) Source: New York Times, 15/01/2013.
(10) The budgetary cuts debate has simply been pushed back two months. Source: New Statesman, 02/01/2013.
(12) The United States will in their turn taste the irony of history: the financial market deregulation and globalisation which they promoted so much is going to turn round dramatically against them.
(14) For a reminder on these quantitative easing operations, one can refer to BankRate.com, Financial crisis timeline.
(15) Source: Les Échos, 05/12/2012.(16) See previous GEAB issues.
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