Ukraine Is Not the Crisis You Think It Is

The crisis happening in Ukraine is not the crisis you think it is. In global economics and politics, the Ukraine situation will be seen as a tiny blip in a few short years. Fears that it would escalate into a full blown crisis with serious repercussions for the western world have been blown out of proportion painful as it may be to the Ukrainian people. The social mood of the times suggest that events in Ukraine and between Russia and the US and EU will blow over. Social mood is upbeat and compromise and forbearance are the order of this time.

Unfortunately for the Ukrainian people Russia is re-establishing its boundaries. Distance  is its security. From the Ukrainian border to Moscow is only 300 kilometers. Russia simply cannot afford to own the Ukraine as it did after WW2. Having access to warm water ports and the Mediterranean and establishing a pro-Russian influence in the Ukraine satisfies  Russian imperialism on it’s western border.

We see the Ukraine situation as now having largely played out and and attention will soon divert elsewhere. Russian stock market prices are heavily discounted as well as it’s currency and are probably a good buy looking for a strong bounce.

The End Long Game 2009-2018?

As at 31st March 2014

Updating the main theme of this website we showed in our last lead article ‘A Generation of Correction’ how the big picture view had resolved itself into two clear scenarios. We painted the broad brush strokes showing those scenarios. Now the picture has advanced sufficiently enough to reveal the direction ahead.

To recap firstly, we are witnessing in our lifetime the completion of large scale cycles of human endeavor and activity with the attendant dislocation and reallocation of social, economic and political activity. The article does not attempt to make trading or investment recommendations, however an understanding of the broad brush strokes both economically and politically may serve to enhance your perspective on what emerges next. The scale of forces at work in societies and economies is so huge that the current social, economic and political drama is taking decades to unfold. This is the topping and completion process of an economic cycle that has been going on for over 200 hundred years. By the time it is finished, it may well have spanned generations of people. On a historical note, we are witnessing the completion of the growth phase of the industrial revolution that began around 1783-5. These cycles affect all industrialized nations including China which joined the industrial revolution much later. Given the length of time involved we anticipate this having a generational impact and may not be completed for decades to come.

We had seen our previous forecast, ‘The Five Act Drama’, invalidated as the so called economic recovery since 2009 continued. The phase 2000 to 2009 which included the dotcom bubble collapse, the post 9/11 recovery and Iraq War followed by the subprime mortgage debacle were all part of a major degree of correction occurring in the late stages of the Industrial Revolution Cycle that began around 1785. We had concluded that the logical outcome of the economic peak in 2007 and the following financial crisis (GFC), that a major downturn with attendant declines in asset values and income levels was underway and that this process would continue into 2016 and possibly as late as 2024. The tenacious strength of the recovery since the GFC surprised us but also revealed alternative cyclic viewpoints. The ‘animal spirits’ that drove bull markets and buoyed economic activity from the 80’s to 2000 along with  the animal spirits of the central bankers whose hubris has now reached giddying heights illustrates the scope of those bull markets and gives rise to what is happening now with a clear scenario emerging.

In the first quarter of 2014 we observed stock markets pushing to new highs. At the same time, the massive US Federal Reserve intervention known as quantitative easing (QE) had started to be wound back. Unemployment levels have continued to fall modestly and economic activity has continued to sputter along in the US and other liberal democratic nations. The effect of QE has had the effect of fuelling asset prices with only marginal improvement in economic activity. The effect of not allowing spontaneous ordering to take place with the required liquidation of malinvestments of the last 20-30 years has been to stall the potential of a recovery that is founded on real growth and productivity. 

Realignments normally occur with structural economic or political realisations and to this end there is no shortage of potential factors. These include the potential for significantly higher bond interest rates, political scandal, general economic failure, student loans, China, Europe, etc. Despite all the worries of Main Street underperformance compared to stock and commodity markets, it appears QE is having the effect of distorting all relationships between markets and their ability to fairly price. Ultimately this too will result in unintended consequences and only prolongs the inevitable. One result will be the utter demolition of the myth that is Keynesian economics.

Our previous scenario was based on the assumption that the beginning of the correction (and completion of the growth phase) of the Industrial Revolution Cycle began in 2000 with the bursting of the Dotcom bubble. Since then asset values have effectively moved sideways to higher in a broad band and currently stand at the upper levels of those bands. In real terms however, asset values are broadly lower reflecting the massive money printing that has occurred. This is also reflected in sputtering global economic activity and rising political and social frustration about the political-economic situation. From another perspective this may be seen as the result of 40 years of fiat money and the economic and social dislocation that occurs when money has no store of value.

At time of writing, US money supply growth figures indicate the potential in 2014 for a mild correction of asset values due to weakening US M2 money supply growth. In effect the US Federal Reserve has failed to transfer money printing to Main Street as banks still remain resistant to large scale lending. This is in part due to distorted interest rates making it unprofitable and risky to lend.  This mild correction is merely a pause in the asset appreciation we have witnessed over the last 5 years caused by QE programs. Any excessive fall in asset values will be met by significant QE stimulus in the short term.

The fact is, the largest investment bubble in the history of humankind is unfolding right on schedule. By schedule we don’t mean time dependent but that what is unfolding is form dependent. All economic bubbles return to the starting point from whence they came. The massive money printing undertaken by central banks, the dislocation of market pricing shows a growing divergence between stocks for example and the rest of the stock market and the relentless chase for yield. Whilst divergence is indicative of major stock market tops, the topping phase can go on for a long time. We have already seen the breaking from the uptrend of many markets including gold and silver, base metals, interest rates and currencies. Human history is littered with examples of failed nations, whose prosperity and future was cut short by depreciation of money values. What makes this era any different? The modern fiat money experiment has been going on for a mere 42 years. The economic system of industrialized nations resets or reforms roughly every 40 years and so it appears we are right on time for the next reset. Given the culmination of history, cycles, accumulation of knowledge and human hubris it appears technology changes but the nature of humankind does not.

One aspect worth considering is the level of political hubris maintained by many liberal democratic countries whose politicians firmly believe that they have the skill and tools necessary to engineer recovery. Until this hubris is totally wiped away along with the hopes and dreams of the people represented, there is not much scope for real change at a societal, political or economic level. Indeed one factor contributing to the economic malaise is the inability of most markets to clear out the malinvestment most industrialized nations suffer. Typical of this is the gridlock in the US political system where entrenched self-interest stops any real or meaningful change. The weight of US economic recovery has been placed firmly on the shoulders of the Fed. US politicians are incapable of undertaking any real economic restructuring and this has the effect of prolonging the contraction phase of the cycle. Meanwhile the hubris continues, restructuring remains on the side-lines and most industrial nations face high unemployment and debt levels, unaffordable social security programs and large ageing populations starting their transition to retirement.      

Interestingly, in this next phase, all of this will come to a head. In the last cyclic correction of the same magnitude – 1710 to 1785, great things were achieved with the advance of the sciences, arts and many new inventions and discoveries. That phase concluded however with the French Revolution and Napoleonic Wars. This next phase will end the same way as humanity forgets itself and its past. It will also be accompanied by many new inventions, discoveries and advances along with the wars and other upheavals. Like all plays (the world is certainly a stage), this year 2014/15 is where the drama reveals the direction and thrust of things to come for the next 20 – 30 years or so.

In effect the recovery from the GFC is the last gasp of the fiat money boom that has been in effect since Nixon left the gold standard. Economic growth since the late sixties has been largely sponsored by credit that has left the liberal democratic economies bloated with debt, regulation and fiat money. To see how this pans out graphically, refer to the accompanying chart. The recovery since 2009 has been boosted by massive cash injections (read printing) of money into the industrialised economies boosting asset prices (read inflationary) as Keynesian orthodoxy suggests boosting asset prices will eventually lead to a follow through in consumer spending. Industrial nation governments are doing their best to boost spending in the finest tradition of neo-Keynes. The printing however is having the harmful effect of dislocating markets and the traditional matrix of pricing set by the markets is breaking down, together with a worrying disconnect between Wall St (stock market prices) and Main St (economic activity, employment). Anticipate the main buzzword to be stagflation through 2015. Commodity markets are spiking up, interest rates are starting to rise and yet, in spite of that, stock markets continue to climb a wall of worries and this gives rise to our predictions.

Our scenario suggests that quality performing stocks, commodities and real estate will continue to climb even as incomes decline and other assets peel away. Translating that into index levels implies, for example seeing the DJIA advancing to new highs from late 2014 onwards, in excess of 20,000 whilst the S&P500 reaches towards 2000-2200. Given the QE printing stimulus to asset prices over the last few years, such a move could be characterized by a final exponential rise followed by a collapse of these two indexes any time from late 2015 onwards. Such a top would mark the completion of the entire Industrial Revolution upward phase of the cycle and indicate we are entering into a prolonged period of economic, social and political stagnation and upheaval. Whilst these highs are being made the discrepancy between Wall Street and Main Street will be acutely emphasized with further deterioration of the economic, social and political fabric of the industrialized nations. At the same time, this may well be accompanied by dramatic movements in interest rates, commodities, currencies, gold and silver. The upward spike in these markets is the result of the massive QE programs flowing through to asset prices. You can also anticipate the emerging market economies to suffer as more cash gets sucked into the leading economies – the US, UK, Germany and Japan. Japan will be forced to make another QE intervention later in 2014.     

In economic history this present phase may well be a replication of the 1921-29 phase also known as the “Roaring Twenties”. This culminated of course in the Crash of 1929 and we are suggesting that the circumstances are building for a repeat performance. The scale and scope however of the coming crash still years away will dwarf the events of 1929-33. Using the stock market as a barometer or benchmark of prosperity is a recent development by the US Federal Reserve and illustrates how far we have traveled from orthodox economics in justifying the level of intervention by government and the Fed. The severity, speed and relentlessness of the events following will shock. For this scenario to unfold there needs to be a further consolidation of stock and commodity markets during 2014 before the final advance begins. We believe however that the time scale to complete the End Game is small, measured in, at most, a few years, before the next major sell off phase.

To summarize, let us be very clear about what is happening or about to happen in the final phase of the End Game:

  • ·         Expect stock markets to correct over most of 2014 before beginning an upward surge leading to an exponential rise in stock, commodity, gold and silver prices. For example anticipate the DJIA correcting to 13784 – 15341 and not below 12876.
  • ·         Anticipate central banks to respond to this correction by escalating their QE programs.
  • ·         Anticipate inflation to break out in an unprecedented way especially in the US, UK and Japan and central banks will be unable to contain it. At the same time higher than normal unemployment and stagnant economic activity will prevail. This is called stagflation.
  • ·         Expect credit markets will seek to re-price themselves in light of emergent inflation creating a liquidity trap for central banks.
  • ·         Anticipate the US, Japan, UK and German stock markets to benefit at the expense of emerging markets as cash gets sucked from the periphery to the centre. 
  • ·         Expect a collapse in stock and commodity prices followed by economic contraction where both inflation and high unemployment are experienced at the same time after this spike in stock and commodity markets prices. 
  • ·         Anticipate ongoing social and political dislocation in many countries.

Near the peak or shortly after it will also be possible to predict more accurately how long the ensuing economic contraction will last. Suffice to say, that from now ‘til anytime out to 2030 we are in for some tough times punctuated with attempts at recovery. By then the writing will be clear for everyone to see. And of course the generation of correction will not merely be confined to asset prices and the vagaries of fiat money and bad economics, but also to societies and politics both domestic and geo-political, where a generation of people will learn about long forgotten natural law and how it applies to human behavior. Social mood will have become dark and this will also be expressed right through music, the arts, fashion, crime, political and social mood and drama. The last phase will set the stage for a new beginning for people from which a new and sustained economic recovery will slowly begin. By the time that moment has arrived however, the nature of our societies and the way we relate with people and between nations will have changed. The wrangling about why it had to happen will be well underway.

 By Peter Twigg

oooOOOooo

© Pointmen Pte Ltd 2011-2014

Proprietary Rights Notice: By reading a copy of this essay, you acknowledge and agree as follows:

This essay is provided to you only for your personal, non-commercial use. This essay does not constitute advice. Except as expressly authorized by Pointmen Pte Ltd (PPL), you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate or commercially exploit the information contained in this report, in printed, electronic or any other form, in any manner, without the prior express written consent of PPL. You also agree not to use the information provided in this report for any unlawful purpose. This essay and its contents are the property of PPL and are protected by applicable copyright, trade secret or other intellectual property laws.

 Hope for Humankind

 

The End Long Game? 2009-2018

We have updated the main theme of the Emerging Events website. Click on the title to read how larger trends and cycles are moving to complete within the next few years and the implications this brings to to people and nations ……… Find it here: http://www.emergingevents.com/?p=2761 Continue reading

Of Course China Wants to Replace the U.S.

thediplomat_2014-02-03_13-29-21-386x257zachary-keck_q
If China becomes the world’s most powerful country, it won’t be satisfied being America’s number two.

Over at The Week, Think Progress’s Zack Beauchamp has a provocative piece arguing that “China is not replacing the United States as the global hegemon. And it never will.” Specifically, Beauchamp posits that “China faces too many internal problems and regional rivals to ever make a real play for global leadership. And even if Beijing could take the global leadership mantle soon, it wouldn’t. China wants to play inside the existing global order’s rules, not change them.

The piece is well-argued and certainly worth a read. In particular, Beauchamp does us a service in combating the myth of the inevitability of China’s rise. He usefully points out that China’s economy faces a multitude of challenges that may prevent it from reaching the potential many currently foresee. He also points out that China faces powerful neighbors that won’t stand by idly if Beijing seeks to construct a new regional order, much less a global one.

Still, on balance, I think Beauchamp’s piece does more to confuse than to inform. The first issue is that even though he discusses the regional balance of power in the piece, his overall argument is that China will not be capable of replacing the United States as the “global hegemon.” Unfortunately, there are many who would claim that America is a global hegemon. However, that argument is preposterous under any reasonable definition of hegemony. It is true that in the post-Cold War (if not earlier) the U.S. has been the only power capable of projecting military power in any region of the world. But this has not allowed it to dictate the regional order of every continent as it largely can in the Western Hemisphere.

Moreover, even if America really is a global hegemon, this would just make it more unlikely that any rising power could replace it as a global hegemon. After all, America’s primacy in the post-Cold War era was only made possible because no other great power existed.  Since China’s rise won’t stop the U.S. from being a great power, unless the two go to war and China wins, Beijing’s relative power will be far less than America’s at the end of the Cold War. And of course, America’s relative power will also be far less than what it enjoyed in 1991.

There are other issues with Beauchamp’s analysis of China’s relative power. For example, he notes that “one analysis suggests China’s GDP may not surpass America’s until the 2100s.” To begin with, while possible, this view seems to be decidedly in the minority among serious economists. Even if China’s economy crashes before 2018—around the time many believe China’s absolute GDP will surpass America’s—it still seems likely that it will find a more sustainable economic model before 80 years pass. And given that China has about four times as many people as the United States, it could easily surpass the U.S. in absolute GDP terms in less than 80 years.

But even if China’s economy doesn’t surpass the United States, this hardly suggests it won’t present a major strategic challenge to Washington. Consider that, according to Paul Kennedy , in 1938 Japan’s share of world manufacturing was just 3.8 percent while America’s was 28.7 percent and the U.K.’s was 9.2 percent. A year earlier, according to the same source, the U.S. national income was $68 billion while the British Empire’s was $22 billion. Japan’s, comparison, was just $4 billion. Yet, in the initial battles of the Pacific War Japan decisively defeated the U.S., England, and the Dutch across the region.

Similarly, the Soviet Union’s GDP was only ever about half as large as the United States, and many times much less than that. This doesn’t mean that America and its allies didn’t face a real strategic threat in the Soviet Union during the Cold War.

The more egregious part of Beauchamp’s case, however, is his contention that China does not seek to challenge the U.S.-led order. In his own words: “Even if this economic gloom and doom is wrong, and China really is destined for a prosperous future, there’s one simple reason China will never displace America as global leader: It doesn’t want to.

He goes on to explain: “China is content to let the United States and its allies keep the sea lanes open and free ride off of their efforts. A powerful China, in other words, would most likely to be happy to pursue its own interests inside the existing global order rather than supplanting it.

Beauchamp isn’t alone in holding this view, which has many faithful adherents in the West. In fact, not too long ago it was the running consensus in the United States, as well as the foundation of U.S. China policy in both the George W. Bush and the early Barack Obama administrations.

One place where this view has not been very popular is in China itself. Indeed, far from being happy to allow the U.S. Navy to keep its sea lanes open, Chinese leaders have been warning about their country’s “Malacca Dilemma” for over a decade now. They have also been actively trying to reduce America’s ability to cut off China’s energy and raw material imports. As they should be—it would be irresponsible for China’s leaders to allow their country’s economy to be at the mercy of a potential competitor if they have the realistic opportunity to allow China to secure its own shipping lanes. This is doubly true in light of the fact that the U.S. has been known to impose sanctions on many countries, including China itself after Tiananmen Square.

But the issue goes much deeper than that. In fact, it goes to the heart of the Chinese Communist Party’s legitimacy at home. At its core, the CCP’s claim to power is based on its ability to restore China to its past glory. Again, neither China nor its leaders have ever made any secret about this. For example, the CCP has always emphasized that it saved China from its “century of humiliation” at the hands of the Western and Japanese colonial powers.

Similarly, since coming to power in 2012, Xi Jinping has repeatedly stressed that, because of the CCP’s rule, the “great rejuvenation of the Chinese nation” is now within China’s grasp. As Zheng Wang points out , the term “rejuvenation is deeply rooted in Chinese history and the national experience.

Wang continues:

“As proud citizens of the ‘Middle Kingdom’ the Chinese feel a strong sense of chosenness and are extremely proud of their ancient and modern achievements. This pride is tempered, however, by the lasting trauma seared into the national conscious as a result of the country’s humiliating experiences at the hands of Western and Japanese imperialism. After suffering a humiliating decline in national strength and status, the Chinese people are unwavering in their commitment to return China to its natural state of glory, thereby achieving the Chinese Dream.

Thus, the CCP would lose all its legitimacy at home if it voluntarily subordinated China to the United States despite being the more powerful country. The CCP treasures its grip on power above all else, and therefore it should come as no surprise that it has already ruled out taking this risk.

Source:  http://thediplomat.com/2014/02/of-course-china-wants-to-replace-the-u-s/

Why The Next Global Crisis Will Be Unlike Any In The Last 200 Years

By F. F. Wiley of Cyniconomics

Sometime soon, we’ll take a shot at summing up our long-term economic future with just a handful of charts and research results. In the meantime, we’ve created a new chart that may be the most important piece. There are two ideas behind it:

  1. Wars and political systems are the two most basic determinants of an economy’s long-term path. America’s unique pattern of economic performance differs from Russia’s, which differs from Germany’s, and so on, largely because of the outcomes of two types of battles: military and political.
  2. The next attribute that most obviously separates winning from losing economies is fiscal responsibility. Governments of winning economies normally meet their debt obligations; losing economies are synonymous with fiscal crises and sovereign defaults. You can argue causation in either direction, but we’re not playing that game here. We’re simply noting that a lack of fiscal responsibility is a sure sign of economic distress (think banana republic).

Our latest chart isolates the fiscal piece by removing war effects and considering only large, developed countries. In particular, we look at government budget balances without military spending components.

(Military spending requires a different evaluation because it succeeds or fails based on whether wars are won or lost. Or, in the case of America’s adventures of the past six decades, whether war mongering policies serve any national interest at all. In any case, military spending isn’t our focus here.)

There are 11 countries in our analysis, chosen according to a rule we’ve used in the past – GDP must be as large as that of the Netherlands. We start in 1816 for four of the 11 (the U.S., U.K., France and Netherlands). Others are added at later dates, depending mostly on data availability. (See this “technical notes” post for further detail.) Here’s the chart:

 

Not only has the global, non-defense budget balance dropped to never-before-seen levels, but it’s falling along a trend line that shows no sign of flattening. The trend line spells fiscal disaster. It suggests that we’ve never been in a predicament comparable to today. Essentially, the world’s developed countries are following the same path that’s failed, time and again, in chronically insolvent nations of the developing world.

Look at it this way: the chart shows that we’ve turned the economic development process inside out. Ideally, advanced economies would stick to the disciplined financial practices that helped make them strong between the early-19th and mid-20th centuries, while emerging economies would “catch up” by building similar track records. Instead, advanced economies are catching down and threatening to throw the entire world into the kind of recurring crisis mode to which you’re accustomed if you live in, say, Buenos Aires.

How did things get so bad?

Here are eight developments that help to explain the post-World War 2 trend:

  1. In much of the world, the Great Depression triggered a gradual expansion in the role of the state.
  2. Public officials failed to establish a sustainable structure for their social safety nets, and got away with this partly by sweeping the true costs of their programs under the carpet .
  3. Profligate politicians were abetted by the economics profession, which was more than happy to serve up unrealistic theories that account for neither unintended consequences nor long-term costs of deficit spending.
  4. With economists having succeeded in knocking loose the old-time moorings to budgetary discipline (see first 150 years of chart), responsible politicians became virtually unelectable.
  5. Central bankers suppressed normal (and healthy) market mechanisms for forcing responsibility, by slashing interest rates and buying up government debt.
  6. Regulators took markets further out of the equation by rewarding private banks for lending to governments, while politicians and central bankers effectively underwrote the private bankers’ risks.
  7. Monetary policies also encouraged dangerous private credit growth and other financial excesses, resulting in budget-destroying setbacks such as stagflation and banking crises.
  8. Budget decisions were made without consideration of the inevitability of these setbacks, because economists wielding huge influence over the budgeting process (think CBO , for example) assumed a naïve utopia of endless economic expansion .

Sadly, all of these developments are still very much intact (excepting small improvements in budget projections that we’ll address next week). They tell us we’ll need substantial changes in political processes, central banking and the economics profession to avert the disaster predicted by our chart. And we’re rapidly running out of time, as discussed in “Fonzi or Ponzi? One Theory on the Limits to Government Debt .

On the bright side, a fiscal disaster should help trigger the needed changes. Every kick of the can lends more weight to the view expressed by some that the debt super-cycle – including public and private debt – needs to go the distance, eventually reaching a Keynesian end game of massive collapse. At that time, we would expect a return to old-fashioned, conservative attitudes toward debt.

As for the chart, it helps to flesh out a handful of ideas we’ve been either writing about or thinking of writing about. We’ll return to it in future posts, including one drilling down to the individual country level that we’ll publish soon.

Source: http://www.cyniconomics.com/2014/02/06/next-crisis/

Is the Dollar REALLY Losing Its Reserve Currency Status … If So, What Will REPLACE It?

Zerohedge reports:

The average life expectancy for a fiat currency is less than 40 years .

But what about “reserve currencies”, like the U.S. dollar? JP Morgan noted last year that “reserve currencies” have a limited shelf-life:

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2013/10/Reserve%20Currency%20Status.png

As the table shows, U.S. reserve status has already lasted as long as Portugal and the Netherland’s reigns.  It won’t happen tomorrow, or next week … but the end of the dollar’s rein is coming nonetheless, and China and many other countries are calling for a new reserve currency.

Remember, China is entering into more and more major deals with other countries to settle trades in Yuans, instead of dollars.  This includes the European Union (the world’s largest economy).

And China is quietly becoming a gold superpower , and China has long been rumored to be converting the Yuan to a gold-backed currency .

Why China Doesn’t Want the Yuan to Become the Reserve Currency 

But a switch to a totally-different system – say, a gold-backed yuan – would cause enormous disruption and chaos. China – which has been a long-term planner for thousands of years – doesn’t want such a sudden change.

Moreover, housing the world’s reserve currency is a huge burden, as well as a privilege.  Venture Magazine notes :

The inherent burden of housing the world’s reserve currency is that the U.S. must continue to run a balance of payment deficit to meet the growing demand. However, it was this outstanding external debt that caused investors to lose confidence in the value of the reserve assets.

Michael Pettis – the well-known American economist teaching at  Peking University in Beijing – explains :

A world without the dollar would mean faster growth and less debt for the United States, though at the expense of slower growth for parts of the rest of the world, especially Asia.

When foreigners actively buy dollar assets they force down the value of their currency against the dollar. U.S. manufacturers are thus penalized by the overvalued dollar and so must reduce production and fire American workers. The only way to prevent unemployment from rising then is for the United States to increase domestic demand — and with it domestic employment — by running up public or private debt. But, of course, an increase in debt is the same as a reduction in savings. If a rise in foreign savings is passed on to the United States by foreign accumulation of dollar assets, in other words, U.S. savings must decline. There is no other possibility.

By definition, any increase in net foreign purchases of U.S. dollar assets must be accompanied by an equivalent increase in the U.S. current account deficit. This is a well-known accounting identity found in every macroeconomics textbook.So if foreign central banks increase their currency intervention by buying more dollars, their trade surpluses necessarily rise along with the U.S. trade deficit. But if foreign purchases of dollar assets really result in lower U.S. interest rates, then it should hold that the higher a country’s current account deficit, the lower its interest rate should be.

Why? Because of the balancing effect: The net amount of foreign purchases of U.S. government bonds and other U.S. dollar assets is exactly equal to the current account deficit. More net foreign purchases is exactly the same as a wider trade deficit (or, more technically, a wider current account deficit).

So do bigger trade deficits really mean lower interest rates? Clearly not. The opposite is in fact far more likely to be true. Countries with balanced trade or trade surpluses tend to enjoy lower interest rates on average than countries with large current account deficits — which are handicapped by slower growth and higher debt.

The United States, it turns out, does not need foreign purchases of government bonds to keep interest rates low any more than it needs a large trade deficit to keep interest rates low. Unless the United States were starved for capital, savings and investment would balance just as easily without a trade deficit as with one.

Only the U.S. economy and financial system are large enough, open enough, and flexible enough to accommodate large trade deficits. But that badge of honor comes at a real cost to the long-term growth of the domestic economy and its ability to manage debt levels.

For the reasons outlined by Pettis, China – which has the world’s 2nd biggest economy (or 1st … depending on the measure used)  – doesn’t want the burden of housing the world’s reserve currency.

As such, China is pushing for a basket of currencies to replace the dollar as reserve currency.

Indeed, China – as well as Russia, the U.N. and many other countries and agencies – have called for the “SDR” to become the new reserve currency .  SDR stands for “Special Drawing Rights”, and it is a basket of 4 currencies – the US dollar,  Euro, British pound, and Japanese yen – administered by the International Monetary Fund .

Jim Rickards – one of the leading authorities on currency, having briefed the CIA, Pentagon and Congress on currency issues – says :

China is not buying gold to create a new gold standard; rather it is aiming to make the Yuan more attractive, with the end result of being included in a basket of currencies, referred to as the Special Drawing Rate (SDR). He added that there is a move to make the SDR the new global reserve currency.

“Everybody knows that the U.S. dollar’s days are numbered but there is no really currency to take its place except for the SDR,” he said.

“What the world is trying to do is move to the SDR and China is fine with that.

Rickards added that China’s goal of being in an SDR basket is the best of both worlds; the country can still have total control over its monetary policy and capital accounts but still influence global economics by being part of a basket of currencies.

“What the Chinese want is to have the Yuan in the SDR basket but not open up their capital account,” he said. “That is a backdoor way for the Yuan to be a de facto reserve currency without having to give up control.

What’s Missing?

It is silly to exclude the Yuan from the basket of currencies.

Indeed, given that there are privileges and burdens of having the reserve currency, I would argue that – if we are going to move away from the dollar as sole reserve currency – all of the currencies of the world could be in the basket … in proportion to the size of their economies.   It is simple to look up the GDP of the world’s nations .

That way, each country would all share in the benefits and costs, in proportion to its size and strength.

(Obviously, some countries have such small or unstable economies that no one would want to settle in their currency.  To be realistic, they’d probably be dropped out of the basket.  But the ideal of including everyone is worth maintaining.)

Keynes and Other Economists Say We Should Use a Basket of Commodities 

While having a basket of different things acting as the world’s reserve currency may sound like a new idea, John Maynard Keynes – creator of our modern “liberal” economics in the 1930s – promoted a basket of 30 commodities called the “Bancor” to replace the dollar as the world’s reserve currency.

The arguments for currency fixed on a basket of commodities – as opposed to currencies – was that it would stabilize the average prices of commodities, and with them the international medium of exchange and a store of value.

As China’s head central banker said in 2009, the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”. Likewise, China suggested pegging SDRs to commodities .

Economics Professor Leanne Ussher of Queens College in New York concludes that a reserve currency made up of a basket of 30 or so commodities would:

Reduce the disorderly swings in individual commodity prices … reduce supply constraints, stabilize costs of production, promote global effective demand from the periphery and balance growth between periphery and core countries.

Monetary expert Bernard Liataer – formerly with Belgium’s Central Bank – writes:

The idea of a commodity-based currency may seem to some a step backwards to a more primitive form of exchange. But in fact, from a practical point of view, commodity-secured money (for example, gold- and silver-based money) is the only type of money that can be said to have passed the test of history in market economics. The kind of unsecured currency (bank notes and treasury notes) presently used by practically all countries has been acceptable only for about half a century, and the judgment of history regarding its soundness still remains to be written.

With a commodity-based currency, a central bank could issue a New Currency backed by a basket of from three to a dozen different commodities for which there are existing international commodity markets. For instance, 100 New Currency could be worth 0.05 ounces of gold, plus 3 ounces of silver, plus 15 pounds of copper, plus 1 barrel of oil, plus 5 pounds of wool.

This New Currency would be convertible because each of its component commodities is immediately convertible. It also offers several kinds of flexibility. The central bank would agree to deliver commodities from this basket whose value in foreign currency equals the value of that particular basket. The bank would be free to substitute certain commodities of the basket for others as long as they were also part of the basket. The bank could keep and trade its commodity inventories wherever the international market was most convenient for its own purposes–Zurich for gold, London for copper, New York for silver, and so on. Because of arbitrage between all these places, it doesn’t really matter where the trades would be executed, as the final hard currency proceeds would be practically equivalent. Finally, since the commodities also have futures markets, it would be perfectly possible for the bank to settle any forward amounts in New Currency, while offsetting the risks in the futures market if it so desired.

This flexibility results in a currency with very desirable characteristics. First of all, the reserves that the country could rely on–actual reserves plus production capacity–are much larger than its current stock of hard currencies and gold. The New Currency would be automatically convertible without the need for new international agreements. Since the necessary international commodity exchanges already exist, the system could be started unilaterally, without any negotiations. Because of the diversification offered by the basket of several commodities, the currency would be much more stable than any of its components–more stable, really, than any other convertible currency in today’s market.

3 Choices for a More Stable Money System 

The 2 choices for reserve currency discussed above are using a (1) basket of currencies or (2) basket of commodities.

A third choice – which may be the best – is to use a mixture.

For example, we could have 50% currencies and 50% commodities.

That would give us some of the desirable characteristics (like stability) of a commodity basket, but not immediately move away from the fiat money systems which are now status quo for the current system.

Any of these 3 choices would give us far more stability and prosperity than we have today … without the chaos and misery – especially for Americans and perhaps Chinese – that switching to a Yuan-only reserve currency would bring.

Notes:  You might assume that public banking advocates would be for a currency-only basket. But Bernard Lietaer was one of leading public banking advocate Ellen Brown’s main teachers, and he is pushing for a basket made up solely of commodities.   (But public banking advocates might argue for adding currencies to the basket currencies to allow for some elasticity in the money supply.)

Gold standard advocates would obviously prefer commodities to currencies.  A basket of commodities might not have the simplicity of a gold standard, but it would accomplish a lot of the same goals.

As an American who wants stability and prosperity for my country, I think a basket would be the best option for a healthy future for the U.S.  And as someone who wants good things for the rest of the world, I believe that a basket would help to share political influence more widely.

Source: http://www.zerohedge.com/contributed/2013-10-29/dollar-really-losing-its-reserve-currency-status-%E2%80%A6-if-so-what-will-replace-it

Prepare for a new gold standard

By Thanong Khanthong

China continues to hoard gold en masse. In June, China imported 104.6 tonnes from Hong Kong. That would bring China’s gold imports from Hong Kong to 1,160 tonnes since the beginning of this year. Officially, China reports its total gold holdings at around 1,000 tonnes. Yet speculation is widespread that it could be holding somewhere between 7,000 to 10,000 tonnes, surpassing the United States’ 8,113 tonnes. China is apparently preparing to adopt an impending gold standard.

Yao Yudong, a member of the People’s Bank of China’s Monetary Policy Committee, recently penned an article in the China Securities Journal, in which he called for a new Bretton Woods system. This would help stabilize the global exchange rates. By implication, he is calling for a return to the gold standard.Under the old Bretton Woods system, the US dollar was the global reserve currency, fixed to gold at US$35 per ounce. This is known as the gold standard system, based on which paper currencies were issued. But President Richard Nixon ended this gold standard in 1971 by floating the US dollar outright.By doing so, the world moved into the fiat currency system – or paper money system. Ever since, the dollar has been printed out of thin air. But the US has also been able to guard the dollar as the world reserve currency. This fiat currency system has given rise to huge debts, an expansion of the banking system and financial markets, and has become the mother of all volatility.Now China is attempting to challenge this fiat currency system. It is no secret that China would like to float the yuan to become an international reserve currency. But China will not bank on the fiat currency system to do so. It is now pegging its yuan to the US dollar tightly. When the timing is right, China will de-link the yuan from the US dollar and fix it to gold instead. This will have far-reaching implications for the global financial system, creating further dislocations and crisis on a global scale.

Also, China has been entering currency swap contracts with other countries to bypass the US dollar. It has currency swap agreements with Brazil, Russia, Iran, Australia and the UK, to name a few. This scheme is developing fast to supplant the dollar with the yuan.

So it is not a surprise that China is building up its gold reserves in preparation for a big bang revolution of the global financial system.

Even with the strong demand for gold from China, Russia and India, gold prices have continued to be hammered down. Gold prices peaked at almost $1,900 per ounce in September 2011. Now, gold prices are struggling to keep to the $1,300 level. Many commentators, from Mexican billionaire Hugo Salinas Price to former US assistant secretary for the Treasury, Paul Craig Roberts, believe that the gold price squeeze is the work of central planners, who would like to protect the value of the dollar.

We are now seeing a battle in the gold market, which reflects a broader currency war. The central planners are holding down the gold prices, while China, Russia, India and other central banks and funds are accumulating physical gold in preparation for a big change. This seesaw battle will continue until the great unravelling.

Interest rates are on a rise. If the US Federal Reserve fails to get control over the bond market, we are going to witness a crisis. Then gold will shine again as China and other countries move to adopt a gold standard to replace the fiat currency system. By that time, history will have been rewritten.

Source: http://www.nationmultimedia.com/opinion/Prepare-for-a-new-gold-standard-30212197.html

Sign of the Times? Peak Oil Website Shuts Down

Anthony Wile, Chief Editor for The Daily Bell writes:

For years, we’ve been pointing out that Peak Oil is a dominant social theme , a scarcity meme used by the powers-that-be to reinforce the US petrodollar and generally to control economic and sociopolitical elements of society.

And now comes word via various news reports including a story at MarketWatch that a main Internet proponent of the Peak Oil myth – The Oil Drum – is shutting its doors.

Here’s how MarketWatch describes it:

… A website created and frequented by advocates of “peak oil,” is closing its doors July 31 after an eight-year run. The site will be kept as a repository of old articles, but will no longer offer new ones, according to a post on the site dated July 3.

The decision was reached thanks to “scarcity of new content caused by a dwindling number of contributors” and the cost of running the site, the post said. The post garnered more than 700 comments from readers mourning the site’s virtual death. Commenters suggested “donate” buttons and other ideas to raise money.

With news of record-breaking North American oil and gas production seemingly every day, maybe it just got too hard to maintain a site devoted to the notion that the world’s oil production was at or near a peak … Detractors gleefully pointed out that the theory did not take into consideration technological advances, while defenders retort that, inevitably, demand for oil will outstrip supply, leading to higher oil prices and shortages.

Count us among the detractors.

For close to a decade, we’ve been identifying and exposing pernicious scarcity memes that seek to scare middle classes into giving up power and wealth to globalist enterprises such as the United Nations , International Monetary Fund , World Bank , etc. Peak Oil was among the higher profile of these memes probably because it was among the most useful.

When top men in the US government and at the Federal Reserve wanted to go off a gold standard , they used Peak Oil concepts to justify the petrodollar. People were led to believe that the only large-scale oil reserves were in the Middle East and then various green manipulations made it difficult to gain oil throughout the West. The Saudis agreed to demand dollars for oil and the rest was history. The world had to hold dollars and dollars became a “reserve currency.”

But now the game is changing. Shale oil and gas – extracted via fracking – have suddenly made it clear that far from suffering from oil scarcity, the world is awash in energy.

Here an excerpt from another recent MarketWatch article:

World to use less OPEC oil as U.S., Canada lead oil supply growth … The world will consume less oil from the Organization of the Petroleum Exporting Countries next year, even as the cartel increased its 2014 oil demand growth forecast to its highest since 2010.

Demand for OPEC crude next year is expected to decline by 300,000 barrels a day to an average of 29.6 million barrels a day, OPEC said Wednesday in its monthly report. The report is the first this year to make predictions for 2014. This year’s demand for OPEC oil was forecast as 29.9 million barrels a day, almost unchanged from the previous report, and a decline of 400,000 from 2012.

Supplies from non-OPEC nations are expected to grow by 1.1 million barrels a day in 2014, with the U.S. and Canada leading that growth, followed by Latin America and countries in the former Soviet Union.

Did you ever think, dear reader, that you would someday read “US and Canada lead oil supply growth”? Perhaps you felt along with millions – billions – of others that oil and gas were scarce commodities, mostly located in the Middle East.

What is noteworthy about fracking is that the technology has been around for decades. In fact, there’s nothing much that seems new about the process except its application. And that has led us to wonder why the technology has been rolled out now by Big Oil. Our conclusion, which we’ve offered in several articles, is that the petrodollar itself is being purposefully destabilized.

In order to globalize currency, one needs to diminish the dollar. Is it just a coincidence that the BRIC countries and their currencies have grown stronger as the dollar and the euro have weakened? Or that gold has taken a tumble?

Perhaps so, or perhaps various currencies are indeed being positioned to create a more globalized currency basket. This has been a globalist dream since John Maynard Keynes proposed a world currency some 50 years ago.

It is easy to ignore such ideas because they imply that there is enormous monetary manipulation and coordination at the very top of Western societies. But the Anglo-American axis still seems firmly in the saddle to me, and scarcity memes seem to be a main tool of various manipulations just as they have been in the past.

What is fascinating to me is the way that the mainstream news media has quietly shifted from covering an era of energy scarcity to reporting on an era of energy plenty. For half a century we’ve been exposed to vehement promotions regarding rapidly diminishing oil and gas supplies. And now that things are different, the mainstream media reports on these fundamental changes as if they were neither noteworthy nor peculiar.

The expansion of oil and gas supplies is a huge story. Assuming it continues to be for real (and does not prove out as yet another peculiar globalist gambit or get sidetracked by environmental concerns) it is going to have a profound impact on societies around the world and even on the money they use.

Like everything else that is critically important, these changes are taking place without the scale of coverage you’d think they warranted.

There’s a lot more to this story than is currently being reported. But we’ll stay on it. The investment implications are vast.

Source: http://www.thedailybell.com/29387/Anthony-Wile-Sign-of-the-Times-Peak-Oil-Website-Shuts-Down

EU threatens to punish Norway for breaching EEA agreement

In the Commission draft report , which looks into the functioning of the EEA, the Scandinavian country is being criticized for imposing tariffs on EU products from 2013 and “resisted EU efforts for ambitious liberalization” of the EU’s single market.

According to the draft, obtained by EurActiv, 427 acts whose compliance date in the EU has expired, also remained to be incorporated in Norway by October 2012.

“This situation might thus lead to competitive advantages for operators based in the EEA-EFTA countries, and more fundamentally risks undermining the legal certainty and homogeneity of the single market,” the report reads.

“This problem is of great concern for the EU side and should be solved as a matter of urgency,” the report states.

‘Selfish Norway’

Moreover, the EU also dislikes the fact that Norway has rejected several directives coming from Brussels. The Norwegian government has for example warned it won’t implement the EU’s postal directive about competitiveness for letter mail weighting less than 50 grams.

Danish MEP Bendt Bendtsen (European People’s Party), who has been closely following the trade issues with Norway, told EurActiv the problems started in 2012 when Norway raised the price of hydrangeas from the EU by 72%.

Eventually, the extra taxes spread to EU food products such as cheese and meat.

Bendtsen said Norway is acting “selfishly” and that the taxes were put on EU goods “deliberately” as the Norwegian Centre Party, which is part of the Norwegian government, has for a long time pushed for the extra taxes.

“Norway only wants the cream on the cake,” the MEP said.

Threaten with punishment

The EU’s foreign service and the Commission, which have the formal responsibility for the relationship with Norway through the EEA agreement, have confirmed that there is an increasing disapproval with Norway.

“This development worries us. We don’t like the backlog on implementing directives, and this is a case we are trying to deal with now,” Maja Kocijancic, spokesperson of Catherine Ashton, the European Union High Representative for Foreign Affairs and Security Policy, told Norwegian TV2 .

She confirmed that the EU is looking into the possibilities for sanctions within the EEA agreement’s frame.

Leader of the pro-EU organisation Europabevegelsen Paal Frisvold said Norway risks exclusion from the European marine and cargo market and could lose cooperation on mobile roaming prices, making them more expensive in Norway.

However, Bendtsen said that the right EU punishment would be to hit Norway’s fishing industry, or to take the step even further: “The consequence should be kicking Norway out of the EEA,” the MEP said.

Stupid situation

Norway’s Prime Minister Jens Stoltenberg said the country has a good relationship with the EU, but the fact that there are disagreements over individual directives is nothing new.

Erna Solberg, leader of the biggest opposition party, the Conservatives, said the Norwegian government doesn’t understand the EEA’s mutual obligations. She said Norway isn’t active enough when it comes to its Europe policy and doesn’t use the opportunities in effecting the EU legislation enough.

“It is stupid that we have put ourselves in a situation where our closest partners obviously are frustrated with us,” Solberg said .

Potential impact on British EU debate

Bendtsen said the problems in the EU-Norway relations could eventually affect the ongoing British debate on whether to stay in or leave the EU.

Norway has previously been mentioned as a positive example of a non-EU member which still gets advantages and benefits of being part of the EU’s single market.

However, in his EU speech last Wednesday, British Prime Minister David Cameron asked whether it was in Britain’s best interest and desirable for Britain to be like Norway or Switzerland – with access to the single market, but outside the EU.

“While Norway is part of the single market – and pays for the principle – it has no say at all in setting its rules: it just has to implement its directives,” Cameron said.

[Emerging Events Comment: A reflection of the polarization and splitting effect of ongoing negative social mood that will ultimately bring the EU down]

Source: http://www.euractiv.com/consumers/eu-threatens-punish-selfish-norw-news-517431