What happens when an irresistible force meets an immovable object?
There have now been two really exciting international events for Generational Dynamics this year.
The first was the end of the Sri Lanka crisis civil war. We got to see and analyze the climax of a crisis civil war as it's happening in real time.
Now we get to see a "Summer of Love." type Awakening era event as it's happening in real time in Iran.
The comparison with America's Summer of Love Awakening era event in 1967, along with the 1968 riots at the Democratic National Convention in Chicago, is very apt. Although the sequencing and details are different, the generational behaviors and attitudes are almost identical.
First of all, Iran's protestors are like America's Boomers -- that is, they're in the Prophet generational archetype, the first generation growing up right after the end of a crisis war. America's Boomers grew up right after World War II, and Iran's protestors grew up right after Iran's last crisis war, the 1979 Islamic Revolution, followed by the Iran/Iraq war that ended in 1988.
And so, Dear Reader, if you're one of the many people who love Iran's protestors, but who hate America's Boomers, then you may be in conflict with yourself. If you want to know what today's doddering Boomers were like when they were kids, just look at today's Iranian protestors.
(For more information on generational archetypes, see "Basics of Generational Dynamics.")
Let me put it another way: Today's Boomers are anxious, frightened, moralistic, judgmental, arrogant and narcisstic. If you'd like to know what these Boomers were like when they were cute kids, just look at today's Iranian protestors. You'll see that they're fearless, moralistic, judgmental, arrogant and narcissistic. The only thing that growing old does to them is to change them from fearless to frightened.
Thus, it's not surprising that Iran's young protestors are becoming more and more furious and outraged about what they see as a complete betrayal by the government. Like our Boomers, they're arrogant and narcissistic. They'll demand the moral high ground, and they'll never back down unless Iran's security forces perpetrate a massacre -- and even then, the protestors will be back when they think it's safe.
Outrage versus pragmatism
That's only half the story. The other half is about the Supreme Leader, Ayatollah Ali Khamenei, whose harsh Friday speech I described a couple of days ago.
Khamenei was born in 1939, 30 years after the end of the Constitutional Revolution, Iran's previous crisis war. That means that Khamenei is in the Nomad generational archetype, like our Generation-Xers, including President Obama.
So this is a delicious twist. Like today's Xers, Khamenei grew up in the shadow of the previous Prophet generation, the one that grew up right after the end of the Constitutional Revolution. Khamanei probably hated them as much as today's Xers hate the Boomers.
So now Khamenei is dealing with a new Prophet generation, and as the saying goes, he must feel like it's "déjà vu all over again." The young protesters are just like the older generation he grew up with -- just as arrogant and narcissistic -- except that now they're much younger than he is. And he probably has the same visceral hatred for them.
Like Gen-Xers, people in any Nomad generation are considered to be "pragmatic," doing anything that's necessary to get the job done. So we can assume that Khamanei will take whatever "pragmatic" action he believes that he has to take to regain control, and defeat the protestors.
There's an old philosophical paradox: What happens when an irresistible force meets an immovable object?
Since the protestors -- the irresistible force -- are going to continue protesting, and Khamenei -- the immovable object -- is going to use whatever he force he has available to end the protesting, we have a kind of political variation of the old paradox.
I always say on this web site that the attitudes and behaviors of a small group of politicians are irrelevant to the great events of a society or country, except insofar as the politicians' attitudes reflect those of the masses of people. What matters are the attitudes and behaviors of those masses of people, entire generations of people. That's a fundamental concept of Generational Dynamics.
Unless Khamenei and the clerics perpetrate massive slaughter on the protestors, there really is no question about who will win this political battle -- the protestors. I'll discuss this further later in this report.
A Revolutionary Confrontation
One key to understanding the generational confrontation in Iran today is a statement that I heard several times from BBC commentators: "The Islamic government has always been contemptuous of the way the Shah of Iran, [Iran's pre-1979 leader,] buckled 30 years ago in the face of popular protest."
To put this into context, think of Supreme leader Ayatollah Ali Khamenei (Nomad archetype) as being the Barack Obama of the 1979 Islamic revolution. In 1979, Khamenei would have been contemptuous of all the accomplishments of Iran's previous Prophet and Artist generations, just as Obama is contemptuous of the accomplishments of the Boomer and Silent generations. According to the BBC statement, Khamanei was particularly contemptuous of the way that his predecessor, the Shah of Iran, buckled to popular protest.
Khamenei was in the generation of protestors in 1979. Today, he's in the position that the Shah occupied in 1979, and he's in the generation that opposing the protestors. Even so, the generational dynamics are very similar. He's not going to buckle to the protestors, Iran's new Prophet generation. He's as contemptuous of this new Prophet generation as he was of the previous Prophet generation, including the Shah.
The revolutionary guards have ordered demonstrators to "end the sabotage and rioting activities" and said their resistance was a "conspiracy" against Iran.
A statement posted on the revolutionary guards' website warned protesters to "be prepared for a resolution and revolutionary confrontation with the guards, Basij and other security forces and disciplinary forces".
This promise of "revolutionary confrontation" may have stopped some protestors in their tracks, but it's infuriating to the Prophet generation, who will never agree to give up the moral high ground.
This is the confrontation between an irresistible force and an immovable object, as I described it above, and if Iran were in a Crisis era (like 1979), this could result in a violent revolution.
Iran's political split
But it's not a Crisis era. Iran is in a generational Awakening era.
In a Crisis era, like Iran in 1979 and in the 1980s, civic unity is regenerated, and political bickering decreases and tapers off.
In an Awakening era, like Iran today, civic unity deteriorates, and political bickering increases.
That's what's happening in Iran, as the split among the ruling clerics is getting increasingly serious. Here's a New York Times report on the political split:
"TEHRAN — A bitter rift among Iran’s ruling clerics deepened Sunday over the disputed presidential election that has convulsed Tehran in the worst violence in 30 years, with the government attempting to link the defiant loser to terrorists and detaining relatives of his powerful backer, a founder of the Islamic republic.
The loser, Mir Hussein Moussavi, the moderate reform candidate who contends that the June 12 election was stolen from him, fired back at his accusers on Sunday night in a posting on his Web site, calling on his own supporters to demonstrate peacefully despite stern warnings from Iran’s top leader, Ayatollah Ali Khamenei, that no protests of the vote would be allowed. “Protesting to lies and fraud is your right,” Mr. Moussavi said in a challenge to Ayatollah Khamenei’s authority.
Earlier, the police detained five relatives of Ali Akbar Hashemi Rafsanjani, a former president who leads two influential councils and openly supported Mr. Moussavi’s election. The relatives, including Mr. Rafsanjani’s daughter, Faezeh Hashemi, were released after several hours.
The developments, coming one day after violent protests in the capital and elsewhere were crushed by police officers and militia members using guns, clubs, tear gas and water cannons, suggested that Ayatollah Khamenei was facing entrenched resistance among some members of the elite. Though rivalries among top clerics have been part of Iranian politics since the 1979 revolution, analysts said that open factional competition amid a major political crisis could hinder Ayatollah Khamenei’s ability to restore order."
This political split is the opening to a solution to the "revolutionary confrontation." The only solution that I can see, short of a huge massacre, is that Khamenei will be forced to back down to the protestors, leaving him to end his life with bitter memories of his failure as a leader. His political opponents, known as "pragmatic conservatives" and led by Rafsanjani, will be the winners.
The role of women in an Awakening era
During a generational Crisis era, women move in the direction of traditional stereotypical female roles and behaviors. See for example my 2004 posting, "'It's going to be the 1950s all over again.'" During Crisis eras, the protection of women becomes an important goal of society, and this continues during the Recovery era that follows the crisis war.
To understand this, think about what mothers were like in the 1950s. There is probably no era so misunderstood as the 1950s, which feminists have painted ridiculously as a time when men were forcing women to stay at home, and refusing to allow them to work outside of the home. Nothing could be further from the truth.
Mothers in the 1950s grew up during the 1930s, where they were surrounded by massive homelessness, starvation and suffering. People were living under bridges, and had to depend on soup kitchens just to get enough food to survive. Then, World War II began. Their brothers, fathers and uncles were tortured and killed on the Bataan Death March, and then were shot down like fish in a barrel on the beaches of Normandy. The women themselves took "Rosie the Riveter" jobs that they hated, but took them out of patriotism, and to support their brothers, fathers and uncles overseas.
It's not an exaggeration to say that these women were traumatized by their experiences. By the time the 1950s came, they considered it a wonderful gift from America that they could stay at home with the kids, living in their homes with white picket fences. This was the American way of life that they had earned in the Great Depression and the war, and they wanted to give that as a gift to their daughters.
The same thing happened to women growing up in Iran's Islamic revolution of 1979 and the Iran/Iraq war of the 1980s. Their fathers, brothers and uncles were maimed and killed by Saddam's forces, and some were gassed to death. It was even worse for these women than it was for American women in WW II, since the Iran/Iraq war took place on Iranian soil, especially because rape is always common during a crisis war. The mothers of daughters growing up after the war ended wanted their daughters to live happy lives enjoying the fruits of the Islamic revolution.
This is what happens to every nation in every Crisis war. But the daughters who grow up after the war ends do not feel the trauma of the war itself. They resent the restrictions placed on them by their parents, who only wish for them to have a happier life, free of the tortures and rape of war.
In Iran's Islamic culture, these restrictions took many forms. Young women would have to wear loose clothing and headscarves, and could not spend time alone with a male. These restrictions actually do make a lot of sense during a crisis war, but not in times of peace.
Neda Agha-Soltan and young women today
While a generational Crisis era is dominated by men, a generational Awakening era is dominated by women (or, at least, women's issues), as the austere rules of the Recovery era begin to unravel.
For years I've been mocking Mahmoud Ahmadinejad's "morality police," who swoop down on women with loose headscarves, and carry them off the police station. Ahmadinejad has managed to piss off practically every young woman in Tehran.
Well, now the young women are getting even.
I wrote last week that Zahra Rahnavard, the wife of opposition candidate Mir-Hossein Mousavi, had taken an active part in the campaign, after Mahmoud Ahmadinejad had insulted her during his debate with Mousavi.
Neda Agha-Soltan - undated picture
A number of news stories have been reporting that women have been playing a leading role in the protestors, especially since the violence by the security forces began. There was a lengthy interview on CNN on Monday with a 19 year old girl who has been taking part in all the Tehran protests. She has been beaten by a baton by the security forces, but says that after you've been beaten once, further beatings don't matter. She says that she and a number of other women have been confronting the security forces, asking them, "Why are you killing your sisters, your mothers and your daughters? Why are you killing your own people?" The logic is that the security forces are less likely to kill or beat a woman than a man, so the women are taking the lead.
A pivotal event in the protests occurred on Saturday when Neda Agha-Soltan, a pretty young 26-year-old girl, was shot dead by the security forces, and the entire incident was captured in a video that's been spreading around the internet.
The video of Neda's death can be viewed below.
However, this 40 second video is VERY GRAPHIC. If you watch this video, you may have nightmares, and it may haunt you for a long time. However, if you think you can handle it, then watch it to understand why it's playing such an important role in Iran's chaotic political crisis:
Neda has become an icon for the Iranian protests, and for young Iranian women in particular.
The future of Iran's crisis
From the point of view of Generational Dynamics, Ayatollah Khamanei doesn't stand a chance of getting through this unscathed. If he ever had a chance at all, it ended with the Neda video. He will be forced to back down, and since he's already staked his reputation on not backing down (see "Iran's government panics, as Supreme Leader hints at violence against protesters"), it will be a humiliating end to his career.
The reasoning in reaching this conclusion is as follows:
Khamanei has dug himself into a hole, so that no compromise is possible.
The only way to stop the protests is a huge massacre of the protestors, but my judgment of the Iranian/Persian culture is that such a massacre will not occur.
In fact, the political split into factions led by Khamanei and Rafsanjani will not tolerate much more violence.
However, to say that Khamanei will have to back down does not mean the end of the Islamic regime.
The Walter Cronkite effect
During the last week, all the political shots have been called by Khamenei, making it clear that Ahmadinejad is nothing more than a cypher in Iran's government. However, this did not increase the stature of Khamenei. Khamenei is supposed to be a spiritual leader who stays above the fray, but his actions this week have brought him down into the political mud with everyone else. So the stature of the entire Islamic "religious democracy" has been stained.
It's not clear whether Ahmadinejad can survive (politically) in the current crisis. But even if he does, his rantings about holocaust denial and pushing Israel into the sea will no longer have their former panache and charm.
More significant will be Iran's reputation as the biggest state sponsor of terrorism in the world, particularly as it applies to Hizbollah in Lebanon and Hamas in Gaza.
Early in 1968, during the Tet offensive of the Vietnam War, CBS reporter Walter Cronkite went to Vietnam, and came back and reported that the war was unwinnable. This report is thought to be the turning point in public opinion over the Vietnam war. It led immediately to the forced decision by President Lyndon Johnson not to run for another term, and later to increased protests and the resignation of President Richard Nixon.
A major part of Ahmadinejad's legacy is the huge amount of money he's spent funding Hizbollah and Hamas through Syria. This has always been a manifestation of Ahmadinejad's insanity anyway, since Hizbollah is Shia Muslim and Hamas is Sunni Muslim. But more to the point, Iran's economy has been deteriorating since Ahmadinejad took office in 2005, and many people blame his monetary support of these two terrorist groups.
All that would be needed at this time or in the near future is for someone prominent in Iran to make a similar "Walter Cronkite" type statement, referring to the funding of Hizbollah and Hamas.
Thus, this political crisis in Iran may have substantial effects on the balance of power in Syria, Lebanon, Israel and Palestine.
Finally, there may be a resolution of Iran's schizophrenia, as I've described for years as a country where the people, especially young people, are pro-American and pro-West, while the government was virulently anti-American and anti-West. One possible outcome of this crisis (over time) is that Iran will become much more pro-Western and much less anti-American. Iran would still be an Islamic "religious democracy," but its foreign policy would be substantially different.
http://www.generationaldynamics.com/cgi-bin/D.PL?d=ww2010.weblog&i=e090623#e090623
30 June 2009
Huff Po does Comex ~ price setting will move elsewhere
When Huff starts talking about the Comex, you know that the propeller heads like Duncan, Gary and myself were on to something. We told you we didn't know much, but we did know that the Stock market was over, that western leadership was suspect and that gold and silver where going up....we read about on the interwebs...
The Comex is the name for the largest gold futures market in the world, traditionally centered in New York City. Although the market recently became part of the Chicago Mercantile Exchange, it has retained its old nickname. Also, the depositories which hold the actual bars of gold used to settle the futures contracts remain in New York City.
A gold depository must be the most boring business on earth. They charge a small monthly fee to store 100oz. standardized bars of gold in an insured vault. It is an industrial-sized version of a safe deposit box.
The owner of a 100oz. bar owns a specific chunk of gold. It has a manufacturer, a serial number, and an exact weight measured to the 1/100th of an ounce. A written depository receipt -- similar to an old-fashioned paper share certificate -- shows the exact date the bar entered the depository, and the entire chain of ownership since that date; they often change hands without leaving the depository. You can request to withdraw the bar from the depository, and you should receive exactly the bar indicated.
Interest in precious metals as an investment has been heating up, and some fund managers have begun to take very large positions. Demand for Comex gold bars has been increasing -- especially as they are significantly cheaper per ounce than alternatives like 1oz. bullion coins or the kilogram bars popular in Europe.
Jim Sinclair of jsmineset.com, a legendary gold trader, reported that some of his contacts have told him that, when they request to withdraw their 100oz. bars from the Comex depositories, they have not received the proper indicted bars. They received a bar, but not one with the correct serial number or weight.
Why not? One possibility is that an honest mistake was made. The high demand recently has apparently kept the depository workers very busy. Wall Street veterans recall that delivery errors were chronic in the days of paper share certificates.
Another possibility is that the bar indicated on the warehouse receipt does not actually exist. The implications of that are rather dire.
This would not be so troubling if there were not already a series of very odd things happening down at the Comex. Delivery delays have been chronic. This could be a symptom of an overworked staff. Or, it could be a purposeful stalling tactic. In any case, it should not take weeks and possibly even months, and sometimes dozen of inquiries, to get the gold you already own out of the warehouse.
The Comex itself, however, has been reporting that business at the warehouse is very slow. The daily reports of warehouse movements show almost nothing happening, day after day. So which is it, busy or not busy?
As futures contracts expire, a certain number of holders elect to pay cash to receive the physical gold. The number of delivery notices has been very high since autumn of last year. For example, in May, investors requested the delivery of 20 million ounces of silver, against a dealer inventory of about 64 million ounces. Since then, there has been no record of anywhere near that amount of silver leaving dealer inventory, being delivered into the warehouse, entering customer inventory, or leaving the warehouse. Another 17.45 million ounces of silver were requested in March, evidence of which was nowhere to be seen in the warehouse reports.
In April, delivery notices were sent on a whopping 1.5 million ounces of gold, against 2.5 million ounces of dealer inventory. That month, Deutsche Bank alone delivered 850,000 ounces. This coincided, rather suspiciously, with a sale of 1.14 million ounces of gold by the European Central Bank that month, suggesting that Deutsche Bank was being bailed out in a big way. Nothing of this size turned up in the warehouse reports. Nothing followed similarly large deliveries in December 2008. By Comex rules, all physical deliveries must go through the warehouse. What happened? Until investors receive an explanation from the exchange, which has thus far been silent, we must regard it as being very suspicious. Very, very suspicious.
What does it all mean? First, there are indications that the seller side of futures contracts (such as Deutsche Bank in April) are having a difficult time making good on their commitments. Second, the information reported by the Comex regarding physical inflows and outflows is looking more and more like a convenient fiction. Third, there is some doubt as to whether there is gold in inventory -- as there absolutely should be -- to match existing warehouse receipts. Fourth, the Comex warehouse is one of the most secure forms of gold investment in the world. If they can't be trusted, what does that say about ETFs, pooled accounts, futures, forwards, options, and all the other forms of "paper gold" out there? Fifth, if it becomes clearer that there is no physical supply to meet physical demand, the dollar price of gold could go much higher.
More in New York...
Much more at Market skeptics....
http://www.marketskeptics.com/2009/06/trouble-at-comex-warehouses.html
The Comex is the name for the largest gold futures market in the world, traditionally centered in New York City. Although the market recently became part of the Chicago Mercantile Exchange, it has retained its old nickname. Also, the depositories which hold the actual bars of gold used to settle the futures contracts remain in New York City.
A gold depository must be the most boring business on earth. They charge a small monthly fee to store 100oz. standardized bars of gold in an insured vault. It is an industrial-sized version of a safe deposit box.
The owner of a 100oz. bar owns a specific chunk of gold. It has a manufacturer, a serial number, and an exact weight measured to the 1/100th of an ounce. A written depository receipt -- similar to an old-fashioned paper share certificate -- shows the exact date the bar entered the depository, and the entire chain of ownership since that date; they often change hands without leaving the depository. You can request to withdraw the bar from the depository, and you should receive exactly the bar indicated.
Interest in precious metals as an investment has been heating up, and some fund managers have begun to take very large positions. Demand for Comex gold bars has been increasing -- especially as they are significantly cheaper per ounce than alternatives like 1oz. bullion coins or the kilogram bars popular in Europe.
Jim Sinclair of jsmineset.com, a legendary gold trader, reported that some of his contacts have told him that, when they request to withdraw their 100oz. bars from the Comex depositories, they have not received the proper indicted bars. They received a bar, but not one with the correct serial number or weight.
Why not? One possibility is that an honest mistake was made. The high demand recently has apparently kept the depository workers very busy. Wall Street veterans recall that delivery errors were chronic in the days of paper share certificates.
Another possibility is that the bar indicated on the warehouse receipt does not actually exist. The implications of that are rather dire.
This would not be so troubling if there were not already a series of very odd things happening down at the Comex. Delivery delays have been chronic. This could be a symptom of an overworked staff. Or, it could be a purposeful stalling tactic. In any case, it should not take weeks and possibly even months, and sometimes dozen of inquiries, to get the gold you already own out of the warehouse.
The Comex itself, however, has been reporting that business at the warehouse is very slow. The daily reports of warehouse movements show almost nothing happening, day after day. So which is it, busy or not busy?
As futures contracts expire, a certain number of holders elect to pay cash to receive the physical gold. The number of delivery notices has been very high since autumn of last year. For example, in May, investors requested the delivery of 20 million ounces of silver, against a dealer inventory of about 64 million ounces. Since then, there has been no record of anywhere near that amount of silver leaving dealer inventory, being delivered into the warehouse, entering customer inventory, or leaving the warehouse. Another 17.45 million ounces of silver were requested in March, evidence of which was nowhere to be seen in the warehouse reports.
In April, delivery notices were sent on a whopping 1.5 million ounces of gold, against 2.5 million ounces of dealer inventory. That month, Deutsche Bank alone delivered 850,000 ounces. This coincided, rather suspiciously, with a sale of 1.14 million ounces of gold by the European Central Bank that month, suggesting that Deutsche Bank was being bailed out in a big way. Nothing of this size turned up in the warehouse reports. Nothing followed similarly large deliveries in December 2008. By Comex rules, all physical deliveries must go through the warehouse. What happened? Until investors receive an explanation from the exchange, which has thus far been silent, we must regard it as being very suspicious. Very, very suspicious.
What does it all mean? First, there are indications that the seller side of futures contracts (such as Deutsche Bank in April) are having a difficult time making good on their commitments. Second, the information reported by the Comex regarding physical inflows and outflows is looking more and more like a convenient fiction. Third, there is some doubt as to whether there is gold in inventory -- as there absolutely should be -- to match existing warehouse receipts. Fourth, the Comex warehouse is one of the most secure forms of gold investment in the world. If they can't be trusted, what does that say about ETFs, pooled accounts, futures, forwards, options, and all the other forms of "paper gold" out there? Fifth, if it becomes clearer that there is no physical supply to meet physical demand, the dollar price of gold could go much higher.
More in New York...
Much more at Market skeptics....
http://www.marketskeptics.com/2009/06/trouble-at-comex-warehouses.html
27 June 2009
"Peter Pan" moves on: MJ rests in the music Valhalla
He was, by any measure, a true giant of popular music. On one level his songs were catchy and memorable. He was a superb pop dancer who created moves every viewer wanted to emulate. He knew how to surround himself with the best musicians. It was no accident that the great jazz maestro Quincy Jones produced his most successful albums; that Eddie Van Halen appeared on Thriller; and that even someone as unlikely as Guns N' Roses guitarist Slash appeared on both his Dangerous and HIStory albums.
He was a daring innovator who saw the potential of the pop video and created an environment where the likes of Prince and Madonna could explore his ideas innovatively.
For the generations who grew up with his music the sight of a very young Michael singing ABC with the Jackson 5 and dancing with the ghouls on the unforgettable Thriller video clip will be images and sounds that will last a lifetime.
25 June 2009
When China Rules the World: the Rise of the Middle Kingdom and the End of the Western World
The point that china is a civilisational state and not merely a nation is well made..
Currency, culture, Confucius: China's writ will run across the world
The rise of the East will change more than just economics. It will shake up the whole way that we think and live our lives
Martin Jacques
The world is being remade but the West is only very slowly waking up to this new reality. In 2027 Goldman Sachs estimates that the size of the Chinese economy will overtake America's and by 2050 will be twice as big.
But we still think of the rise of the developing countries and the relative decline of the developed nations in almost exclusively economic terms. China's rise is seen as having momentous economic implications but being of little political and cultural consequence. This is a profound mistake.
In the past - Britain and the US being obvious cases in point - the economic rise of a country has always been the prelude to the exercise of much wider political and cultural influence. So why should China be different?
The only plausible reason that I can think of is the hubristic belief that our ways of doing things are so superior that other countries will automatically adopt our arrangements, values and belief systems. It is based on the absurd assumption that China's modernity will not be deeply shaped by its own long and rich history and culture.
Let me give a few examples of how China will remain very different from the West. The nation state, a product of the European tradition, has become the primary defining entity of nations. The problem is that China is not really a nation state: it may have called itself one over the past century, but for the previous two millennia it was a civilisation state. For China, the nation state is the top soil and the civilisation state the geological formation.
The Chinese do not think of themselves in terms of nation but civilisation; it is the latter that gives them their sense of identity.
Although we tend to think of China in somewhat homogeneous terms, it is a continent that contains great diversity; and to govern a continent requires a plurality of systems that a nation state would never tolerate. The maxim of a nation state is “one nation, one system”; that of a civilisation state is, of necessity, “one country, several systems”.
Think back to the constitutional formula that underpinned the handover of Hong Kong: “one country, two systems”. Despite Western scepticism, the Chinese really meant it, as the Hong Kong of today clearly illustrates.
Now imagine what it might be like to have a civilisation state, rather than a nation state, as the world's dominant power: the consequences are bound to be very far-reaching but very difficult to conceive because of its unfamiliarity.
Or take the tributary state system, which organised interstate relations in East Asia for thousands of years. It was a loose and flexible system of states that was organised around the dominance of China, the acceptance of the latter's cultural superiority, and a symbolic tribute that was paid in return for the protection of the Chinese emperor. That system lasted until about 1900.
The deeply rooted attitudes that informed the tributary system have never really gone away, either on the part of the Chinese or others. Furthermore, the conditions that swept it away - the decline of China and the arrival of European colonialism (and the subsequent influence of the United States) - have disappeared or, in the case of America, is waning.
We are now witnessing the rapid reconfiguration of the region around a resurgent China. It is entirely plausible that we might once again see the return, in a modern context, of some elements of the tributary state system, thereby challenging the global dominance of that European invention (the Westphalian system) of sovereign, independent nation states.
There are other examples of how China will remain very different from the Western norms that we are so familiar with: unlike in Europe, the state has never had its powers curbed by competitors, giving it an unrivalled position at the heart of Chinese society; or its highly distinctive position on race, where about 92 per cent of the population believe that they are of one race; and the lack of a conception of, or respect for, difference that flows from this.
The rise of China will transform a world that presently conforms to a Western template. It will not happen quickly; not least because the Chinese are, for now, too preoccupied with economic growth and escaping from poverty to entertain such questions. But in time that will change as the country becomes more prosperous and people can afford to raise their sights and entertain other ambitions. In the 19th century, Europe left a profound and indelible impression on the world, marking the birth of the Western(-made) world. That era is now in retreat.
The rise of China signals the slow dawning of a very different era in which Chinese influence will become profound.
The renminbi will replace the dollar as the world's dominant currency. The international financial system will be remade in China's financial centre, Shanghai. Mandarin, already spoken by twice as many people as English, will become a lingua franca just like English is now.
The great landmarks of Chinese history - the voyages of Zheng He, the formation of the Qin dynasty, the inventions of the Song dynasty, the 1949 revolution - will become universally familiar.
Confucius will take his place as a philosopher of global, not just Chinese, signficance. Chinese film, already popular in the West through movies such as Hero and Curse of the Golden Flower will exercise a growing influence on the popular imagination. Beijing, rather than New York, will be the global reference point. Chinese traditional medicine, based on principles very different from Western, will become widespread across the globe.
Our children and grandchildren will grow up in a world that is increasingly unfamiliar to us, where the old Western furniture can no longer be taken for granted. For the first time for more than two centuries Westerners will be obliged to adapt to and learn from other cultures in a quite novel way. It will be a highly disorientating and disconcerting process.
Martin Jacques is author of When China Rules the World: the Rise of the Middle Kingdom and the End of the Western World (Allen Lane £30)
Currency, culture, Confucius: China's writ will run across the world
The rise of the East will change more than just economics. It will shake up the whole way that we think and live our lives
Martin Jacques
The world is being remade but the West is only very slowly waking up to this new reality. In 2027 Goldman Sachs estimates that the size of the Chinese economy will overtake America's and by 2050 will be twice as big.
But we still think of the rise of the developing countries and the relative decline of the developed nations in almost exclusively economic terms. China's rise is seen as having momentous economic implications but being of little political and cultural consequence. This is a profound mistake.
In the past - Britain and the US being obvious cases in point - the economic rise of a country has always been the prelude to the exercise of much wider political and cultural influence. So why should China be different?
The only plausible reason that I can think of is the hubristic belief that our ways of doing things are so superior that other countries will automatically adopt our arrangements, values and belief systems. It is based on the absurd assumption that China's modernity will not be deeply shaped by its own long and rich history and culture.
Let me give a few examples of how China will remain very different from the West. The nation state, a product of the European tradition, has become the primary defining entity of nations. The problem is that China is not really a nation state: it may have called itself one over the past century, but for the previous two millennia it was a civilisation state. For China, the nation state is the top soil and the civilisation state the geological formation.
The Chinese do not think of themselves in terms of nation but civilisation; it is the latter that gives them their sense of identity.
Although we tend to think of China in somewhat homogeneous terms, it is a continent that contains great diversity; and to govern a continent requires a plurality of systems that a nation state would never tolerate. The maxim of a nation state is “one nation, one system”; that of a civilisation state is, of necessity, “one country, several systems”.
Think back to the constitutional formula that underpinned the handover of Hong Kong: “one country, two systems”. Despite Western scepticism, the Chinese really meant it, as the Hong Kong of today clearly illustrates.
Now imagine what it might be like to have a civilisation state, rather than a nation state, as the world's dominant power: the consequences are bound to be very far-reaching but very difficult to conceive because of its unfamiliarity.
Or take the tributary state system, which organised interstate relations in East Asia for thousands of years. It was a loose and flexible system of states that was organised around the dominance of China, the acceptance of the latter's cultural superiority, and a symbolic tribute that was paid in return for the protection of the Chinese emperor. That system lasted until about 1900.
The deeply rooted attitudes that informed the tributary system have never really gone away, either on the part of the Chinese or others. Furthermore, the conditions that swept it away - the decline of China and the arrival of European colonialism (and the subsequent influence of the United States) - have disappeared or, in the case of America, is waning.
We are now witnessing the rapid reconfiguration of the region around a resurgent China. It is entirely plausible that we might once again see the return, in a modern context, of some elements of the tributary state system, thereby challenging the global dominance of that European invention (the Westphalian system) of sovereign, independent nation states.
There are other examples of how China will remain very different from the Western norms that we are so familiar with: unlike in Europe, the state has never had its powers curbed by competitors, giving it an unrivalled position at the heart of Chinese society; or its highly distinctive position on race, where about 92 per cent of the population believe that they are of one race; and the lack of a conception of, or respect for, difference that flows from this.
The rise of China will transform a world that presently conforms to a Western template. It will not happen quickly; not least because the Chinese are, for now, too preoccupied with economic growth and escaping from poverty to entertain such questions. But in time that will change as the country becomes more prosperous and people can afford to raise their sights and entertain other ambitions. In the 19th century, Europe left a profound and indelible impression on the world, marking the birth of the Western(-made) world. That era is now in retreat.
The rise of China signals the slow dawning of a very different era in which Chinese influence will become profound.
The renminbi will replace the dollar as the world's dominant currency. The international financial system will be remade in China's financial centre, Shanghai. Mandarin, already spoken by twice as many people as English, will become a lingua franca just like English is now.
The great landmarks of Chinese history - the voyages of Zheng He, the formation of the Qin dynasty, the inventions of the Song dynasty, the 1949 revolution - will become universally familiar.
Confucius will take his place as a philosopher of global, not just Chinese, signficance. Chinese film, already popular in the West through movies such as Hero and Curse of the Golden Flower will exercise a growing influence on the popular imagination. Beijing, rather than New York, will be the global reference point. Chinese traditional medicine, based on principles very different from Western, will become widespread across the globe.
Our children and grandchildren will grow up in a world that is increasingly unfamiliar to us, where the old Western furniture can no longer be taken for granted. For the first time for more than two centuries Westerners will be obliged to adapt to and learn from other cultures in a quite novel way. It will be a highly disorientating and disconcerting process.
Martin Jacques is author of When China Rules the World: the Rise of the Middle Kingdom and the End of the Western World (Allen Lane £30)
BRIC and SCO Summits ~Reinventing the Wheel
A new world is being born, one without the US dollar greasing the wheels of commerce, notes Eric Walberg
Yekaterinburg, famous tragically as the spot Lenin chose to have the Tsar and his family executed in 1918, and ironically as the fiefdom of Boris Yeltsin, who finished off the Russian revolution itself in 1991, witnessed something no less remarkable last week when leaders of the so-called BRIC nations (Brazil, Russia, India and China) held their first summit, following the yearly meeting of the Shanghai Cooperation Organisation (SCO). The BRIC countries comprise 15 per cent of the world economy, 40 per cent of global currency reserves and half the world’s population. Brazil , India and China have also weathered the financial crisis better than the world as a whole.
Holding the two meetings together meant that Indian Prime Minister Manmohan Singh attended the SCO for the first time. The SCO, Russian and China ’s Eurasian security organization, has become a key counterweight to US hegemony in the world, and Russia and China are eager to have India upgrade its position of observer to member. This summit appeared to have coaxed India a step closer, as the SCO security agenda has shifted its emphasis to the growing security threat from Afghanistan, which satisfies the more pro-US India .
But the headline-stealer was the BRIC summit. While the US plays its tiresome geopolitical games on Russia ’s eastern borders, Russian President Dmitri Medvedev was busy charting a new economic and political reality in the heart of Eurasia . “The artificially maintained unipolar system”, he lectured, is based on “one big centre of consumption, financed by a growing deficit and ... one formerly strong reserve currency.” At the root of the global financial crisis, he concluded, is that the US makes too little and spends too much. Especially upsetting for Russia is its continued military largesse to Georgia , the missile shield in Eastern Europe and its invasions of Iraq and Afghanistan . “The summit must create the conditions for a fairer world order,” he read out, as Presidents Hu Jintao of China , Luiz Inacio Lula da Silva of Brazil and the Indian prime minister looked on approvingly.
China backs Russia ’s two big gripes with the US : “The security of some states cannot be ensured at the expense of others, including the expansion of military-political alliances or the creation of global or regional missile defense systems,” the joint Chinese-Russian statement says. Chinese leader Hu Jintao also joined Medvedev in denouncing US plans to militarise outer space: “Russia and China advocate peaceful uses of outer space and oppose the prospect of it being turned into a new area for deploying weapons ... The sides will actively facilitate practical work on a draft treaty on the prevention of the deployment of weapons in outer space, and of the use of force or threats to use force against space facilities.”
Iranian President Ahmedinejad, fresh from trouncing his pro-Western rival in presidential elections, dotted the “i”s at the SCO meeting, taking a leaf from Venezuela ’s Hugo Chavez: “The international capitalist order is retreating. It is absolutely obvious that the age of empires has ended and its revival will not take place.”
But there was more than colourful rhetoric in all this, despite the pooh-poohing of Western pundits, who deride the SCO and BRIC as a collection of misfits and wannabes. The BRICs have put the US dollar on notice, and are already finding alternatives as a means of clearing accounts. Medvedev called for the IMF to include the Russian ruble and the Chinese yuan in the basket of currencies used to value its financial products. But that is just for starters. Chinese Central Bank governor Zhou Xiaochuan says the goal is now to create a reserve currency “that is disconnected from individual nations.”
Even more ominous for the threadbare dollar, though perfectly sensible in the computer age, is the revival of stone-age barter on a big scale, which bypasses the need for any reserve currency at all. Brazil ’s biggest trading partner, once the US , is now (surprise) China , and they are using barter deals to settler their accounts, bypassing the dollar altogether. Two weeks ago China reached an agreement with Malaysia to denominate trade between the two countries in yuan.
As dollars are the world’s default reserve currency today, the US government can churn them out at will to paper over its massive foreign debt and budget deficit, effectively letting it steal other countries assets legally and forcing countries everywhere to finance its military spending. China , Russia , Brazil and now India are well aware of this, have had enough, and have the international heft to do something about it. For them, the US is the ultimate rogue nation. How else to characterise a country that insists other countries follow one set of laws – on war, debt repayment and treatment of prisoners – but ignores them itself? The US is now the world’s largest debtor yet has curiously avoided the pain of “structural adjustments” that the IMF imposes on other debtor economies, refusing to cut its bloated military budget or increase taxes meaningfully. “The world economy should not remain entangled, so directly and unnecessarily, in the vicissitudes of a single great world power,” said Roberto Mangabeira Unger, Brazil’s minister for strategic affairs.
The US can never “repay” the $4 trillion debt it owes foreign governments, their central banks and the wealth funds set up precisely to dispose of the global dollar glut. “ America has become a deadbeat – and indeed, a militarily aggressive one,” notes Michael Hudson. The problem is how to contain it. Rumblings are coming not only from fringe peaceniks. Yu Yongding, a former Chinese central bank advisor now with China ’s Academy of Sciences, advises US Treasury Secretary Tim Geithner that the US should save by cutting back on its military spending. “ US tax revenue is not likely to increase in the short term because of low economic growth, inflexible expenditures and the cost of ‘fighting two wars’”.
The BRICs are trying to organise their affairs so that they are no longer the unwilling recipients of dollars. No matter what they think of the US , they hasten to insist they don’t want to see the US dollar collapse, since they hold most of their own reserves in dollars. But they are beginning to withdraw the life-support system the US has been relying on since Nixon completed the transition from a gold-based reserve currency to a purely paper one in 1971.
Just to emphasise how serious the situation is, according to the Financial Times, the top 5 financial institutions by market capitalisation in 1999 were, in order, Citigroup (US), Bank of America (US), HSBC (UK), Lloyds TSB (UK), Fannie Mae (US). The top 5 as of 2009 are Industrial & Commercial Bank of China, China Construction Bank, Bank of China, HSBC (UK), and JPMorgan Chase (US). From 0:3 to 3:1 for China, now officially the world’s second largest economy after the US – a rout.
Just as countries are beginning to rediscover age-old barter, fixed, pegged and dual exchange rates are also being considered, mechanisms once derided as passe. In the face of continued US overspending, de-dollarisation will force countries to return to nationally determined fixed exchange rates and dual exchange rates – one exchange rate for commodity trade, another for capital movements and investments.
The world is discarding its sixty-year old framework, though the historic meetings in Yekaterinburg elicited only a collective yawn from most media. “Between the BRIC countries, there is really little in common,” said Yevgeni Yasin, head of research at the Higher School of Economics in Moscow. “Each of them has its own destiny, its own special character, and it will be much more difficult for them to agree among themselves than separately with Western countries.” China depends on manufactured exports to the US and Europe. Russia sells oil, natural gas and other natural resources. Brazil relies on agricultural exports, while India ’s growth has been largely based on its domestic market.
However, Jeng Fengin at the Chinese Institute of Modern-Day International Relations is less blase: “The financial crisis has given a much-needed boost to the fledgling partnership between Brazil, Russia, India and China and helped our voice to be heard everywhere.” President of the Brazil-Russia Chamber of Commerce, Industry and Tourism Gilberto Ramos warned sceptics that the BRIC countries are all powers of a truly continental scope and have very much in common, both geographically and macroeconomically.
In case Obama hasn’t noticed, Eurasia is coalescing, not around littler Georgia and big brother Poland, with their pretensions as forward bases for the mighty US empire, but around China, Russia and India. He would do well to remember Yekaterinburg is not only famous for its Russian past, but for Gary Powers, the US spy shot down in 1960, a fitting metaphor for how Russia and China are taking aim at the US-dominated international financial order.
***
Eric Walberg writes for Al-Ahram Weekly. You can reach him at
http://ericwalberg.com/
Yekaterinburg, famous tragically as the spot Lenin chose to have the Tsar and his family executed in 1918, and ironically as the fiefdom of Boris Yeltsin, who finished off the Russian revolution itself in 1991, witnessed something no less remarkable last week when leaders of the so-called BRIC nations (Brazil, Russia, India and China) held their first summit, following the yearly meeting of the Shanghai Cooperation Organisation (SCO). The BRIC countries comprise 15 per cent of the world economy, 40 per cent of global currency reserves and half the world’s population. Brazil , India and China have also weathered the financial crisis better than the world as a whole.
Holding the two meetings together meant that Indian Prime Minister Manmohan Singh attended the SCO for the first time. The SCO, Russian and China ’s Eurasian security organization, has become a key counterweight to US hegemony in the world, and Russia and China are eager to have India upgrade its position of observer to member. This summit appeared to have coaxed India a step closer, as the SCO security agenda has shifted its emphasis to the growing security threat from Afghanistan, which satisfies the more pro-US India .
But the headline-stealer was the BRIC summit. While the US plays its tiresome geopolitical games on Russia ’s eastern borders, Russian President Dmitri Medvedev was busy charting a new economic and political reality in the heart of Eurasia . “The artificially maintained unipolar system”, he lectured, is based on “one big centre of consumption, financed by a growing deficit and ... one formerly strong reserve currency.” At the root of the global financial crisis, he concluded, is that the US makes too little and spends too much. Especially upsetting for Russia is its continued military largesse to Georgia , the missile shield in Eastern Europe and its invasions of Iraq and Afghanistan . “The summit must create the conditions for a fairer world order,” he read out, as Presidents Hu Jintao of China , Luiz Inacio Lula da Silva of Brazil and the Indian prime minister looked on approvingly.
China backs Russia ’s two big gripes with the US : “The security of some states cannot be ensured at the expense of others, including the expansion of military-political alliances or the creation of global or regional missile defense systems,” the joint Chinese-Russian statement says. Chinese leader Hu Jintao also joined Medvedev in denouncing US plans to militarise outer space: “Russia and China advocate peaceful uses of outer space and oppose the prospect of it being turned into a new area for deploying weapons ... The sides will actively facilitate practical work on a draft treaty on the prevention of the deployment of weapons in outer space, and of the use of force or threats to use force against space facilities.”
Iranian President Ahmedinejad, fresh from trouncing his pro-Western rival in presidential elections, dotted the “i”s at the SCO meeting, taking a leaf from Venezuela ’s Hugo Chavez: “The international capitalist order is retreating. It is absolutely obvious that the age of empires has ended and its revival will not take place.”
But there was more than colourful rhetoric in all this, despite the pooh-poohing of Western pundits, who deride the SCO and BRIC as a collection of misfits and wannabes. The BRICs have put the US dollar on notice, and are already finding alternatives as a means of clearing accounts. Medvedev called for the IMF to include the Russian ruble and the Chinese yuan in the basket of currencies used to value its financial products. But that is just for starters. Chinese Central Bank governor Zhou Xiaochuan says the goal is now to create a reserve currency “that is disconnected from individual nations.”
Even more ominous for the threadbare dollar, though perfectly sensible in the computer age, is the revival of stone-age barter on a big scale, which bypasses the need for any reserve currency at all. Brazil ’s biggest trading partner, once the US , is now (surprise) China , and they are using barter deals to settler their accounts, bypassing the dollar altogether. Two weeks ago China reached an agreement with Malaysia to denominate trade between the two countries in yuan.
As dollars are the world’s default reserve currency today, the US government can churn them out at will to paper over its massive foreign debt and budget deficit, effectively letting it steal other countries assets legally and forcing countries everywhere to finance its military spending. China , Russia , Brazil and now India are well aware of this, have had enough, and have the international heft to do something about it. For them, the US is the ultimate rogue nation. How else to characterise a country that insists other countries follow one set of laws – on war, debt repayment and treatment of prisoners – but ignores them itself? The US is now the world’s largest debtor yet has curiously avoided the pain of “structural adjustments” that the IMF imposes on other debtor economies, refusing to cut its bloated military budget or increase taxes meaningfully. “The world economy should not remain entangled, so directly and unnecessarily, in the vicissitudes of a single great world power,” said Roberto Mangabeira Unger, Brazil’s minister for strategic affairs.
The US can never “repay” the $4 trillion debt it owes foreign governments, their central banks and the wealth funds set up precisely to dispose of the global dollar glut. “ America has become a deadbeat – and indeed, a militarily aggressive one,” notes Michael Hudson. The problem is how to contain it. Rumblings are coming not only from fringe peaceniks. Yu Yongding, a former Chinese central bank advisor now with China ’s Academy of Sciences, advises US Treasury Secretary Tim Geithner that the US should save by cutting back on its military spending. “ US tax revenue is not likely to increase in the short term because of low economic growth, inflexible expenditures and the cost of ‘fighting two wars’”.
The BRICs are trying to organise their affairs so that they are no longer the unwilling recipients of dollars. No matter what they think of the US , they hasten to insist they don’t want to see the US dollar collapse, since they hold most of their own reserves in dollars. But they are beginning to withdraw the life-support system the US has been relying on since Nixon completed the transition from a gold-based reserve currency to a purely paper one in 1971.
Just to emphasise how serious the situation is, according to the Financial Times, the top 5 financial institutions by market capitalisation in 1999 were, in order, Citigroup (US), Bank of America (US), HSBC (UK), Lloyds TSB (UK), Fannie Mae (US). The top 5 as of 2009 are Industrial & Commercial Bank of China, China Construction Bank, Bank of China, HSBC (UK), and JPMorgan Chase (US). From 0:3 to 3:1 for China, now officially the world’s second largest economy after the US – a rout.
Just as countries are beginning to rediscover age-old barter, fixed, pegged and dual exchange rates are also being considered, mechanisms once derided as passe. In the face of continued US overspending, de-dollarisation will force countries to return to nationally determined fixed exchange rates and dual exchange rates – one exchange rate for commodity trade, another for capital movements and investments.
The world is discarding its sixty-year old framework, though the historic meetings in Yekaterinburg elicited only a collective yawn from most media. “Between the BRIC countries, there is really little in common,” said Yevgeni Yasin, head of research at the Higher School of Economics in Moscow. “Each of them has its own destiny, its own special character, and it will be much more difficult for them to agree among themselves than separately with Western countries.” China depends on manufactured exports to the US and Europe. Russia sells oil, natural gas and other natural resources. Brazil relies on agricultural exports, while India ’s growth has been largely based on its domestic market.
However, Jeng Fengin at the Chinese Institute of Modern-Day International Relations is less blase: “The financial crisis has given a much-needed boost to the fledgling partnership between Brazil, Russia, India and China and helped our voice to be heard everywhere.” President of the Brazil-Russia Chamber of Commerce, Industry and Tourism Gilberto Ramos warned sceptics that the BRIC countries are all powers of a truly continental scope and have very much in common, both geographically and macroeconomically.
In case Obama hasn’t noticed, Eurasia is coalescing, not around littler Georgia and big brother Poland, with their pretensions as forward bases for the mighty US empire, but around China, Russia and India. He would do well to remember Yekaterinburg is not only famous for its Russian past, but for Gary Powers, the US spy shot down in 1960, a fitting metaphor for how Russia and China are taking aim at the US-dominated international financial order.
***
Eric Walberg writes for Al-Ahram Weekly. You can reach him at
http://ericwalberg.com/
24 June 2009
No green shoots of the trade kind visable
World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
World stock markets have rebounded a bit since March, and world trade has stabilised, but these are still following paths far below the ones they followed in the Great Depression.
There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.
http://www.voxeu.org/index.php?q=node/3421
World stock markets have rebounded a bit since March, and world trade has stabilised, but these are still following paths far below the ones they followed in the Great Depression.
There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.
http://www.voxeu.org/index.php?q=node/3421
23 June 2009
Wandering from a dead past toward an unknown future
I beleive real change is afoot. The debt bubble in the final analysis is the endpoint of a money system which mispriced capital too cheap and therefore pumped up asset prices, then monitised to pay for lots of fossil fuels and consumption. With the illusions on which it was based shattered this credit creation system is completely busted. The centrality of Wall Street and the City has hit the brick wall of investor sentiment, physics (obsolete production paradigms) and politics and in the medium term will be disintermediated by a long credit winter. The baton has been passed to almost invisible organisms with snug burrows and good prospects that are out of sight to most.
The bankers who created a new alliance between private bankers and public government, the government bond enabled state ambition, used firstly to finance mercenary armies to pillage the competitors of Italian City States. Those bankers would have no difficulty recognising that a nation with the power to make its bonds the universal measure of value would ride its advantages to vast wealth, geopolitical clout and military power.
In the same way that we dimly recognise that much of what passed for financial modernity was the last gasps of that medieval order, they knew that secret interventions in the public market for such state debt can maintain the facade of solvency that covers the flight of insiders..
The architects of the old order of giant financial reptiles were also fully invested, naturally enough, in political power. Hence the bailouts to date, but the enormous cost has only bought a little time and in the end no tree grows to the sky and politics always follows the money. Money, barring a final hyperinflationary death rattle will be seen to now flow from first movers in a new technological, economic and social order.
The real deal ahead, imo, is all about conservation and efficiency and new production technologies. Its about a return to the classic human virtues and a recovery from a mania that was "all quickness but no movement" fueled by cheap fossil fuel energy. Only after rest and rehab will the West finally muster the sacrifice and effort required to build a cleaner, greener and clearly sustainable for the long haul future.
Popular culture will track the declining prestige of bankers and bondholders relative to innovators in manufacturing and technology and a new respect for greenies, farmers, scientists, teachers and librarians will slowly emerge.
So what we are in is that difficult period when those who will benefit from the great changes ahead lack power while those who will lose by them are well established with the means to defend the status quo.
We wander a no-mans land where reality is only slowly dawning where unless your absolutely sure about what your doing a burrow is the best bet.
The consensus view, far from grappling with the technical and political difficulties of implementing the required policy response, has failed even to admit the extent of the problem. Yet such an admission is a prerequisite, the first step in fact, of doing what needs to be done.
For almost two years now, our leaders have been in denial, burying the details and delaying the really tough decisions. In recent weeks, though, something has changed.
For the first time since the credit crunch hit the headlines in August 2007, reality is punching through. Powerful people are breaking ranks and saying what needs to be said. Pretty soon we may even begin tackling the root causes of this debacle by facing down the vested interests and making the changes necessary to rescue the Western world from years of economic stagnation.
Earlier this month, Angela Merkel, the redoubtable German Chancellor, took a stand and appealed for "a return to policies of reason" – calling time on "quantitative easing", the deeply misguided policy that has seen Western central banks double the size of their balance sheets to buy government debt.
QE was always a ruse to recapitalise insolvent banks by the back door, so their powerful executives could avoid admitting previous mistakes. Yet it has shattered the world's faith in the West's policy-making competence. It has destroyed any authority we had to tell economies elsewhere what to do.
QE will result in high inflation – in turn, destroying investment and jobs. And it will mean that, for years to come, Western taxpayers pay higher interest charges to service our government's debts.
Almost alone among the ranks of the seriously powerful speaking sense, Merkel was last week joined by Mervyn King. At the annual Mansion House dinner, the Bank of England Governor called for Gordon's Brown's disastrous "tripartite" reforms to be scrapped, returning banking supervision to Threadneedle Street.
That has to be right. UK banks have been able to act so irresponsibly because the authority to monitor them was split between the Bank and the FSA. In fact, Brown was so addicted to the political feel-good factor resulting from ever higher leverage that his system was explicitly designed to allow responsibility for reining in the banks to fall between two stools.
King also stated "it is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee".
These words echoed around the world. The Governor is calling for a re-instatement of the "Glass-Steagall" firewall – the removal of which allowed investment banks to merge with commercial banks. That meant taxpayer-backed deposits could be used by bonus-fuelled traders to make high-risk bets – in the knowledge the state would have to fund a bail-out given that ordinary voters deposits were involved.
By calling for a new "Glass-Steagall", King is taking on Wall Street and the City – among the world's most powerful vested interests.
Yet, politicians need to realise it's precisely because this safeguard was removed, and the "universal banks" became so big, that what started as a banking crisis has become a fiscal crisis – a crisis so severe that some of the world's leading nations could default and, at the very least, several generations of Western taxpayers will be saddled with the bill.
Other harsh realities are now also coming to the fore. New figures confirmed UK government debt is rising quicker than at any time in history – not least due to the bank bail-outs. As the recession hits tax revenues, May saw the biggest surge in monthly public sector borrowing since records began.
In this context, the Tories are now finally allowing themselves to face down Brown and his economically-literate allies – by admitting spending cuts are necessary. How ridiculous does Brown sound when he contrasts "Labour investment with Tory cuts"?
Then there is "deflation" – in my view, the "biggest lie" of all. In May, CPI inflation remained at 2.2pc – above the Bank of England's target. Were it not for the government's temporary VAT cut, the CPI would be 3.4pc – with the Bank have to write yet another public letter explaining why it's so high. We're a million miles from deflation.
As I've often said, the "danger of deflation" was always a myth – conjured up to give Western governments an alibi to pursue wildly expansionary fiscal and monetary policy and perpetuated by the vested interests benefiting from such largesse.
If we're to emerge from this crisis, and avoid similar future disasters, powerful figures now need to recognise and expose such inconvenient truths.
Alarm bells on public sector pensions
Some state employees work hard – and we're lucky to have them. But, in general, public-sector workers enjoy shorter hours, longer holidays, better job security and higher wages than their private-sector counterparts.
Yet 90pc of public-sector workers also have gold-plated final-salary pensions, compared to only 10pc in the private sector. They retire earlier too.
Our ageing society means most of us will reach for our slippers later and on lower pensions than previously thought. But state workers remain immune to economic reality – at everyone else's expense.
The costs of this injustice are vast. Between 2001 and 2008, our public sector pension liability officially grew 110pc to £794bn. A new Policy Exchange report by Neil Record puts the true figure at a staggering £1,104bn.
This massive debt doesn't appear on the Government's balance sheet. Yet each year taxpayers spend more on public sector pensions than defence. By 2040, the annual bill will approach what we spend on the NHS.
A former Bank of England economist, Record has a deserved reputation as an astute, non-partisan fiscal expert. His report's advisory committee includes some of the UK's top actuaries and the former chairman of the Inland Revenue.
The Tory front-bench needs to act on this study. Spin is not enough. The ratings agencies are watching – and public-sector pensions are high on their list of concerns.
BRICs at the top table
Last week, leaders of four of the world's largest economies – Brazil, Russia, India and China – met in Yekaterinburg, Russia. Known as the BRICs, these vibrant nations now account for almost 20pc of global GDP – the same as the United States.
Even this startling figure understates the importance of the BRICs, and the emerging markets (EMs) more generally. Together, they now drive 42pc of global GDP – and rising. That outstrips the US and EU combined.
Over the next few years, as the Western world stagnates, the EMs – with their low debts and highly productive workforces – will keep growing. Global investors largely agree. That's one reason the world's top 10 performing share indices so far in 2009 are all EMs.
Crucially, EMs now boast two-thirds of the world's foreign exchange reserves. The BRICs control the lion's share of that haul.
For the most part, the Western media has dismissed this first BRIC summit as "unimportant". That's partly because the G7 nations weren't invited. The reality is the BRICs' emergence on the world stage is transforming global commerce – and politics too.
These countries are crucial Western creditors. Insolvency looms, unless they keep funding our spiralling government debts. Western leaders need to grow up and realise the world has changed. If we don't accept the emerging giants at the top table, they'll create their own – resulting in a less prosperous, more dangerous world.
It's refreshing to see that you are one of the few writers in the mainstream press who is constantly reminding us of the forthcoming oil crises that the government doesn't want to talk about probably because they think that we're depressed enough as it is.
You may also wish to look into what the Chinese are doing to monopolise RARE EARTH materials e.g. Neodymium is essential for producing the super-magnets inside wind turbines and hybrid cars. RARE EARTH elements are also vital for producing batteries and other such requirements in our so-called "green future". Transitioning into this future is by no means going to be as seamless and painless as our short-sighted politicians make out. The Chinese are already planning their green and fossil fuel energy requirements into the 22nd century. They have already got their teeth into Brazil and the deep offshore Petrobras project. They are also starting to monopolise on RARE EARTHS. It doesn't look like there will sufficient resources left over for the economies of the western hemisphere to carry-on-business-as usual. Check out RARE EARTHS.
Mark Pearce
on June 22, 2009
at 06:01 PM
Report this comment
We're currently in a paradigm red shift. Deflation and inflation are two black holes that are consuming each other. The "negative feedback loop" is still running full steam and still requires inflation as a component. The only way deflation "wins in the end" is by getting pushed over the cliff by inflation disguised in some form or another (debt, commodities and equities). Debt is the worst. The offspring of all the bubbles have come home to roost. Until the high cost of debt disappears to the tune of tens of trillions of dollars, it remains highly inflationary in its current state. Furthermore, debt begets debt because the marginal productivity of debt turned negative throughout the creation of all the fiat driven bubbles, so the debt will only become more expensive - THAT is inflationary and will continue to eat away at the operating margins of individuals, businesses, and governments.
If only Ambrose Evans Pritchard and Edmund Conway in the DT had your sense Liam.
Deflation was a lie sold to the masses with a concerted media campaign using amongst others Conway and Pritchard Evans in the DT. Its prime purpose being to prop up inflated assets (houses) and prevent the necessary correction from taking place. The 'elite' who run the western banking system have no intention of allowing a needed correction to take place. They would rather debase the currency and prop up assets and eventually return to business as usual even at the risk of hyperinflation and anarchy.
The bankers who created a new alliance between private bankers and public government, the government bond enabled state ambition, used firstly to finance mercenary armies to pillage the competitors of Italian City States. Those bankers would have no difficulty recognising that a nation with the power to make its bonds the universal measure of value would ride its advantages to vast wealth, geopolitical clout and military power.
In the same way that we dimly recognise that much of what passed for financial modernity was the last gasps of that medieval order, they knew that secret interventions in the public market for such state debt can maintain the facade of solvency that covers the flight of insiders..
The architects of the old order of giant financial reptiles were also fully invested, naturally enough, in political power. Hence the bailouts to date, but the enormous cost has only bought a little time and in the end no tree grows to the sky and politics always follows the money. Money, barring a final hyperinflationary death rattle will be seen to now flow from first movers in a new technological, economic and social order.
The real deal ahead, imo, is all about conservation and efficiency and new production technologies. Its about a return to the classic human virtues and a recovery from a mania that was "all quickness but no movement" fueled by cheap fossil fuel energy. Only after rest and rehab will the West finally muster the sacrifice and effort required to build a cleaner, greener and clearly sustainable for the long haul future.
Popular culture will track the declining prestige of bankers and bondholders relative to innovators in manufacturing and technology and a new respect for greenies, farmers, scientists, teachers and librarians will slowly emerge.
So what we are in is that difficult period when those who will benefit from the great changes ahead lack power while those who will lose by them are well established with the means to defend the status quo.
We wander a no-mans land where reality is only slowly dawning where unless your absolutely sure about what your doing a burrow is the best bet.
The consensus view, far from grappling with the technical and political difficulties of implementing the required policy response, has failed even to admit the extent of the problem. Yet such an admission is a prerequisite, the first step in fact, of doing what needs to be done.
For almost two years now, our leaders have been in denial, burying the details and delaying the really tough decisions. In recent weeks, though, something has changed.
For the first time since the credit crunch hit the headlines in August 2007, reality is punching through. Powerful people are breaking ranks and saying what needs to be said. Pretty soon we may even begin tackling the root causes of this debacle by facing down the vested interests and making the changes necessary to rescue the Western world from years of economic stagnation.
Earlier this month, Angela Merkel, the redoubtable German Chancellor, took a stand and appealed for "a return to policies of reason" – calling time on "quantitative easing", the deeply misguided policy that has seen Western central banks double the size of their balance sheets to buy government debt.
QE was always a ruse to recapitalise insolvent banks by the back door, so their powerful executives could avoid admitting previous mistakes. Yet it has shattered the world's faith in the West's policy-making competence. It has destroyed any authority we had to tell economies elsewhere what to do.
QE will result in high inflation – in turn, destroying investment and jobs. And it will mean that, for years to come, Western taxpayers pay higher interest charges to service our government's debts.
Almost alone among the ranks of the seriously powerful speaking sense, Merkel was last week joined by Mervyn King. At the annual Mansion House dinner, the Bank of England Governor called for Gordon's Brown's disastrous "tripartite" reforms to be scrapped, returning banking supervision to Threadneedle Street.
That has to be right. UK banks have been able to act so irresponsibly because the authority to monitor them was split between the Bank and the FSA. In fact, Brown was so addicted to the political feel-good factor resulting from ever higher leverage that his system was explicitly designed to allow responsibility for reining in the banks to fall between two stools.
King also stated "it is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee".
These words echoed around the world. The Governor is calling for a re-instatement of the "Glass-Steagall" firewall – the removal of which allowed investment banks to merge with commercial banks. That meant taxpayer-backed deposits could be used by bonus-fuelled traders to make high-risk bets – in the knowledge the state would have to fund a bail-out given that ordinary voters deposits were involved.
By calling for a new "Glass-Steagall", King is taking on Wall Street and the City – among the world's most powerful vested interests.
Yet, politicians need to realise it's precisely because this safeguard was removed, and the "universal banks" became so big, that what started as a banking crisis has become a fiscal crisis – a crisis so severe that some of the world's leading nations could default and, at the very least, several generations of Western taxpayers will be saddled with the bill.
Other harsh realities are now also coming to the fore. New figures confirmed UK government debt is rising quicker than at any time in history – not least due to the bank bail-outs. As the recession hits tax revenues, May saw the biggest surge in monthly public sector borrowing since records began.
In this context, the Tories are now finally allowing themselves to face down Brown and his economically-literate allies – by admitting spending cuts are necessary. How ridiculous does Brown sound when he contrasts "Labour investment with Tory cuts"?
Then there is "deflation" – in my view, the "biggest lie" of all. In May, CPI inflation remained at 2.2pc – above the Bank of England's target. Were it not for the government's temporary VAT cut, the CPI would be 3.4pc – with the Bank have to write yet another public letter explaining why it's so high. We're a million miles from deflation.
As I've often said, the "danger of deflation" was always a myth – conjured up to give Western governments an alibi to pursue wildly expansionary fiscal and monetary policy and perpetuated by the vested interests benefiting from such largesse.
If we're to emerge from this crisis, and avoid similar future disasters, powerful figures now need to recognise and expose such inconvenient truths.
Alarm bells on public sector pensions
Some state employees work hard – and we're lucky to have them. But, in general, public-sector workers enjoy shorter hours, longer holidays, better job security and higher wages than their private-sector counterparts.
Yet 90pc of public-sector workers also have gold-plated final-salary pensions, compared to only 10pc in the private sector. They retire earlier too.
Our ageing society means most of us will reach for our slippers later and on lower pensions than previously thought. But state workers remain immune to economic reality – at everyone else's expense.
The costs of this injustice are vast. Between 2001 and 2008, our public sector pension liability officially grew 110pc to £794bn. A new Policy Exchange report by Neil Record puts the true figure at a staggering £1,104bn.
This massive debt doesn't appear on the Government's balance sheet. Yet each year taxpayers spend more on public sector pensions than defence. By 2040, the annual bill will approach what we spend on the NHS.
A former Bank of England economist, Record has a deserved reputation as an astute, non-partisan fiscal expert. His report's advisory committee includes some of the UK's top actuaries and the former chairman of the Inland Revenue.
The Tory front-bench needs to act on this study. Spin is not enough. The ratings agencies are watching – and public-sector pensions are high on their list of concerns.
BRICs at the top table
Last week, leaders of four of the world's largest economies – Brazil, Russia, India and China – met in Yekaterinburg, Russia. Known as the BRICs, these vibrant nations now account for almost 20pc of global GDP – the same as the United States.
Even this startling figure understates the importance of the BRICs, and the emerging markets (EMs) more generally. Together, they now drive 42pc of global GDP – and rising. That outstrips the US and EU combined.
Over the next few years, as the Western world stagnates, the EMs – with their low debts and highly productive workforces – will keep growing. Global investors largely agree. That's one reason the world's top 10 performing share indices so far in 2009 are all EMs.
Crucially, EMs now boast two-thirds of the world's foreign exchange reserves. The BRICs control the lion's share of that haul.
For the most part, the Western media has dismissed this first BRIC summit as "unimportant". That's partly because the G7 nations weren't invited. The reality is the BRICs' emergence on the world stage is transforming global commerce – and politics too.
These countries are crucial Western creditors. Insolvency looms, unless they keep funding our spiralling government debts. Western leaders need to grow up and realise the world has changed. If we don't accept the emerging giants at the top table, they'll create their own – resulting in a less prosperous, more dangerous world.
It's refreshing to see that you are one of the few writers in the mainstream press who is constantly reminding us of the forthcoming oil crises that the government doesn't want to talk about probably because they think that we're depressed enough as it is.
You may also wish to look into what the Chinese are doing to monopolise RARE EARTH materials e.g. Neodymium is essential for producing the super-magnets inside wind turbines and hybrid cars. RARE EARTH elements are also vital for producing batteries and other such requirements in our so-called "green future". Transitioning into this future is by no means going to be as seamless and painless as our short-sighted politicians make out. The Chinese are already planning their green and fossil fuel energy requirements into the 22nd century. They have already got their teeth into Brazil and the deep offshore Petrobras project. They are also starting to monopolise on RARE EARTHS. It doesn't look like there will sufficient resources left over for the economies of the western hemisphere to carry-on-business-as usual. Check out RARE EARTHS.
Mark Pearce
on June 22, 2009
at 06:01 PM
Report this comment
We're currently in a paradigm red shift. Deflation and inflation are two black holes that are consuming each other. The "negative feedback loop" is still running full steam and still requires inflation as a component. The only way deflation "wins in the end" is by getting pushed over the cliff by inflation disguised in some form or another (debt, commodities and equities). Debt is the worst. The offspring of all the bubbles have come home to roost. Until the high cost of debt disappears to the tune of tens of trillions of dollars, it remains highly inflationary in its current state. Furthermore, debt begets debt because the marginal productivity of debt turned negative throughout the creation of all the fiat driven bubbles, so the debt will only become more expensive - THAT is inflationary and will continue to eat away at the operating margins of individuals, businesses, and governments.
If only Ambrose Evans Pritchard and Edmund Conway in the DT had your sense Liam.
Deflation was a lie sold to the masses with a concerted media campaign using amongst others Conway and Pritchard Evans in the DT. Its prime purpose being to prop up inflated assets (houses) and prevent the necessary correction from taking place. The 'elite' who run the western banking system have no intention of allowing a needed correction to take place. They would rather debase the currency and prop up assets and eventually return to business as usual even at the risk of hyperinflation and anarchy.
22 June 2009
Will Martin Weiss publish my comment? I doubt it..
http://blogs.moneyandmarkets.com/martin-weiss/the-timing-breakthrough-of-the-century-revealed/comment-page-1/#comment-19211
I hope your high end services have improved. I'm skeptical of your web presence. This is why. In 2004 I subscribed to your Interest Rate Options advisory to make money on your expected spike in rates. It was $5000 dollars per annum, if I recall correctly, I got six months for 2500.
I staked $10000 and opened an account to trade US options.
The account was gone in three months. Nearly every trade was covered at a loss. Your vague general apology was noted but no refunds were offered.
I would say on that basis your all hype and no responsibility. You leveraged your credibility and wiped me out when I was a timing newbie.
How can you live with yourself without taking responsibility and take yourself seriously when you hired an idiot to run a timing service that was doomed from the start by way of his sloppy rather conventional trades that foundered on a bad premise and poor execution and then go on to make similar promises.
If you had offered a refund and a free turn with a high end timing service of yours with a track record of success, assuming one actually exists, I might have kept faith.
You leverage your cred and hype the news and claim to be for the little guy, but you just take the money and run, apparently, and rely on your massive addy budget for new suckers to arrive.
What else can I infer from my experience.
Martin Weiss, you cost me 15K in six months, it was genius..but it wasn't about timing.
What are you going to do about it?
I hope your high end services have improved. I'm skeptical of your web presence. This is why. In 2004 I subscribed to your Interest Rate Options advisory to make money on your expected spike in rates. It was $5000 dollars per annum, if I recall correctly, I got six months for 2500.
I staked $10000 and opened an account to trade US options.
The account was gone in three months. Nearly every trade was covered at a loss. Your vague general apology was noted but no refunds were offered.
I would say on that basis your all hype and no responsibility. You leveraged your credibility and wiped me out when I was a timing newbie.
How can you live with yourself without taking responsibility and take yourself seriously when you hired an idiot to run a timing service that was doomed from the start by way of his sloppy rather conventional trades that foundered on a bad premise and poor execution and then go on to make similar promises.
If you had offered a refund and a free turn with a high end timing service of yours with a track record of success, assuming one actually exists, I might have kept faith.
You leverage your cred and hype the news and claim to be for the little guy, but you just take the money and run, apparently, and rely on your massive addy budget for new suckers to arrive.
What else can I infer from my experience.
Martin Weiss, you cost me 15K in six months, it was genius..but it wasn't about timing.
What are you going to do about it?
Deep Capture, Cramer and the story of Dendreon
This story, like too many others, begins with Jim Cramer, the CNBC personality, making “a mistake.”
On September 26, 2005, Cramer announced to his television audience the sad news (punctuated by funny sound effects – a clown horn, a crashing airplane) that Provenge, an experimental treatment for prostate cancer, had flopped. Thousands of end-stage patients had been pinning their hopes on Provenge, but according to Cramer the treatment had just been rejected by the Food & Drug Administration. It would never go to market.
This seemed odd, because Dendreon (NASDAQ: DNDN), the company developing Provenge, had not yet submitted an application for FDA approval. As everybody in the biotech investment community knew, Dendreon had, in fact, only recently completed Phase 3 clinical trials and probably would not face scrutiny from an FDA advisory panel for at least another year.
As for the likelihood that the advisory panel would eventually vote in favor of Provenge, the odds looked quite good. The Phase 3 trials had demonstrated that Provenge significantly increased patient survival with only minimal side-effects, such as a few days of mild fever. Moreover, Provenge was an altogether different sort of treatment – one that fought tumors by boosting patients’ immune systems rather than subjecting them to the ravages of chemotherapy.
Provenge was not a magical elixir of life, but Dendreon was doing more than just developing a new technology. It was pioneering a treatment that could revolutionize the way that doctors fight prostate cancer. By some conservative estimates, the market for Provenge alone could reach more than $2 billion a year. If the treatment could be applied to other cancers, the market would be even larger.
The morning after Cramer declared Dendreon and Provenge to be dead in the water, Mark Haines, the anchor of CNBC’s “Squawk Box” program, apologized for Cramer’s “mistake.” That afternoon, at an important UBS investor conference, Dendreon presented still more promising data. This would normally have given a significant boost to the company’s stock price, but the value of Dendreon’s shares stayed flat for the day, and then began a gradual decline.
This had partly to do with Cramer. The next evening, on his “Mad Money” program, the journalist (or entertainer, or self-confessed criminal, or… whatever Cramer is) acknowledged that the FDA had not yet rejected Provenge, but drawing upon his medical expertise, Cramer maintained that Provenge was not effective. In characteristically level-headed fashion, he announced that Dendreon shareholders were drunken, carousing, gambling Falstaffs who “might as well take their money to Vegas.”
Dendreon, Cramer added (rather ominously), was a “battleground stock.”
* * * * * * * *
What Cramer meant by “battleground ” has since become all too apparent. For the past four years, Dendreon has been one of the most manipulated stocks on NASDAQ. During some periods the volume of trading in the shares of this little company has exceeded the trading in America’s largest corporations – a good sign that hedge funds have been churning the stock to move the market.
And with every burst of good news, the company has faced waves upon waves of naked short selling – hedge funds illegally selling millions of shares that do not exist to flood the market and drive down the stock price. Along with the phantom stock, people seeking to diminish Dendreon have deployed false financial research , biased media, bogus class action lawsuits, Internet bashers, dubious science, and other familiar weapons of the “battleground.”
The denouement of this stock market “battle” occurred recently, on April 28, 2009, when Dendreon was to present all-important results at the American Urological Association’s annual meeting in Chicago. Some days prior, Dendreon’s CEO, Mitch Gold, had announced that the results of an Independent Monitoring Committee study were “unambiguous in nature…a clear hit” for Provenge.
If a CEO uses language like that and does not produce the data to back it up, he is guaranteed a visit from the Securities and Exchange Commission. Unless the CEO or his allies have juice with the SEC, the commission will usually charge the CEO with making false statements to pump his stock. Gold was unlikely to take that risk, so it was clear to most people that the meeting in Chicago was going to be a triumph for Dendreon.
And it indeed it was. The data presented that day showed that Provenge lowers the risk of prostate cancer death by 22.5 percent, with little or no toxicity. With a few notable exceptions (some of whom are to appear as prominent characters in this story), nearly every medical professional on the planet now concurred that Provenge was a blockbuster drug – one that should receive FDA approval and make Dendreon a highly profitable company.
But the hedge funds weren’t finished. In the days following Gold’s announcement, short sellers piled on with a vengeance, returning Dendreon to the leagues of the world’s most heavily traded stocks. The firm once again found itself on the SEC’s “Reg Sho” list of companies whose stock was “failing to deliver” in excessive quantities –a sign of illegal naked short selling.
On CNBC, meanwhile, Cramer had hammered Dendreon. On April 6, 2009, amidst ear-rattling sound effects –dogs fighting, and (inexplicably) a baby crying — Cramer had said “I don’t like Dendreon.” He had shouted that Provenge had no chance of getting FDA approval and Dendreon shareholders should “SELL! SELL! SELL!”
Then, on April 28, at 10:01 am central time — just hours before Dendreon’s triumph in Chicago – an anonymous message board author on Yahoo! Finance posted this message: “HIGH PROBABILITY OF MASSIVE BEAR RAID…DNDN [Dendreon] could easily drop 50% on a massive bear raid…its coming today@12:30 pm central.”
Just minutes before 12:30 pm central, Dendreon’s stock price began to fall. It didn’t just fall–it nosedived from $24 to under $8 … in 75 seconds. That’s correct, during a period of 75 seconds, more than 4,000 trades were placed, totaling 3 million shares, or about 50% of Dendreon’s (spectacularly high) average daily volume. Given that the message board poster knew what was coming more than two hours beforehand, and predicted the timing almost precisely, it is a safe bet that this was a coordinated, illegal naked short selling attack. And just in case you still didn’t get this – it caused Dendreon’s share price to lose more than 65% of its value – in just 75 seconds flat.
“My desk was floored,” one trader wrote on a message board. “We all just stood up swearing, headsets and other assorted desk items being thrown at monitors…I haven’t heard that much swearing in years…”
It was, say others, one of the strangest occurrences in Wall Street history.
* * * * * * * *
In fact Dendreon had witnessed even stranger occurrences – brutal naked short selling attacks occurring simultaneously with antics that simply have no precedence in the world of medicine. As will be described presently, these strange occurrences very nearly destroyed Dendreon in 2007. These strange occurrences have also prevented patients from having access to Dendreon’s treatment – a treatment that, as will become clear, should have reached the market some time ago.
And from the day of that first strange occurrence in September 2005, when Cramer predicted that Dendreon would become a “battleground” stock, to the latest strange occurrence in April 2009, when Dendreon’s stock nosedived by 65% in 75 seconds, more than 60,000 men in the United States died of prostate cancer.
So we must ask: Who did this? Who stood to profit from Dendreon’s demise? Were the extremely odd delays in getting Provenge to market purely accidental? Or, were the remarkable trading patterns and volatility accompanying those delays in fact an expression of stock manipulation, and if so, who were the manipulators? Since we know that Dendreon experienced naked short selling, and naked short selling is a crime, who are the criminals? And when much of the medical community rallied around Provenge last month, which manipulators crashed the stock to single digits – possibly to make the company ripe for a hostile takeover by the very people who once sought to destroy it?
* * * * * * * *
It is one of the peculiarities of the Securities and Exchange Commission that while it is ever-eager to hassle CEOs of small companies, it goes to considerable lengths to protect billionaire hedge fund managers. The SEC has publicly stated that naked short selling is a crime. It has said that it has evidence that illegal naked short selling occurs on a large scale and does serious damage to public companies. But it almost never says which hedge funds are responsible. It never says who is flooding the market with phantom stock.
As far as the SEC is concerned, it’s all a big secret. As the commission states on its website, the naked short selling statistics “of individual firms and customers is proprietary information and may reflect firms’ trading strategies.” It seems not to matter to the SEC that those “proprietary” trading strategies are illegal.
Meanwhile, the SEC does not require hedge funds to disclose even their legal short positions. As a result, it is impossible for any journalist to present photo-perfect portraits of attacks on companies like Dendreon.
But brokers and other sources can tell us who some of the short sellers are. And by analyzing public information (such as data that hints at various hedge funds’ options strategies) we can make educated guesses as to who has the most to gain from a company’s decline. We can also come to understand the relationships that bind certain hedge fund managers and miscreants, and ask whether these people might have been acting in concert.
If the relationships are few in number, or separated by six degrees, we must abandon the project – a spatter of dots on the wall is not a work of art. But if the dots are plentiful, precise, and show a recognizable pattern, then we have something valuable – a sort of pointillist painting of market behavior.
In the case of Dendreon, we have such a painting. And when we look at this painting, with its dozens of data points, we can see quite clearly the familiar smirk of Michael Milken, the famous “junk bond king” and criminal stock manipulator.
During the times when Dendreon has been most evidently a “battleground stock,” nearly every hedge fund known to have placed large bets against Dendreon and a significant number of Dendreon’s detractors — esteemed medical professionals, financial research analysts, government officials, and Jim Cramer himself – have been tied to Milken or his close associates.
Most of the hedge fund managers who appear in this story are part of a tight network that has been in operation – exchanging information, attacking the same stocks, employing the same tactics – for upwards of twenty years. This is the same network that attacked the major financial institutions in 2008, possibly contributing to the collapse of the American financial system. And though I recognize that some people find this hard to absorb, I will present further evidence that a good number of the people in this network have ties to organized crime – the Mafia.
As for Milken, he was released from prison in 1993, at which point he went to considerable lengths to rebrand himself as a “prominent philanthropist.” One of the “philanthropic” outfits that he founded is the Prostate Cancer Foundation, and for this he has received widespread applause from the media, government officials, and the business elite. Because Milken has effectively bathed himself in the glow of his “philanthropy” (and because his public relations machine is so indisputably clever), many people find themselves saying that Milken’s financial crimes were but misdemeanors – the slight over-exuberance of a “market innovator.”
But the Dendreon story raises serious questions about the nature of Milken’s “philanthropy” – and about a society that venerates and even seeks guidance and favor from the most destructive financial criminal the world has ever known.
http://www.deepcapture.com/michael-milken-60000-deaths-and-the-story-of-dendreon-chapter-1-of-15/
On September 26, 2005, Cramer announced to his television audience the sad news (punctuated by funny sound effects – a clown horn, a crashing airplane) that Provenge, an experimental treatment for prostate cancer, had flopped. Thousands of end-stage patients had been pinning their hopes on Provenge, but according to Cramer the treatment had just been rejected by the Food & Drug Administration. It would never go to market.
This seemed odd, because Dendreon (NASDAQ: DNDN), the company developing Provenge, had not yet submitted an application for FDA approval. As everybody in the biotech investment community knew, Dendreon had, in fact, only recently completed Phase 3 clinical trials and probably would not face scrutiny from an FDA advisory panel for at least another year.
As for the likelihood that the advisory panel would eventually vote in favor of Provenge, the odds looked quite good. The Phase 3 trials had demonstrated that Provenge significantly increased patient survival with only minimal side-effects, such as a few days of mild fever. Moreover, Provenge was an altogether different sort of treatment – one that fought tumors by boosting patients’ immune systems rather than subjecting them to the ravages of chemotherapy.
Provenge was not a magical elixir of life, but Dendreon was doing more than just developing a new technology. It was pioneering a treatment that could revolutionize the way that doctors fight prostate cancer. By some conservative estimates, the market for Provenge alone could reach more than $2 billion a year. If the treatment could be applied to other cancers, the market would be even larger.
The morning after Cramer declared Dendreon and Provenge to be dead in the water, Mark Haines, the anchor of CNBC’s “Squawk Box” program, apologized for Cramer’s “mistake.” That afternoon, at an important UBS investor conference, Dendreon presented still more promising data. This would normally have given a significant boost to the company’s stock price, but the value of Dendreon’s shares stayed flat for the day, and then began a gradual decline.
This had partly to do with Cramer. The next evening, on his “Mad Money” program, the journalist (or entertainer, or self-confessed criminal, or… whatever Cramer is) acknowledged that the FDA had not yet rejected Provenge, but drawing upon his medical expertise, Cramer maintained that Provenge was not effective. In characteristically level-headed fashion, he announced that Dendreon shareholders were drunken, carousing, gambling Falstaffs who “might as well take their money to Vegas.”
Dendreon, Cramer added (rather ominously), was a “battleground stock.”
* * * * * * * *
What Cramer meant by “battleground ” has since become all too apparent. For the past four years, Dendreon has been one of the most manipulated stocks on NASDAQ. During some periods the volume of trading in the shares of this little company has exceeded the trading in America’s largest corporations – a good sign that hedge funds have been churning the stock to move the market.
And with every burst of good news, the company has faced waves upon waves of naked short selling – hedge funds illegally selling millions of shares that do not exist to flood the market and drive down the stock price. Along with the phantom stock, people seeking to diminish Dendreon have deployed false financial research , biased media, bogus class action lawsuits, Internet bashers, dubious science, and other familiar weapons of the “battleground.”
The denouement of this stock market “battle” occurred recently, on April 28, 2009, when Dendreon was to present all-important results at the American Urological Association’s annual meeting in Chicago. Some days prior, Dendreon’s CEO, Mitch Gold, had announced that the results of an Independent Monitoring Committee study were “unambiguous in nature…a clear hit” for Provenge.
If a CEO uses language like that and does not produce the data to back it up, he is guaranteed a visit from the Securities and Exchange Commission. Unless the CEO or his allies have juice with the SEC, the commission will usually charge the CEO with making false statements to pump his stock. Gold was unlikely to take that risk, so it was clear to most people that the meeting in Chicago was going to be a triumph for Dendreon.
And it indeed it was. The data presented that day showed that Provenge lowers the risk of prostate cancer death by 22.5 percent, with little or no toxicity. With a few notable exceptions (some of whom are to appear as prominent characters in this story), nearly every medical professional on the planet now concurred that Provenge was a blockbuster drug – one that should receive FDA approval and make Dendreon a highly profitable company.
But the hedge funds weren’t finished. In the days following Gold’s announcement, short sellers piled on with a vengeance, returning Dendreon to the leagues of the world’s most heavily traded stocks. The firm once again found itself on the SEC’s “Reg Sho” list of companies whose stock was “failing to deliver” in excessive quantities –a sign of illegal naked short selling.
On CNBC, meanwhile, Cramer had hammered Dendreon. On April 6, 2009, amidst ear-rattling sound effects –dogs fighting, and (inexplicably) a baby crying — Cramer had said “I don’t like Dendreon.” He had shouted that Provenge had no chance of getting FDA approval and Dendreon shareholders should “SELL! SELL! SELL!”
Then, on April 28, at 10:01 am central time — just hours before Dendreon’s triumph in Chicago – an anonymous message board author on Yahoo! Finance posted this message: “HIGH PROBABILITY OF MASSIVE BEAR RAID…DNDN [Dendreon] could easily drop 50% on a massive bear raid…its coming today@12:30 pm central.”
Just minutes before 12:30 pm central, Dendreon’s stock price began to fall. It didn’t just fall–it nosedived from $24 to under $8 … in 75 seconds. That’s correct, during a period of 75 seconds, more than 4,000 trades were placed, totaling 3 million shares, or about 50% of Dendreon’s (spectacularly high) average daily volume. Given that the message board poster knew what was coming more than two hours beforehand, and predicted the timing almost precisely, it is a safe bet that this was a coordinated, illegal naked short selling attack. And just in case you still didn’t get this – it caused Dendreon’s share price to lose more than 65% of its value – in just 75 seconds flat.
“My desk was floored,” one trader wrote on a message board. “We all just stood up swearing, headsets and other assorted desk items being thrown at monitors…I haven’t heard that much swearing in years…”
It was, say others, one of the strangest occurrences in Wall Street history.
* * * * * * * *
In fact Dendreon had witnessed even stranger occurrences – brutal naked short selling attacks occurring simultaneously with antics that simply have no precedence in the world of medicine. As will be described presently, these strange occurrences very nearly destroyed Dendreon in 2007. These strange occurrences have also prevented patients from having access to Dendreon’s treatment – a treatment that, as will become clear, should have reached the market some time ago.
And from the day of that first strange occurrence in September 2005, when Cramer predicted that Dendreon would become a “battleground” stock, to the latest strange occurrence in April 2009, when Dendreon’s stock nosedived by 65% in 75 seconds, more than 60,000 men in the United States died of prostate cancer.
So we must ask: Who did this? Who stood to profit from Dendreon’s demise? Were the extremely odd delays in getting Provenge to market purely accidental? Or, were the remarkable trading patterns and volatility accompanying those delays in fact an expression of stock manipulation, and if so, who were the manipulators? Since we know that Dendreon experienced naked short selling, and naked short selling is a crime, who are the criminals? And when much of the medical community rallied around Provenge last month, which manipulators crashed the stock to single digits – possibly to make the company ripe for a hostile takeover by the very people who once sought to destroy it?
* * * * * * * *
It is one of the peculiarities of the Securities and Exchange Commission that while it is ever-eager to hassle CEOs of small companies, it goes to considerable lengths to protect billionaire hedge fund managers. The SEC has publicly stated that naked short selling is a crime. It has said that it has evidence that illegal naked short selling occurs on a large scale and does serious damage to public companies. But it almost never says which hedge funds are responsible. It never says who is flooding the market with phantom stock.
As far as the SEC is concerned, it’s all a big secret. As the commission states on its website, the naked short selling statistics “of individual firms and customers is proprietary information and may reflect firms’ trading strategies.” It seems not to matter to the SEC that those “proprietary” trading strategies are illegal.
Meanwhile, the SEC does not require hedge funds to disclose even their legal short positions. As a result, it is impossible for any journalist to present photo-perfect portraits of attacks on companies like Dendreon.
But brokers and other sources can tell us who some of the short sellers are. And by analyzing public information (such as data that hints at various hedge funds’ options strategies) we can make educated guesses as to who has the most to gain from a company’s decline. We can also come to understand the relationships that bind certain hedge fund managers and miscreants, and ask whether these people might have been acting in concert.
If the relationships are few in number, or separated by six degrees, we must abandon the project – a spatter of dots on the wall is not a work of art. But if the dots are plentiful, precise, and show a recognizable pattern, then we have something valuable – a sort of pointillist painting of market behavior.
In the case of Dendreon, we have such a painting. And when we look at this painting, with its dozens of data points, we can see quite clearly the familiar smirk of Michael Milken, the famous “junk bond king” and criminal stock manipulator.
During the times when Dendreon has been most evidently a “battleground stock,” nearly every hedge fund known to have placed large bets against Dendreon and a significant number of Dendreon’s detractors — esteemed medical professionals, financial research analysts, government officials, and Jim Cramer himself – have been tied to Milken or his close associates.
Most of the hedge fund managers who appear in this story are part of a tight network that has been in operation – exchanging information, attacking the same stocks, employing the same tactics – for upwards of twenty years. This is the same network that attacked the major financial institutions in 2008, possibly contributing to the collapse of the American financial system. And though I recognize that some people find this hard to absorb, I will present further evidence that a good number of the people in this network have ties to organized crime – the Mafia.
As for Milken, he was released from prison in 1993, at which point he went to considerable lengths to rebrand himself as a “prominent philanthropist.” One of the “philanthropic” outfits that he founded is the Prostate Cancer Foundation, and for this he has received widespread applause from the media, government officials, and the business elite. Because Milken has effectively bathed himself in the glow of his “philanthropy” (and because his public relations machine is so indisputably clever), many people find themselves saying that Milken’s financial crimes were but misdemeanors – the slight over-exuberance of a “market innovator.”
But the Dendreon story raises serious questions about the nature of Milken’s “philanthropy” – and about a society that venerates and even seeks guidance and favor from the most destructive financial criminal the world has ever known.
http://www.deepcapture.com/michael-milken-60000-deaths-and-the-story-of-dendreon-chapter-1-of-15/
21 June 2009
Worse to come for Australian economy, says Harry Dent
AUSTRALIA'S sharemarket will halve in value, house prices will slump as much as 40 per cent and unemployment will climb to 10 per cent.
That's the bold prediction from economic forecaster Harry Dent, who says a bigger crash is ahead for the global economy within the next two years.
And while Australia's strong financial system, links to China and young working population have cushioned the nation from the economic turmoil so far, Mr Dent says smart investors are cashing up in preparation for "the Mother of all depressions".
"When you have to deleverage a major bubble in stocks and housing and commodities . . . it doesn't just get over with in one year with a nice stimulus program," he says.
Mr Dent, who predicted Japan's 1990s recession and the present economic crisis, yesterday began an Australian speaking tour in Brisbane.
He says a "perfect storm" is brewing where a peak in spending by baby boomers will collide with the global commodity bubble to "leave behind the next great crash".
Although Australia's All Ordinaries Index may peak at between 4500 and 5000 points by the end of this year, he says a crash in about 2011 will see it slump to about 2000 points.
He says our house prices are "among the most overvalued in the world" and will backtrack by as much as 40 per cent while unemployment – now at 5.7 per cent – will hit double digits.
"I would say Australia is not paying close enough attention to the worldwide housing bubble and banking crisis," he says.
Mr Dent scoffs at a BIS Shrapnel report, issued this week, that said home values would rise by as much as 20 per cent over the next three years.
"Look at Japan to see what happens when a generational trend finally slows your economy and a housing bubble bursts. Housing peaked in 1991 in Japan and is still down over 60 per cent from the peak 18 years later."
He believes the next boom will begin to unfold in 2023, when India will take over from China as the world's growth powerhouse.
"If I was Australian businesses and government I'd say, 'OK, China's our best customer now but we need to be cultivating India'," Mr Dent says.
"India is the one large country – that isn't dependent on just commodity cycles for exports – that could grow dramatically and urbanise."
He says India's economic strength will be underpinned by its youthful population – something that will also help make Australia one of the most resilient developed economies throughout the next two decades.
Most of the affluent world is not having enough children to support their ageing population, he says.
Japan has the oldest population in the world, followed by Italy.
However, Australia's immigration policy has ensured the local economy has stayed refreshed by young, skilled workers from overseas, helping drive innovation to "take the economy to new heights".
"Your demographics do not turn down nearly as much as Europe and the United States and Japan's did and your banking system didn't go nuts," Mr Dent says. "You will fare better but you won't come out of this unscathed."
http://www.news.com.au/couriermail/story/0,23739,25660536-3122,00.html
That's the bold prediction from economic forecaster Harry Dent, who says a bigger crash is ahead for the global economy within the next two years.
And while Australia's strong financial system, links to China and young working population have cushioned the nation from the economic turmoil so far, Mr Dent says smart investors are cashing up in preparation for "the Mother of all depressions".
"When you have to deleverage a major bubble in stocks and housing and commodities . . . it doesn't just get over with in one year with a nice stimulus program," he says.
Mr Dent, who predicted Japan's 1990s recession and the present economic crisis, yesterday began an Australian speaking tour in Brisbane.
He says a "perfect storm" is brewing where a peak in spending by baby boomers will collide with the global commodity bubble to "leave behind the next great crash".
Although Australia's All Ordinaries Index may peak at between 4500 and 5000 points by the end of this year, he says a crash in about 2011 will see it slump to about 2000 points.
He says our house prices are "among the most overvalued in the world" and will backtrack by as much as 40 per cent while unemployment – now at 5.7 per cent – will hit double digits.
"I would say Australia is not paying close enough attention to the worldwide housing bubble and banking crisis," he says.
Mr Dent scoffs at a BIS Shrapnel report, issued this week, that said home values would rise by as much as 20 per cent over the next three years.
"Look at Japan to see what happens when a generational trend finally slows your economy and a housing bubble bursts. Housing peaked in 1991 in Japan and is still down over 60 per cent from the peak 18 years later."
He believes the next boom will begin to unfold in 2023, when India will take over from China as the world's growth powerhouse.
"If I was Australian businesses and government I'd say, 'OK, China's our best customer now but we need to be cultivating India'," Mr Dent says.
"India is the one large country – that isn't dependent on just commodity cycles for exports – that could grow dramatically and urbanise."
He says India's economic strength will be underpinned by its youthful population – something that will also help make Australia one of the most resilient developed economies throughout the next two decades.
Most of the affluent world is not having enough children to support their ageing population, he says.
Japan has the oldest population in the world, followed by Italy.
However, Australia's immigration policy has ensured the local economy has stayed refreshed by young, skilled workers from overseas, helping drive innovation to "take the economy to new heights".
"Your demographics do not turn down nearly as much as Europe and the United States and Japan's did and your banking system didn't go nuts," Mr Dent says. "You will fare better but you won't come out of this unscathed."
http://www.news.com.au/couriermail/story/0,23739,25660536-3122,00.html
GEAB N° 36 is available! Global systemic crisis in summer 2009: The cumulative impact of three « rogue waves »
As anticipated by LEAP/E2020 as early as October 2008, on the eve of summer 2009, the question of the US and UK capacity to finance their unbridled public deficits has become the central question of international debates, thus paving the way for these two countries to default on their debt by the end of this summer.
At this stage of the global systemic crisis’ process of development, contrary to the dominant political and media stance today, the LEAP/E2020 team does not foresee any economic upsurge after summer 2009 (nor in the following 12 months) (1). On the contrary, because the origins of the crisis remain unaddressed, we estimate that the summer 2009 will be marked by the converging of three very destructive « rogue waves » (2), illustrating the aggravation of the crisis and entailing major upheaval by September/October 2009. As always since this crisis started, each region of the world will be affected neither at the same moment, nor in the same way (3). However, according to our researchers, all of them will be concerned by a significant deterioration in their situation by the end of summer 2009 (4).
This evolution is likely to catch large numbers of economic and financial players on the wrong foot who decided to believe in today’s mainstream media operation of “euphorisation”.
In this special « Summer 2009 » edition, our team describes in detail these three converging « rogue waves » and their impact, and gives a number of strategic recommendations (currencies, gold, real estate, bonds, stocks, currencies) to avoid being swept away in this deadly summer.
LEAP/E2020 believes that, instead of « green shoots what will appear on the horizon is a group of three destructive waves of the social and economic fabric expected to converge in the course of summer 2009, illustrating the aggravation of the crisis and entailing major changes by the end of summer 2009… more specifically, debt default events in the US and UK, both countries at the centre of the global system in crisis. These waves appear as follows:
1. Wave of massive unemployment: Three different dates of impact according to the countries in America, Europe, Asia, the Middle East and Africa
2. Wave of serial corporate bankruptcies: companies, banks, housing, states, counties, towns
3. Wave of terminal crisis for the US Dollar, US T-Bond and GBP, and the return of inflation
In fact, these three waves do not appear in quick succession like the « sisters rogue waves ». They are even more dangerous because they are simultaneous, asynchronous and non-parallel. Hence their impact on the global system accentuates the risks because they hit at various angles, at different speeds and with varying strength. The only certain thing at this stage is that the international system has never been so weak and powerless to face such a situation. The IMF and global governance institutions’ reforms announced by the London G20 are at a standstill (7). The G8 becomes more like a moribund club whose utility is increasingly questioned (8). US leadership is the shadow of what it used to be, mostly concerned by desperately trying to find purchasers for its T-Bonds (9). The global monetary system is in a process of disintegration, with the Russians and Chinese in particular accelerating their positioning in the post-Dollar era. Companies foresee no improvement in the business climate and speed up the pace of layoffs. A growing number of states falter under the weight of their accumulated debt created to “rescue banks” and are about to be faced with a welter of failings by the end of this summer (10). And, last but not least, the banks, once they have squeezed money out of naive savers thanks to the market upsurge orchestrated in the past few weeks, will be have to admit that they are still insolvent by the end of summer 2009.
In the United States and United Kingdom in particular, the colossal public financial effort made in 2008 and at the beginning of 2009 for the sole benefit of large banks became so unpopular that it was impossible to consider injecting more public money into banks in spring 2009, despite the fact that they were still insolvent (11). It then became necessary to invent a “fairy tale” to convince the average saver to inject his/her own money into the financial system. By means of the « green shoots » story, overpriced stock indices based on no real economic grounds and promises of « anticipated public funding repayment », the conditioning was achieved. Hence, while big investors from oil-producing and Asian countries (12) withdrew capital from these banks, large numbers of small individual investors returned, full of hope. Once these small investors discover that public funding repayment is only a drop in the ocean of public aid granted to these banks (to help them dispose of their toxic assets) and that, after three or four months at best (as analyzed in this GEAB N°36), these banks are again on the verge of collapse, they will realize, powerless, that their share is worth nothing once again.
Intoxicated by financiers, world political leaders will be surprised - once again – to see all the problems of last year reappear, all the more severe since they were not addressed but only buried under piles of public money. Once that money has been squandered by insolvent banks compelled to « rescue » even more insolvent rivals, or by ill-conceived economic stimulus plans, problems will re-emerge, further exacerbated. For hundreds of millions of citizens in America, Europe, Asia and Africa, the summer 2009 will be a dramatic transition towards lasting impoverishment due to the loss of their jobs, with no hope of finding new ones in the next two, three or four years, or due to the disappearance of their savings invested in stocks or capital-based pension funds, or in banking investments linked to stock markets or denominated in US dollars or British pounds, or investment in shares of companies pressured to desperately wait for an improvement not coming soon.
--------
Notes:
(1) Not even the « jobless recovery » many experts are trying to make us believe in. In the United States, United Kingdom, Eurozone and Japan, it is a « recoveryless recovery » we must expect, i.e. a pure invention aimed at convincing US and UK insolvent consumers to start buying again and keeping US T-Bonds’ and UK Gilts’ country purchasers waiting as long as possible (until they decide that there is really no future selling their products to the lands of the US Dollar and British Pound.
(2) « Rogues waves » are very large and sudden ocean surface waves which used to be considered as rare, though we now know that they appear in almost every storm above a certain strength. « Rogue waves » can reach heights of 30 meters (98 ft) and exert tremendous pressure. For instance, a normal 3 meter-high wave exerts a pressure of 6 tons/m². A 10 meter-high tempest wave exerts a pressure of 12 tons/m². A 30 meter-high rogue wave can exert pressure of up to 100 tons/m². No ship yet built is able to resist such pressures. One specific kind of rogue wave is called the “three sisters”, i.e. a group of three rogue waves all the more dangerous in that, even if a ship had time to react properly to the first two waves, there is no way she could be in the right position to brave the third one. According to LEAP/E2020, it is a similar phenomenon that the world is about to encounter this summer; and no country (ship) is in a favourable position to face them, even if some countries are more at risk than others, as explained in this GEAB (N°36).
(3) LEAP/E2020 estimate that their anticipations of social and economic trends in the various regions of the world - published in GEAB N°28 (10/16/2008) – are still relevant.
(4) More precisely, in every region, media and stock markets will no longer be able to hide the deterioration.
(5) Our readers have not failed to notice that the same people, media and institutions, considered everything was for the best in the best of worlds 3 years ago, that there was no risk of a severe crisis 2 years ago, and that the crisis was under control a year ago. Their opinion is therefore highly reliable!
(6) As regards US economic statistics, it will be interesting to follow the consequences of the revision of the indexing formula by the Bureau of Economic Analysis due to take place on 07/31/2009. Usually, this type of revision results in further complexity of historical comparisons and favourable modification of important figures. For example, some previous revisions enabled the division of the average level of measured inflation by three. Source: MWHodges, 04/2008.
(7) Except at a regional level where each political entity is organized the way that it wants. For instance, the EU is taking advantage of the political fading away of the UK - mired in a financial, economic and political crisis - and taking supervisory control of the City of London (source: Telegraph, 06/11/2009). It is likely that summer 2009 will be the end of 300 years of the City’s supremacy at the centre of British power. On this subject, it is instructive to read George Monbiot’s article in The Guardian dated 06/08/2009 and take the time to read John Lanchester’s brilliant essay published in the London Review of Books dated 05/28/2009 entitled « It's finished ».
(8) Who cares any more about G8 final statements, such as that following the June 13th G8-Finance meeting (source: Forbes, 06/13/2009), at a time when each player in fact plays by his own rules: Americans on one side, Canadians and Europeans on another, British and Japanese in the middle, while the Russians play a complete different game?
(9) US Treasury’s Secretary of State, Timothy Geithner, recently suffered a very embarrassing experience whilst giving a speech in front of Beijing University students: his audience simply burst into laughter when he reassured that the Chinese government had made the right choice investing their holdings in US T-Bonds and Dollars (source: Examiner/Reuters, 6/02/2009)! There is nothing worse than arousing irony or ridicule when you are an established power because that power is nothing without respect (on the part of both friends and enemies), especially when the one mocking is supposed to be “trapped” by the one mocked. According to LEAP/E2020, this laughter is worth a thousand explanations of the fact that China does not feel at all « trapped » by the US dollar and the Chinese authorities know exactly what tracks greenbacks and T–Bonds are following. This kind of situation was unthinkable only 12 months, maybe even 6 months ago, first because the Chinese were still naive, second because they thought it was in their interest to make everyone believe they were naive. Obviously, on the eve of summer 2009, this situation has vanished: no need to pretend anymore, as highlighted by this survey of 23 famous Chinese economists, published on the first day of Timothy Geithner’s visit to Beijing, and revealing that most of them deem US assets « risky » (source: Xinhuanet, 05/31/2009). This student burst of laughter will continue to echo for many months to come…
(10) Not only in the US will shareholders be systematically prejudiced by the state under the pretext of higher common interest, as in the case of pension fund and bondholder losses related to the Chrysler and GM bankruptcies, or when the US government and Federal Reserve pressured Bank of America to hide the calamitous state of Merrill Lynch from its shareholders at the time of the latter’s takeover. Sources: OpenSalon, 06/10/2009 / WallStreetJournal, 04/23/2009. In the UK, Europe and Asia, the same causes will produce the same effects: the « raison d'état » has always been the simplest excuse to justify large-scale plundering … and severe crises are perfect times to call in the « raison d'état ».
(11) Germany has a similar problem due to next September’s national election. After the election, the country’s banking problems will be in the headlines, as several hundreds of billions of risky assets on the balance sheets of a number of banks, mainly regional ones, will need dealing with. It is far from the scope of US and UK banking problems, nevertheless Berlin will probably be faced with a number of potential bank failures. Source: AFP/Google, 04/25/2009. In the United States, the banks bailed out by the federal state have simply lowered the amount of loans granted when they are supposed to do the contrary. Source: CNNMoney, 06/15/2009
(12) Sources: Financial Times, 06/01/2009; YahooFinance, 06/04/2009; StreetInsider+Holdings/4656921.html, 05/15/2009; Financial Times, 06/01/2009
Mercredi 17 Juin 2009
http://www.leap2020.eu/GEAB-N-36-is-available!-Global-systemic-crisis-in-summer-2009-The-cumulative-impact-of-three-rogue-waves_a3359.html
At this stage of the global systemic crisis’ process of development, contrary to the dominant political and media stance today, the LEAP/E2020 team does not foresee any economic upsurge after summer 2009 (nor in the following 12 months) (1). On the contrary, because the origins of the crisis remain unaddressed, we estimate that the summer 2009 will be marked by the converging of three very destructive « rogue waves » (2), illustrating the aggravation of the crisis and entailing major upheaval by September/October 2009. As always since this crisis started, each region of the world will be affected neither at the same moment, nor in the same way (3). However, according to our researchers, all of them will be concerned by a significant deterioration in their situation by the end of summer 2009 (4).
This evolution is likely to catch large numbers of economic and financial players on the wrong foot who decided to believe in today’s mainstream media operation of “euphorisation”.
In this special « Summer 2009 » edition, our team describes in detail these three converging « rogue waves » and their impact, and gives a number of strategic recommendations (currencies, gold, real estate, bonds, stocks, currencies) to avoid being swept away in this deadly summer.
LEAP/E2020 believes that, instead of « green shoots what will appear on the horizon is a group of three destructive waves of the social and economic fabric expected to converge in the course of summer 2009, illustrating the aggravation of the crisis and entailing major changes by the end of summer 2009… more specifically, debt default events in the US and UK, both countries at the centre of the global system in crisis. These waves appear as follows:
1. Wave of massive unemployment: Three different dates of impact according to the countries in America, Europe, Asia, the Middle East and Africa
2. Wave of serial corporate bankruptcies: companies, banks, housing, states, counties, towns
3. Wave of terminal crisis for the US Dollar, US T-Bond and GBP, and the return of inflation
In fact, these three waves do not appear in quick succession like the « sisters rogue waves ». They are even more dangerous because they are simultaneous, asynchronous and non-parallel. Hence their impact on the global system accentuates the risks because they hit at various angles, at different speeds and with varying strength. The only certain thing at this stage is that the international system has never been so weak and powerless to face such a situation. The IMF and global governance institutions’ reforms announced by the London G20 are at a standstill (7). The G8 becomes more like a moribund club whose utility is increasingly questioned (8). US leadership is the shadow of what it used to be, mostly concerned by desperately trying to find purchasers for its T-Bonds (9). The global monetary system is in a process of disintegration, with the Russians and Chinese in particular accelerating their positioning in the post-Dollar era. Companies foresee no improvement in the business climate and speed up the pace of layoffs. A growing number of states falter under the weight of their accumulated debt created to “rescue banks” and are about to be faced with a welter of failings by the end of this summer (10). And, last but not least, the banks, once they have squeezed money out of naive savers thanks to the market upsurge orchestrated in the past few weeks, will be have to admit that they are still insolvent by the end of summer 2009.
In the United States and United Kingdom in particular, the colossal public financial effort made in 2008 and at the beginning of 2009 for the sole benefit of large banks became so unpopular that it was impossible to consider injecting more public money into banks in spring 2009, despite the fact that they were still insolvent (11). It then became necessary to invent a “fairy tale” to convince the average saver to inject his/her own money into the financial system. By means of the « green shoots » story, overpriced stock indices based on no real economic grounds and promises of « anticipated public funding repayment », the conditioning was achieved. Hence, while big investors from oil-producing and Asian countries (12) withdrew capital from these banks, large numbers of small individual investors returned, full of hope. Once these small investors discover that public funding repayment is only a drop in the ocean of public aid granted to these banks (to help them dispose of their toxic assets) and that, after three or four months at best (as analyzed in this GEAB N°36), these banks are again on the verge of collapse, they will realize, powerless, that their share is worth nothing once again.
Intoxicated by financiers, world political leaders will be surprised - once again – to see all the problems of last year reappear, all the more severe since they were not addressed but only buried under piles of public money. Once that money has been squandered by insolvent banks compelled to « rescue » even more insolvent rivals, or by ill-conceived economic stimulus plans, problems will re-emerge, further exacerbated. For hundreds of millions of citizens in America, Europe, Asia and Africa, the summer 2009 will be a dramatic transition towards lasting impoverishment due to the loss of their jobs, with no hope of finding new ones in the next two, three or four years, or due to the disappearance of their savings invested in stocks or capital-based pension funds, or in banking investments linked to stock markets or denominated in US dollars or British pounds, or investment in shares of companies pressured to desperately wait for an improvement not coming soon.
--------
Notes:
(1) Not even the « jobless recovery » many experts are trying to make us believe in. In the United States, United Kingdom, Eurozone and Japan, it is a « recoveryless recovery » we must expect, i.e. a pure invention aimed at convincing US and UK insolvent consumers to start buying again and keeping US T-Bonds’ and UK Gilts’ country purchasers waiting as long as possible (until they decide that there is really no future selling their products to the lands of the US Dollar and British Pound.
(2) « Rogues waves » are very large and sudden ocean surface waves which used to be considered as rare, though we now know that they appear in almost every storm above a certain strength. « Rogue waves » can reach heights of 30 meters (98 ft) and exert tremendous pressure. For instance, a normal 3 meter-high wave exerts a pressure of 6 tons/m². A 10 meter-high tempest wave exerts a pressure of 12 tons/m². A 30 meter-high rogue wave can exert pressure of up to 100 tons/m². No ship yet built is able to resist such pressures. One specific kind of rogue wave is called the “three sisters”, i.e. a group of three rogue waves all the more dangerous in that, even if a ship had time to react properly to the first two waves, there is no way she could be in the right position to brave the third one. According to LEAP/E2020, it is a similar phenomenon that the world is about to encounter this summer; and no country (ship) is in a favourable position to face them, even if some countries are more at risk than others, as explained in this GEAB (N°36).
(3) LEAP/E2020 estimate that their anticipations of social and economic trends in the various regions of the world - published in GEAB N°28 (10/16/2008) – are still relevant.
(4) More precisely, in every region, media and stock markets will no longer be able to hide the deterioration.
(5) Our readers have not failed to notice that the same people, media and institutions, considered everything was for the best in the best of worlds 3 years ago, that there was no risk of a severe crisis 2 years ago, and that the crisis was under control a year ago. Their opinion is therefore highly reliable!
(6) As regards US economic statistics, it will be interesting to follow the consequences of the revision of the indexing formula by the Bureau of Economic Analysis due to take place on 07/31/2009. Usually, this type of revision results in further complexity of historical comparisons and favourable modification of important figures. For example, some previous revisions enabled the division of the average level of measured inflation by three. Source: MWHodges, 04/2008.
(7) Except at a regional level where each political entity is organized the way that it wants. For instance, the EU is taking advantage of the political fading away of the UK - mired in a financial, economic and political crisis - and taking supervisory control of the City of London (source: Telegraph, 06/11/2009). It is likely that summer 2009 will be the end of 300 years of the City’s supremacy at the centre of British power. On this subject, it is instructive to read George Monbiot’s article in The Guardian dated 06/08/2009 and take the time to read John Lanchester’s brilliant essay published in the London Review of Books dated 05/28/2009 entitled « It's finished ».
(8) Who cares any more about G8 final statements, such as that following the June 13th G8-Finance meeting (source: Forbes, 06/13/2009), at a time when each player in fact plays by his own rules: Americans on one side, Canadians and Europeans on another, British and Japanese in the middle, while the Russians play a complete different game?
(9) US Treasury’s Secretary of State, Timothy Geithner, recently suffered a very embarrassing experience whilst giving a speech in front of Beijing University students: his audience simply burst into laughter when he reassured that the Chinese government had made the right choice investing their holdings in US T-Bonds and Dollars (source: Examiner/Reuters, 6/02/2009)! There is nothing worse than arousing irony or ridicule when you are an established power because that power is nothing without respect (on the part of both friends and enemies), especially when the one mocking is supposed to be “trapped” by the one mocked. According to LEAP/E2020, this laughter is worth a thousand explanations of the fact that China does not feel at all « trapped » by the US dollar and the Chinese authorities know exactly what tracks greenbacks and T–Bonds are following. This kind of situation was unthinkable only 12 months, maybe even 6 months ago, first because the Chinese were still naive, second because they thought it was in their interest to make everyone believe they were naive. Obviously, on the eve of summer 2009, this situation has vanished: no need to pretend anymore, as highlighted by this survey of 23 famous Chinese economists, published on the first day of Timothy Geithner’s visit to Beijing, and revealing that most of them deem US assets « risky » (source: Xinhuanet, 05/31/2009). This student burst of laughter will continue to echo for many months to come…
(10) Not only in the US will shareholders be systematically prejudiced by the state under the pretext of higher common interest, as in the case of pension fund and bondholder losses related to the Chrysler and GM bankruptcies, or when the US government and Federal Reserve pressured Bank of America to hide the calamitous state of Merrill Lynch from its shareholders at the time of the latter’s takeover. Sources: OpenSalon, 06/10/2009 / WallStreetJournal, 04/23/2009. In the UK, Europe and Asia, the same causes will produce the same effects: the « raison d'état » has always been the simplest excuse to justify large-scale plundering … and severe crises are perfect times to call in the « raison d'état ».
(11) Germany has a similar problem due to next September’s national election. After the election, the country’s banking problems will be in the headlines, as several hundreds of billions of risky assets on the balance sheets of a number of banks, mainly regional ones, will need dealing with. It is far from the scope of US and UK banking problems, nevertheless Berlin will probably be faced with a number of potential bank failures. Source: AFP/Google, 04/25/2009. In the United States, the banks bailed out by the federal state have simply lowered the amount of loans granted when they are supposed to do the contrary. Source: CNNMoney, 06/15/2009
(12) Sources: Financial Times, 06/01/2009; YahooFinance, 06/04/2009; StreetInsider+Holdings/4656921.html, 05/15/2009; Financial Times, 06/01/2009
Mercredi 17 Juin 2009
http://www.leap2020.eu/GEAB-N-36-is-available!-Global-systemic-crisis-in-summer-2009-The-cumulative-impact-of-three-rogue-waves_a3359.html
Gulf states central banks "aggressive" in hunt for gold
The WGC did not publish data regarding the UAE Central Bank's gold reserve apparently because the country has not disclosed its gold reserve to the IMF in the past six months. Two GCC countries – Saudi Arabia and Qatar – were shown were as having 11.9 and 3.1 per cent of their reserves in gold. The figure stood at 12.4 per cent and 3.7 per cent respectively for the two hydrocarbon rich countries in March 2009.
WGC CEO Aram Shishmanian had recently told Emirates Business that the GCC central banks are looking forward to improving their gold reserves. "Central banks with low reserves of gold are looking forward to increasing their reserves. They are trying to analyse what the right balance should be. They are getting aggressive," he had said.
http://www.business24-7.ae/Articles/2009/6/Pages/20062009/06212009_c0e95058f0ab435fae8c789e39688011.aspx
WGC CEO Aram Shishmanian had recently told Emirates Business that the GCC central banks are looking forward to improving their gold reserves. "Central banks with low reserves of gold are looking forward to increasing their reserves. They are trying to analyse what the right balance should be. They are getting aggressive," he had said.
http://www.business24-7.ae/Articles/2009/6/Pages/20062009/06212009_c0e95058f0ab435fae8c789e39688011.aspx
Fed to keep 0% rates for another year...
The US Federal Reserve will keep rates close to zero until 2011 to continue providing monetary stimulus to an economy that will slow down again next year after the current bounce, analysts said.
"We are changing our forecasts to indicate stronger GDP growth overall for both 2009 and 2010. But this stronger growth is caused by a temporary spurt in output during Q4 2009 and Q1 2010, when we see annualised growth reaching three per cent," said John Calverley, Standard Chartered bank's (SCB) Head of Research for North America.
"Later in 2010, as the fiscal stimulus reverses out and the inventory bounce comes to an end, economic growth will slow again, as the economy works through the aftermath of the financial crisis. Inflation will continue to fall back throughout 2009 and 2010, at least, and we expect the Fed to keep the Funds rate at the current near-zero level until 2011," Calverley wrote in a research note.
Stimulus boost
The first effects of the $1 trillion-plus (Dh3.67trn) US stimulus package have shown up in income growth in recent months via tax cuts. Starting this summer, SCB expects to see some of the infrastructure spending begin to kick in.
"The effects of the stimulus will add to GDP for three or four quarters and then, as the spending rate slows, there will be a negative effect on GDP, sometime later in 2010," Calverley said.
"A few months ago US lawmakers promised there would be more stimulus packages next year if necessary. Probably some Congressmen had hopes they would have the chance to legislate for more spending just ahead of the November 2010 mid-term elections!
"But the bond market, reinforced by the view of several foreign governments, has already squashed those hopes. Even if unemployment is still very high next year [as we anticipate], there will be no room for a major new stimulus. Indeed the Administration and Congress will need to demonstrate how they plan to reduce the deficit over time," he said.
State and local governments are struggling to deal with reduced revenues and some have already made or announced large cuts in spending, while others are finding ways to temporarily avoid them. Further cuts will be necessary in 2010-2011, the analyst said, "as opportunities for creative accounting and prevarication dwindle".
Hence, 2010-2011 overall is likely to see the first stages of a substantial tightening of fiscal policy. Markets have recently begun to price in a rise in the Fed Funds rate over the winter. "Our forecast of a recovery starting in Q3 and with some relatively robust GDP numbers over the winter would, at first sight, seem to support that view. Moreover, we have long argued that the Fed will not want to leave interest rates at ultra-low levels for too long for fear of inflating a new bubble and creating new imbalances," Calverley said.
"However, we believe that the Fed will remain on hold during this period for two reasons. First, we expect core inflation to continue to decline over the next year, with fears shifting again towards deflation. An inflation-targeting central bank – as the Fed is in all but name – should keep rates below 'neutral' as long as inflation is below target.
"Secondly, we expect that the Fed will be focusing closely on private final demand, along with unemployment. We expect private final demand to continue to show clear signs of weakness since the recovery will mostly be due to the inventory bounce and government spending, both of which are strictly temporary," he said.
"Meanwhile, unemployment will peak at more than 10 per cent next year, leaving substantial slack in the economy and making it uncomfortable for the Fed to raise interest rates. Instead they will more likely tighten liquidity by reducing the size of the Fed's balance sheet, selling securities into the market. Our guess is that they will not rush to sell back the Treasuries and mortgage securities being acquired this year but instead will sell short-term securities into the market to mop up the liquidity.
"By the middle of next year the Fed might be ready to think about rate increases but, by then, we expect the bounce in growth to be fading. Only in 2011 do we expect a stronger outlook for growth, allowing the Fed to finally push up rates. Even then we expect the new norm for Federal Funds rate, at least initially to be around 2-2.5 per cent rather than the 4-5 per cent of the last two economic cycles," Calverley said.
Inventories will provide lift
Economic recoveries in the US historically have been driven by a combination of an inventory rebound, a surge in house-building and a jump in car and other big-ticket purchases. The inventory rebound is almost a mechanical process, Calverley said.
"During a recession, business cuts output below sales to pull inventories lower and then, once inventories are on a downward path, production picks up again, generating the economic recovery. After the severe recessions of 1974 and 1982, this bounce gave a lift to GDP of around two to three per cent over the subsequent year.
"We expect a boost in the one to three per cent range this time, because inventories are a smaller share of GDP than in the past. The exact timing of this rebound is hard to predict, though as usual it will have a considerable impact on the quarterly path of GDP.
"It could start as early as Q3 but given the still very high level of inventories in relation to sales currently, inventory liquidation may stay very high during the summer so we forecast it starting Q4," Calverley said.
House-building recovery
The outlook for house-building in the near term is less promising. Recent levels of starts, at around 500,000 annually, are well below the rate of growth of household formation based on demographic and immigration trends. "So, at some point, we can expect house-building to move back up to around 1.5 million annually, an adjustment which will provide a boost to GDP of around two per cent," SCB said.
But any significant upward move is unlikely for some time, it added, given the overhang of unsold homes and continuing high foreclosures. "Housing starts exceeded the 1.5 million level throughout 2002-06 and we estimate that there is a surplus now of perhaps two million homes. Absorbing this surplus will take around two years at the current level of starts.
"House-building likely will creep up gradually, starting later this year but not fast enough to add a whole lot to GDP growth. That will probably have to wait until 2011-12. Still, Q4 this year may be the first quarter since 2005 that residential construction has not subtracted from GDP. "Unfortunately, the better news here will be offset by declining commercial construction as buildings are completed and few new ones are started, unless they are part of the government's fiscal stimulus package," Calverley said.
Car sales and production
There is a good chance that car sales will pick up from their current very depressed levels, the bank said. In 2006-07, sales were running at an annual rate of 16-17 million units, whereas recently the figure has been below 10 million. Sales have been depressed partly by the uncertain economic outlook and rising unemployment and partly by the difficulty of obtaining credit.
"As unemployment starts to top out, (in our view between 10-11 per cent), and auto financing becomes easier with the help of government programmes such as the TALF, sales should pick up. However, we would not expect a quick rebound to 2007 levels. For one thing, Americans probably bought too many cars during the last boom, with the help of surging wealth from real estate and stocks as well as zero-rate credit.
"So, despite recent low sales, it is much too early to talk of pent-up demand, as was often an important factor after past recessions. Still, over time, a recovery in car sales and production, perhaps initially into the 12-13 million range annually, will help boost the economy," Calverley said.
Consumer demand
All this implies that consumer demand is expected to remain sluggish, and that is bad news for an economy in which this accounts for 70 per cent of GDP. "The two key variables are real income growth and the savings rate, but it is hard to be optimistic on either," Calverley said. Income is being squeezed by rising unemployment, slowing wage growth and rising gas prices. There are reports from across the US of pay freezes and even pay cuts. Benefits are being shaved too.
"Of course we expect price inflation to moderate as well so real income growth will not slow as much as nominal income but companies are determined to raise margins so real income will still be squeezed. Consumers will not have much extra money to spend, nor will they be able easily to borrow.
"Banks continue to cut back on credit lines, while the fall in home prices is undermining wealth and collateral. Weak income growth due to rising unemployment is a particular problem right now and will restrain spending in Q2 and Q3," the bank said.
"Payroll losses should come to an end and, depending on oil price trends, real income growth should resume, though slowly. Then much will depend on the savings rate. It has already moved up to 5.7 per cent but we expect consumers to continue to push the savings rate higher," it said.
"We are changing our forecasts to indicate stronger GDP growth overall for both 2009 and 2010. But this stronger growth is caused by a temporary spurt in output during Q4 2009 and Q1 2010, when we see annualised growth reaching three per cent," said John Calverley, Standard Chartered bank's (SCB) Head of Research for North America.
"Later in 2010, as the fiscal stimulus reverses out and the inventory bounce comes to an end, economic growth will slow again, as the economy works through the aftermath of the financial crisis. Inflation will continue to fall back throughout 2009 and 2010, at least, and we expect the Fed to keep the Funds rate at the current near-zero level until 2011," Calverley wrote in a research note.
Stimulus boost
The first effects of the $1 trillion-plus (Dh3.67trn) US stimulus package have shown up in income growth in recent months via tax cuts. Starting this summer, SCB expects to see some of the infrastructure spending begin to kick in.
"The effects of the stimulus will add to GDP for three or four quarters and then, as the spending rate slows, there will be a negative effect on GDP, sometime later in 2010," Calverley said.
"A few months ago US lawmakers promised there would be more stimulus packages next year if necessary. Probably some Congressmen had hopes they would have the chance to legislate for more spending just ahead of the November 2010 mid-term elections!
"But the bond market, reinforced by the view of several foreign governments, has already squashed those hopes. Even if unemployment is still very high next year [as we anticipate], there will be no room for a major new stimulus. Indeed the Administration and Congress will need to demonstrate how they plan to reduce the deficit over time," he said.
State and local governments are struggling to deal with reduced revenues and some have already made or announced large cuts in spending, while others are finding ways to temporarily avoid them. Further cuts will be necessary in 2010-2011, the analyst said, "as opportunities for creative accounting and prevarication dwindle".
Hence, 2010-2011 overall is likely to see the first stages of a substantial tightening of fiscal policy. Markets have recently begun to price in a rise in the Fed Funds rate over the winter. "Our forecast of a recovery starting in Q3 and with some relatively robust GDP numbers over the winter would, at first sight, seem to support that view. Moreover, we have long argued that the Fed will not want to leave interest rates at ultra-low levels for too long for fear of inflating a new bubble and creating new imbalances," Calverley said.
"However, we believe that the Fed will remain on hold during this period for two reasons. First, we expect core inflation to continue to decline over the next year, with fears shifting again towards deflation. An inflation-targeting central bank – as the Fed is in all but name – should keep rates below 'neutral' as long as inflation is below target.
"Secondly, we expect that the Fed will be focusing closely on private final demand, along with unemployment. We expect private final demand to continue to show clear signs of weakness since the recovery will mostly be due to the inventory bounce and government spending, both of which are strictly temporary," he said.
"Meanwhile, unemployment will peak at more than 10 per cent next year, leaving substantial slack in the economy and making it uncomfortable for the Fed to raise interest rates. Instead they will more likely tighten liquidity by reducing the size of the Fed's balance sheet, selling securities into the market. Our guess is that they will not rush to sell back the Treasuries and mortgage securities being acquired this year but instead will sell short-term securities into the market to mop up the liquidity.
"By the middle of next year the Fed might be ready to think about rate increases but, by then, we expect the bounce in growth to be fading. Only in 2011 do we expect a stronger outlook for growth, allowing the Fed to finally push up rates. Even then we expect the new norm for Federal Funds rate, at least initially to be around 2-2.5 per cent rather than the 4-5 per cent of the last two economic cycles," Calverley said.
Inventories will provide lift
Economic recoveries in the US historically have been driven by a combination of an inventory rebound, a surge in house-building and a jump in car and other big-ticket purchases. The inventory rebound is almost a mechanical process, Calverley said.
"During a recession, business cuts output below sales to pull inventories lower and then, once inventories are on a downward path, production picks up again, generating the economic recovery. After the severe recessions of 1974 and 1982, this bounce gave a lift to GDP of around two to three per cent over the subsequent year.
"We expect a boost in the one to three per cent range this time, because inventories are a smaller share of GDP than in the past. The exact timing of this rebound is hard to predict, though as usual it will have a considerable impact on the quarterly path of GDP.
"It could start as early as Q3 but given the still very high level of inventories in relation to sales currently, inventory liquidation may stay very high during the summer so we forecast it starting Q4," Calverley said.
House-building recovery
The outlook for house-building in the near term is less promising. Recent levels of starts, at around 500,000 annually, are well below the rate of growth of household formation based on demographic and immigration trends. "So, at some point, we can expect house-building to move back up to around 1.5 million annually, an adjustment which will provide a boost to GDP of around two per cent," SCB said.
But any significant upward move is unlikely for some time, it added, given the overhang of unsold homes and continuing high foreclosures. "Housing starts exceeded the 1.5 million level throughout 2002-06 and we estimate that there is a surplus now of perhaps two million homes. Absorbing this surplus will take around two years at the current level of starts.
"House-building likely will creep up gradually, starting later this year but not fast enough to add a whole lot to GDP growth. That will probably have to wait until 2011-12. Still, Q4 this year may be the first quarter since 2005 that residential construction has not subtracted from GDP. "Unfortunately, the better news here will be offset by declining commercial construction as buildings are completed and few new ones are started, unless they are part of the government's fiscal stimulus package," Calverley said.
Car sales and production
There is a good chance that car sales will pick up from their current very depressed levels, the bank said. In 2006-07, sales were running at an annual rate of 16-17 million units, whereas recently the figure has been below 10 million. Sales have been depressed partly by the uncertain economic outlook and rising unemployment and partly by the difficulty of obtaining credit.
"As unemployment starts to top out, (in our view between 10-11 per cent), and auto financing becomes easier with the help of government programmes such as the TALF, sales should pick up. However, we would not expect a quick rebound to 2007 levels. For one thing, Americans probably bought too many cars during the last boom, with the help of surging wealth from real estate and stocks as well as zero-rate credit.
"So, despite recent low sales, it is much too early to talk of pent-up demand, as was often an important factor after past recessions. Still, over time, a recovery in car sales and production, perhaps initially into the 12-13 million range annually, will help boost the economy," Calverley said.
Consumer demand
All this implies that consumer demand is expected to remain sluggish, and that is bad news for an economy in which this accounts for 70 per cent of GDP. "The two key variables are real income growth and the savings rate, but it is hard to be optimistic on either," Calverley said. Income is being squeezed by rising unemployment, slowing wage growth and rising gas prices. There are reports from across the US of pay freezes and even pay cuts. Benefits are being shaved too.
"Of course we expect price inflation to moderate as well so real income growth will not slow as much as nominal income but companies are determined to raise margins so real income will still be squeezed. Consumers will not have much extra money to spend, nor will they be able easily to borrow.
"Banks continue to cut back on credit lines, while the fall in home prices is undermining wealth and collateral. Weak income growth due to rising unemployment is a particular problem right now and will restrain spending in Q2 and Q3," the bank said.
"Payroll losses should come to an end and, depending on oil price trends, real income growth should resume, though slowly. Then much will depend on the savings rate. It has already moved up to 5.7 per cent but we expect consumers to continue to push the savings rate higher," it said.
Can more Debt solve a debt crisis....I doubt it somehow..
The head of the European Union and Czech prime minister Mirek Topolanek has publicly said that the plan to spend nearly $2 trillion to push the U.S. economy out of recession is "road to hell". There is no reason to castigate Mr. Topolanek for his characterization of the Obama plan. True, it would have been more polite and diplomatic if he had couched his comments in words to the effect that "the Obama plan was made in blissful ignorance of the marginal productivity of debt which was now negative and falling further. In consequence more spending on stimulus packages would only stimulate deflation and economic contraction."
President Obama, like president Nixon before him, missed an historic opportunity in not ordering a complete change of guards at the Treasury and at the Fed. Now the same gentlemen who have landed the country and the world in this unprecedented débâcle are in charge of the rescue effort. The QTM, the corner stone of Milton Friedman's monetarism, is the wrong prognosticating tool. The marginal productivity of debt is superior as it focuses on deflation rather than inflation.
The financial and economic collapse of the past two years must be seen as part of the progressive disintegration of Western civilization that started with the sabotaging of the gold standard by governments exactly one hundred years ago when in France and in Germany paper money was made legal tender. The measure was introduced in preparation to the coming war, so that the government could stop paying the military and the civil service in gold coins, starting in 1909.
http://www.safehaven.com/article-13063.htm
Some commentary on this article my supkis..
http://emsnews.wordpress.com/2009/06/20/dr-fekete-talks-about-bond-markets/
President Obama, like president Nixon before him, missed an historic opportunity in not ordering a complete change of guards at the Treasury and at the Fed. Now the same gentlemen who have landed the country and the world in this unprecedented débâcle are in charge of the rescue effort. The QTM, the corner stone of Milton Friedman's monetarism, is the wrong prognosticating tool. The marginal productivity of debt is superior as it focuses on deflation rather than inflation.
The financial and economic collapse of the past two years must be seen as part of the progressive disintegration of Western civilization that started with the sabotaging of the gold standard by governments exactly one hundred years ago when in France and in Germany paper money was made legal tender. The measure was introduced in preparation to the coming war, so that the government could stop paying the military and the civil service in gold coins, starting in 1909.
http://www.safehaven.com/article-13063.htm
Some commentary on this article my supkis..
http://emsnews.wordpress.com/2009/06/20/dr-fekete-talks-about-bond-markets/
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