31 October 2009

An Object Lesson in Governmental Failure: Derivatives reform

If you want to understand why Congress seems completely incapable of checking the power of Wall Street, look back to a hearing on the Hill last October 7, and the subsequent events surrounding it. On that day, the House Financial Services Committee hosted a panel on reform of the market for derivatives, the financial instrument which played such a notable role in the country’s economic meltdown.

Everyone rational knows that there is an enormous need to seriously reform the derivatives market, but the committee, headed by Congressman Barney Frank (D-Wall Street), invited a panel of eight guests who were distinguished by their uniformly pro-industry positions. They included Jon Hixson of Cargill, James Hill of Morgan Stanley (on behalf of the Securities Industry and Financial Markets Association), Stuart Kaswell of the Managed Funds Association (which, through one of its lobbyists, has delivered significant “bundled” donations to Frank) and Christopher Ferreri of the Wholesale Markets Brokers Association.

In response to complaints from Americans for Financial Reform, which represents hundreds of consumer groups and labor unions, the committee issued an invitation—the night before the hearing was held — to Rob Johnson of the Roosevelt Institute. For the committee, the last minute inclusion of Johnson — a former managing director at Bankers Trust Company and former economist at the Senate Banking Committee and Senate Budget Committee — apparently constituted sufficient balance.

Predictably, witnesses at the hearing trotted out positions urging caution in regard to the matter of reform. Derivatives and other exotic financial devices have reaped the finance industry vast profits, but for Hixson of Cargill the common man and woman would be the real losers if Congress were to act too severely. “We offer customized hedges to help bakeries manage price volatility of their flour so that their retail prices for baked goods can be as stable as possible for consumers and grocery stores,” he told the committee’s wagging heads. “We offer customized hedges to help a restaurant chain maintain stable prices on their chicken so that the company can offer consistent prices and value for their retail customers when selling chicken sandwiches.”

Johnson, who came last, offered the only serious critical viewpoint, saying that the American public had been “quite demoralized by…the bailouts that we experienced last fall.” After about five minutes of his testimony, Congresswoman Melissa Bean—another industry-funded committee member who chaired the hearing because Frank was absent—had heard enough. “I’m just going to ask you to wrap up because we’re running out of time,” she told Johnson.

Johnson gamely continued. “When I hear the testimony today that are largely financial institutions and end users, I believe that I represent a third group that comes to the table, which is the taxpayers, the working people of the United States,” he said.

“I do need a final comment,” Bean interjected seconds later.

That put an end to Johnson’s testimony. “I was just called to this hearing last night, so I will provide detailed comments on your bill and a statement for the record that will finish my comments,” he concluded.

About five days later Johnson submitted his full testimony to the committee, to be included on its website along with the statements of the other eight panelists. When it wasn’t posted, Johnson asked Lynn Parramore, editor of the Roosevelt Institute’s blog, to see what was up. Parramore emailed and spoke to staffers at the Financial Services Committee, and received a number of explanations for why Johnson’s testimony had not been posted: first she was told it hadn’t been received, then that it had to be submitted as a PDF, then that the committee was having IT problems. “I couldn’t decide whether it was incompetence or mischief, but I began to suspect the latter,” Parramore told me.

Finally, she was informed that the committee’s general counsel would not allow posting of the testimony because Johnson had not submitted it during the hearing. (Of course, since Johnson had been invited at the last minute it was impossible for him to fulfill this pointless requirement.) So you still can’t read Johnson’s prepared testimony at the committee website, but you can check it out on the Roosevelt Institute’s blog.

Meanwhile, Frank’s committee has put forth its “reform” bill. “Too tepid, too weak, too late,” Johnson says of the legislation. “Very industry influenced. We had a crisis and they are pandering to the perpetrators.”


Excellent post on $A Carry Trade in SMH, Age

Kenneth Davidson has been one of the most consistent voices for sensible economic analysis in the Australian media for decades now (another I’d give a similar accolade to is Brian Toohey), and he’s written a brilliant piece in The Age and The Sydney Morning Herald on the specualtive bubble that is the Australian dollar.

Davidson lays out the causes and probable effects superbly in the length of a newspaper feature. The causes are that:
The bailout funds in the USA and UK in particular have cashed up financial institutions that don’t want to lend any more to mortgages (and have long ago forgotten how to lend to fund productive enterprises), so they’re looking for short term hot money gains;
The RBA’s flagging that it intends raising rates from 2-3% above rates in the USA and UK to possibly 4-5% above is a “sure thing” return on a currency that was already appreciating because of commodity sales to China;
This gives the hedge funds a sure fire double whammy gain:
borrow in the US or UK at 1% to buy $A and “invest” in floating rate bonds or shares (particularly in banks) and get a higher return (at least 2% better than the borrowing costs, and assured to rise); and
drive up the $A in the process, so that when you sell out, you get both a higher return and an appreciated currency in which it is denominated.

The most remarkable thing about this bubble is that the RBA’s “we’re raising rates now and we’re going to keep on doing it for a few months” messages are part of the cause, and yet they seem unaware of both the phenomenon and the dangers it poses. Davidson points out that Brazil, which is experiencing a similar commodity-driven currency appreciation bubble, is aware of the dangers and is doing something about it:

“The rising value of the Brazilian real and the Australian dollar against the US dollar has had a disastrous impact on both countries’ non-commodity export and import competing industries. Brazil’s popular and largely economically successful left-wing Government led by President Lula da Silva is meeting the problem head on. It has decided to impose a 2 per cent tax on all capital inflows to stop the real appreciating further.”

In the meantime, our RBA seems possibly even pleased that this short-term phenomenon is afflicting our manufacturing sector adversely.

Of course, like any speculative bubble, this has an end-game–and that’s when you think the rate rises have come to an end, sell out and watch the $A crash for those who are still holding it. Then the dollar (and Australian bank shares) will crash, and our economy will have acted as a dollar pump for the hedge funds.

Davidson also accurately notes that the RBA’s obsession with driving rates higher now is driven by the classic “fighting the last war” syndrome of believing that an outbreak of wage-driven commodity-price inflation is the main danger facing the Australian economy–just as it was in, oh, about 1973 (if you ignore private debt levels of course…).

He concludes that:

The world has moved on but the obsessive debate about wage inflation and union powers hasn’t. Since the beginning of the ’80s, the problem has been periodic bouts of asset price inflation. It is the biggest danger now.

Instead of controlling the unions, there should be control of financial institutions. The Australian dollar bubble and the incipient housing bubble should be micro-managed. Capital inflow could be dampened by a compulsory deposit of 1 to 2 per cent to be redeemed after a year to stop speculative inflow. Home ownership has become a tax shelter. The steam could be taken out of the rise in house prices if negative gearing was limited to new housing. This would obviate the need for higher interest rates that affect everyone.

It’s an excellent article–read it and pass it on. The more people who do read it, the higher it will rise in the newspapers’ online-indicators of reader interest, which will push it towards the top of the online page. And I’m heading out now to buy a paper copy of the SMH as well. Bravo, Kenneth Davidson.

The pooh-bahs running US and British hedge funds and the banks supporting them are more than capable of reading the minutes of the Reserve Bank of Australia board meetings and coming to the conclusion that RBA Governor Glenn Stevens is committed to pushing up the cash rate from the present 3.25 per cent to 4 to 5 per cent if necessary.

And they are already betting tens of billions of dollars on what has so far been a sure bet. These foreign financial institutions are up to their old tricks. After getting trillions of dollars out of their respective governments to avoid GFC-induced bankruptcy - which was largely engineered by their criminal greed - because they are ''too big to fail'', they are already using their influence to maintain ''business as usual''.

Why funnel the money gouged out of American and British taxpayers into lending to their national economies to maintain employment when there are richer pickings elsewhere? Two of those destinations are Brazil and Australia. Their resource-rich economies are still doing well compared with most other countries because they are riding in the slipstream of the strong demand for commodities from China and India.

Cash is pouring into these economies, not for development, but to speculate on the local currency and the sharemarket. The rising value of the Brazilian real and the Australian dollar against the US dollar has had a disastrous impact on both countries' non-commodity export and import competing industries. Brazil's popular and largely economically successful left-wing Government led by President Lula da Silva is meeting the problem head on. It has decided to impose a 2 per cent tax on all capital inflows to stop the real appreciating further.

Arguably, the monetary strategy adopted by Stevens has compounded Australia's lack of international competitiveness for our manufacturing and service industries, especially tourism. Since the end of 2008 our dollar has appreciated 27 per cent (as of last week). This means that financial institutions that invested money at the beginning of January are enjoying an annual rate of return on their investments of 35 per cent.

US and British commercial banks can borrow from their central banks at a rate less than 1 per cent. The equivalent RBA rate is 3.25 per cent and many pundits are forecasting the rate could go to 3.75 per cent before the end of 2009. This will increase the differential between Australian and British and US interest rates and make the scope for speculative profits even higher.

Since the beginning of the year, $64 billion has poured into Australia in the form of direct and portfolio (share) investment and foreign lenders have switched $80 billion of foreign debt payable in foreign currencies to Australian currency. Most of the portfolio investment ($41 billion) has gone into bank shares. Banks now represent 40 per cent of the value of shares traded on the stock exchange, and while shares in the big four bank shares have increased by about 80 per cent (as measured by CBA shares), the Australian Stock Exchange Index has risen by only 30 per cent.

Foreigners have shifted out of Australian fixed interest debt and into equities because as interest rates go up, the capital value of fixed debt declines. By driving up interest rates to curb inflationary expectations and the prospect of a housing price bubble the RBA is in far greater danger of creating a stock exchange asset price bubble as well as an Australian dollar bubble. Once foreigners believe interest rates have peaked, the bubbles are likely to be pricked as financial speculators attempt to realise their gains. This could lead to a stampede out of Australian denominated securities.

With unemployment expected to continue to rise, and the level of unemployment disguised by growing numbers of workers being forced to work part-time, there is little chance of the underlying inflation rate, already below 2 per cent, increasing as a result of a wages break-out. The last wages breakout (leaving aside the explosive growth in executive salaries in the past three decades) occurred in 1979.

The world has moved on but the obsessive debate about wage inflation and union powers hasn't. Since the beginning of the '80s, the problem has been periodic bouts of asset price inflation. It is the biggest danger now.

Instead of controlling the unions, there should be control of financial institutions. The Australian dollar bubble and the incipient housing bubble should be micro-managed. Capital inflow could be dampened by a compulsory deposit of 1 to 2 per cent to be redeemed after a year to stop speculative inflow. Home ownership has become a tax shelter. The steam could be taken out of the rise in house prices if negative gearing was limited to new housing. This would obviate the need for higher interest rates that affect everyone.

Kenneth Davidson is an Age senior columnist.

Golden Accumulation Opportunity in Silver ~ Willie

Actually, the golden opportunity is for buying silver at current prices. The motive for lifting the USDollar was the gargantuan $115 billion in USTreasurys offered this week. With bond yields rising from gargantuan supply, the USGovt and USDept Treasury and USFed did not wish to have both bond principal values fall and the USDollar fall. So the witch doctors engineered a meager semi-lifeless US$ rally, and a full 100-cent silver price discount. The claim again came that the bond auction bid/cover was strong at over 3:1 ratio. But 1.0 of that comes from the primary dealers who are bound to bid. The rest came in majority from foreign central banks. Same Modus Operandi by the Big Boyz. The difference is that precious metals were taken down in price, using the typical naked shorting of futures contracts sponsored and endorsed by the USGovt, which refuses to enforce the regulatory requirement to maintain 80% metal in inventory. Heck, we could all bring down the price of cotton, and make boxer shorts (jockeys too) cheap, if we all were permitted to sell in gargantuan quantities without benefit of cotton in possession. The Little Boyz are happy either way, since the cotton has the right feel. Now is yet another opportunity to gather in gold, and especially silver, at a hefty price discount. The silver price after some stabilizing days will be ready for a serious assault on the $20 price level. See the brief technical review later in this article.


The stories pushed out by the increasingly lost USGovt officials, supported by the armada of Wall Street henchmen to carry out marching orders, and issued by the wholly subservient US financial press, have become downright laughable. In the last several days, on numerous occasions on the tube and on numerous occasions in published articles, the phrases ‘flight to safety’ or ‘seeking safe haven’ or ‘safety & security’ were heard and read. On its face, each description is an affront to any thinking man or woman, entirely in conflict with the Global Paradigm Shift movement away from the USDollar, and in sharp contrast with most deep seated monetary practices in full speed on American shores. The United States financial arena is the home of the most gargantuan monetary inflation in the history of mankind (as in scores of centuries), as central bank balance sheets hit $3000 billion. The United States financial arena is the home of the most gargantuan federal deficit, with almost no visible end. The United States financial arena is the home of the most gargantuan illicit (not well hidden) debt monetization, as each and every mammoth auction would fail without the purchase from the Printing Pre$$. The United States financial arena is the home of the most gargantuan secretive payment for ruinous credit derivative losses under its offered shelter for Fannie Mae mortgage toxic bond manager and the American Intl Group credit default swap insurer. The United States financial arena is the home of the most gargantuan carte blanche sacred budgets for aggressive war, widely debated as primarily for private firm gains. The point is that the fundamentals and financials of the United States contradict any hint of a global movement drawn to safety, security, stability, wisdom, or leadership. This is pure Orwellian rubbish!

The United States financial arena is the home of the most gargantuan array of liquidity facilities which are designed to enable the US Federal Reserve to function as a quasi-banking system, argued as requiring a program to keep up with the many types and functions. The United States financial arena is the home of the most gargantuan Medicare expense coverage for an aging population best described as the sickest in the entire industrial world, and the most medicated, along with the most bombarded by television commercials for even more drug usage. The United States financial arena is the home of the most gargantuan prop initiatives for the stock market, which boasts over 70% of its volume from Wall Street program trades, and without the role of the Plunge Protection Team and the corrupted cover offered by relaxed accounting rules, would have plumbed the depths long ago. The United States financial arena is the home of the most gargantuan banker welfare programs disguised as systemic rescues, like the TARP fund. The United States financial arena is the home of the most gargantuan list of insolvent big banks acting like huge zombies. The United States financial arena is the home of the most gargantuan, and still growing, list of banks declared dead in official FDIC funeral services. The point is that the fundamentals and financials of the United States contradict any hint of a global movement drawn to safety, security, stability, wisdom, or leadership. This is pure Orwellian rubbish!

The United States financial arena is the home of the most gargantuan nationalization initiatives, none of which has any merit or longstanding stability to offer. The United States financial arena is the home of the most gargantuan consumption binge in the history of mankind, where wealth is often measured in a credit line rather than work or industrial capacity. The United States financial arena is the home of the most gargantuan flight of working capital ever witnessed by mankind, whose land is left with queer homes that once acted like engines of spending after conversion to automatic teller machines. The United States financial arena is the home of the most gargantuan destruction of home equity and home ownership loss via foreclosure. The United States financial arena is the home of the most gargantuan hidden inventory of bank owned property. Enough, stop there! Monotony does set in! The point is that the fundamentals and financials of the United States contradict any hint of a global movement drawn to safety, security, stability, wisdom, or leadership. This is pure Orwellian rubbish!

Tragically, the US financial arena has become a dangerous land of acidic minted paper posing as money, whose volumes are so gargantuan, that the corrosive effect on capital borders on total. The United States is the home of the worst economists ever to walk on the earth, who command iconic respect, yet who never properly justify their past string of failures, and past numerous chapters of baseless mythology upon which the USEconomy has been built and continues to rest. The US has adopted the Weimar financial plan, complete with high risks. The cast of foreign creditors and major trade partners have almost all begun deep commitments for a new IMF global reserve basket of currencies to temporary displace the USDollar. They have almost all begun deep commitments for international trade settlements outside the USDollar, like for crude oil. The primary adversary is clearly the Chinese, who have among other steps installed Yuan currency swap facilities worldwide. The combined effect is to knock the USDollar off its perch in global reserve currency status. The Chinese hold the spearhead to de-throne the USDollar. Behind the scenes, the Germans work steadily to remove the US and UK from their perch, clearly held by strong-arm means like with interventions in markets too numerous to name. The easier question is which market the US & UK tagteam do NOT intervene to render out of equilibrium. The point is that the entire world has shown early and urgent commitment to move AWAY from the USDollar, not toward it. They do not seek safety and security in the USDollar arenas any longer. They drive the new Paradigm Shift.


A great paradox has come home to roost and be felt. Harken back to 1971 when the US under the errant leadership of Richard Nixon. The US broke the Bretton Woods Accord that dictated gold to anchor the USDollar in the global financial system. The Vietnam War and the Great Society programs at the time resulted in a quick run on US gold held in Fort Knox. That supply is 99% gone now, after the Clinton-Rubin Admin engineered their own Decade of Stolen Prosperity. They brought the gold lease rate to nearly zero, spawned a Gold Carry Trade, gutted the USTreasury of its gold, financed private gains for Wall Street in the hundreds of billion$, and rendered the US financial system vulnerable to collapse.

The paradox has come full circle. When a nation steps forward to declare itself the lead engine in the global economy, the lead police cop with global military reach, and the lead capital market in Wall Street, it does so at a great risk when it serves as custodian to the global reserve currency. In the initial decades, the risk is minimized. The risk is that the nation holding control of the global reserve currency, the USDollar, must supply new funds for capital formation, for credit extension, for government finance, for continued functions of myriad types. The grand wellspring has a US$ brand on its liquid product that is essentially inflated unendingly. In the initial decades, the monetary base was inflated for productive purposes. Some would argue fervently that the entire USMilitary buildup with so-called Star Wars was the basis of exiting the strong 1980 recession. The initiative earned the US a Pyrrhic Victory, leaving it wounded in victory. At least a significant swath of new money and new credit was devoted to capital formation in the next decade or two, in forming businesses, and development of the USEconomy. Not until after 2000, did the United States embark on highly destructive economic policies that would quickly fail. Refer to the dispatch of much US industrial base to China from 2000 to 2005. Refer to the rekindle of the housing bubble, the establishment of home equity ATM machines, the raid of home equity for consumption purposes. Refer to the wars in Iraq and Afghanistan, regardless of their purposes, but with heavy crippling ongoing costs. In the last year or more, the sanctioned purpose of new money and new credit, again without basis or tangible backstop, has been the flood of rescue funds to the banking sector. This is the same banking sector that spread fraudulent and toxic bonds around the globe during the same housing bubble, which has a matching mortgage finance bubble.

The destinations of the new money and new credit in the last year or more have been destructive, non-productive, and probably loaded with yet more fraud. An economy that must function without a sizeable portion of its industrial base cannot remain stable, yet alone thrive. An economy that has been led to dependence upon housing bubble equity, otherwise known as inflated asset as collateral, cannot remain stable, yet alone thrive. Refer to the challenge against the USFed itself to reveal first the usage of the TARP funds, and second their entire balance sheet. My view is straightforward. The destination of the majority of funds in the last few years has been for syndicate purposes, for private gain, with the defense establishment and the banking sector. My view is that high crimes are involved, and that USGovt agency protection is offered routinely. Refer to the Goldman Sachs insider trading unix box that monitored and exploited order flow information, complete with front running, all tidily covered up.

Here we are at the end of an era, where the USDollar sacrificed itself for the system. The high risk of the paradox is that late in the pathogenesis, the nation that benefited early in the cycle must endure powerful forces that bring a collapse of the currency that provided the wellspring of false capital. THE RISK IS OF A USDOLLAR IMPLOSION, AND WRECKAGE OF THE US BANKING SYSTEM. The currency served its purpose, and the cycle comes to an end. Originally, the benefits were global toward the flourish of capitalism. Lately, the benefits have been for the syndicate in its war machinery and the banking sector responsible for bond fraud. The gradual and inexorable decline of the US banking system will continue without interruption, only pauses to fool the gullible, the ignorant, and the unwashed masses of vassals. The global revolt against the USDollar is surely a loud signal, enough to herald a new foundation in the making with key alternative structures. The US$ cannot co-exist with a new system underpinned by a different vehicle as foundation. The IMF basket of currencies is but a temporary device, as the new currencies backed by hard assets are to be delivered by the Monetary Stork. Their hatch will be difficult, require much careful planning, and must endure military threat. The end stage, part and parcel to the paradox stated, is that the USDollar must die its death, assured when departure from the gold backing was permitted and agreed upon. The more capably the economy and financial sector is managed, the longer the process before the forced death of the system itself. In this decade, the Mussolini Fascist Business Model has embraced and promoted syndicate activity, with merger of big business with the state, to such an extent that the system is ripe for failure. A failed state comes.

This process has a parallel, the human birth ensures an eventual death. The US$ without the gold tether guaranteed its death, all in time. The time is upon us, as the US$ is going through its stages of death. First is denial. Second is alternatives in construction. Third is anger with vengeance. Also, the US banking system is going through its stages of death. Their ongoing fresh asset losses continue to outpace their new infusion of capital or funny money funds granted by the USGovt, delivered from the Printing Pre$$. Refer to their hidden housing inventory from foreclosure, along with the Prime Option ARMortgage losses, in addition to the commercial loan losses. The US banks cannot be revived any more than Humpty Dumpty can have his shell glued back together after a fall in disgrace. The banks maintain a charade in order to continue to channel funds into their balance sheets, to enable stock sales to the public while executives sell out, and to permit elite overseas bank accounts to be filled. They are buying time hoping that borrowing at 0% and investing in long-term USTreasurys will replenish their balance sheets, mostly in safe keeping at the USFed itself, and NOT LENT. They race against the Grim Reaper seeking out toxic assets.


Few opportunities are so striking and promising. One can purchase silver under $17 per ounce. One very well connected colleague said recently “Silver is an absolute steal at any price under $20, but the coming breakdown in the Western banks and monetary system will be centered on their gold mismanagement.” The silver price filled an early October gap evident in the faster charts. In the view shown below, the old resistance, now new support at 16.1 held firm. The price revisited the 50-day moving average. The moving averages are all on the rise. Who knows? The price must have felt the urgent need to touch the 50dMA after having spent all this time since mid-August above it. Nah! The Powerz are scared white, are soiling their stolen underwear, and are increasingly desperate. They get away with their corrupt games, using paper still to push down metal prices, as they anger the world further. They motivate the search and establishment of alternatives to the USDollar in its key role. The real motive was the huge $115 billion in USTreasury for sale at auction this week. They needed some cloud cover, and a listless US$ rally would serve the purpose. The ultimate problem they have is the grossly inadequate silver supply in physical form. They more they offer silver at a deep discount, the more they drain their physical supply for delivery, and the more they tighten the noose around their own necks.

The USDollar is the object of international scorn. No credible evidence whatsoever indicates a global flight to the USDollar. In fact, a deeply oversold condition has persisted for several months. The Buck cannot find its true value well below the 70 level unless it relieves the oversold condition, finds some semblance of contract balance, enables fresh new shorts to be put into place, and allows time to pass as the world continues its abandonment. The Paradigm Shift away from the beleaguered discredited USDollar continues on a path that cannot be reversed. The nations that depart from it will be the leaders of the next era, plainly spoken. The US$ DX index seems to search for technical validation, like a touch of the 50-day moving average just below the 77 level. Either passage of time or a slight increase will manifest a touch. By the way, now that the week is almost over, and most of the USTreasury auctions have been completed, the USDollar has executed an ‘Outside Day’ with a higher intraday high hit, but a strong selloff in reversal, to log a close at the daily low. It seeks its true wrecked value.


The latest Gross Domestic Product data for 3Q2009 is illustrative, out today. The USEconomy supposedly grew by 3.5%, if you believe their methods. Not here! Fully half of that growth was attributed to the Clunker Car Program, which cost $9 to the USGovt for every $1 in saved fuel. Government at its best, trading amplified debt for ineffective so-called growth. Also, 0.9% of the growth announced was attributed to inventory drawdown. Lastly, imports grew at 16.4%, against 14.6% for exports in the quarter. So the USEconomy is attempting slowly to revert to its broken model of importing what it needs, often for consumption purposes. The buzz among financial commentators and anchors is that the USGovt cannot possibly withdraw its stimulus, because they would send the economy back to where it was before it required the stimulus. They are essentially admitting the USGovt financial leaders are stuck with constant state of stimulus. The Uncle Sam patient is stuck in the Intensive Care Ward. He cannot walk alone or even with a crutch, as he has too many intravenous lines and monitors plugged to his decrepit body, that even a medical school would reject for a free cadaver under study.

True reform is noticeably absent in the last year. Liquidity facilities led by the USFed do not qualify for reform. USGovt purchase of the Treasury Inflation Protection Security (TIPS) that ruin the measure itself do not qualify for reform. Nationalization of the General Motors and Chrysler do not qualify for reform. Installation of numerous czars without Constitutional powers that form an American Politburo do not qualify for reform. Stop-gap ass-backward programs like Clunker Cars certainly do not qualify for reform. Prosecution of a non-New Yorker hedge fund manager of Indian origin for insider trading does not qualify for reform.

Watch the battle to pass an expansion of the federal debt limit. That should be interesting, even explosive. Watch the battle for bank regulatory reform, which is nothing but a power grab by the same guilty parties who perpetrated the bond fraud and urged the lax bank system oversight. Watch the vapid baseless inept running commentary from the USFed on solutions and the current national condition, along with the plans for an Exit Strategy. This same august clown crew offered continuous blessing of the housing & mortgage bubbles as legitimate, misjudged the bank loss magnitude, and did not even anticipate a recession. The battle is on against a permanent stranglehold of the US financial ministries and function, for syndicate control versus some semblance of populist control. Watch the battle for disclosure of the TARP funds and the USFed balance sheet. This is actually a legal crowbar to reveal syndicate activity, which in all likelihood includes money laundering of narcotic funds. Word came a year ago to my desk that disbursal of TARP funds involved significant foreign extortion to avoid legal prosecution of bond fraud, replete with murder threats of Wall Street executives.


Copyright © 2009 Jim Willie, CB

26 October 2009

Those once called bonkers now point to where the madness lies

You talking to me, Liam? Its the coming QE driven hyperstagflation, isn't it.

As a result, the argument goes, we have "no choice" but to keep the Bank of England's printing presses in overdrive, pressing on with so-called "quantitative easing". And, clearly, any action to get the UK's disgraceful public finances under control would, given this deflationary threat, be "woefully premature".

The above paragraph, in essence, captures the consensus view now driving macroeconomic policy in both Britain and America – the "QE two". Yet it's completely and utterly wrong – not least as it's been formulated entirely to serve the financial vested interests that have so thoroughly captured these countries' political and policy-making elites.

I accept that UK inflation in September was low. But 1.1pc is nowhere near "deflation", which means that the CPI would remain negative for many months. The credit crunch has been in full swing for more than two years and it is only recently that the CPI has gone below the Bank's 2pc target, let alone breached zero.

Last month's CPI fall is entirely explained by the one-off impact of lower energy bills (tariffs were hiked last September) and last December's VAT reduction from 17.5pc to 15pc. Once these energy base effects wear off and the VAT cut is reversed, inflation will rise sharply. Core CPI inflation – excluding energy costs – rose to 1.7pc last month and would be 2.5pc had VAT stayed the same.

For all the talk that Britain is "slipping towards deflation", inflation averaged 1.5pc during the third quarter – above the 1.3pc forecast the Bank made just two months ago. The reality is that UK inflation has remained far higher during the credit crunch than the vast majority of economists expected.

At this point, I could rant on about how a few of us did warn that the threat of deflation was a self-serving myth, an intellectual deceit designed to justify the monetary incontinence we've seen since. Some of us were even called "bonkers" for our trouble and subjected to ad hominem attacks by government place-men within the Bank of England.

But we've been proven right. September was the low-point for the UK's CPI – and it's still a long way from zero. Given the impact of the recently falling pound on import prices, the Bank will be forced to increase its CPI projections in next month's quarterly Inflation Report.

With oil prices now rising steadily, having plunged during the fourth quarter of last year, the energy base effects will soon work in reverse, pushing the CPI up as fuel bills start to head skyward.

Even now, the Bank is forecasting 2.1pc inflation in the first three months of 2010 – further away from deflation. I'd say that's still too low. There are serious price pressures in the pipeline – over and above the "inconvenient truth" that QE means the UK will soon have tripled the size of its monetary base. When banks stop hoarding that cash, inflation will let rip.

Even before that happens, there are undeniable signs that supply-chain realities are now pushing prices up. In September, the producer price index rose for the first time in four months.

Which brings me, once again, to the "output gap" – yet another intellectual device that the City's pet economists have been using to justify our recent wildly expansionary policies (which, by coincidence have bailed out the banks that employ them, pumped up the stock market and ensured big bonuses are back in vogue).

For months, we've been told the credit crunch has created a "huge reservoir" of excess capacity and the economy's ability to supply dwarfs demand. So the government can print money and borrow like crazy without fear of stoking inflation.

This is total tosh. By starving firms of credit, this financial crisis has destroyed vast swathes of supply. I've said it many times before and now some serious people are starting to agree.

Last week James Bullard, the respected president of the St. Louis Federal Reserve, argued that America's output gap is "much smaller than is commonly believed" – not least because the credit crunch has caused firms to shut and workforces to disperse, so eradicating productive capacity. Bullard dismisses as "overplayed" the notion that output gaps will keep inflation low.

Unlike his Fed colleagues in Washington, Bullard is no White House lickspittle. He is a serious economist, well capable of independent thought. We need more policymakers like him – who cannot be dismissed as "bonkers", but who dare to highlight the madness of the current policy consensus.


Indicator of the Week: Monthly MACD By Rocky White, Senior Quantitative Analyst

Hat Tip qqq.

Foreword: The market has rallied quite strongly during the past several months. A couple of popular long-term technical indicators, the Stochastics and the RSI, signaled a buy at the end of April. We just had another major technical indicator give a buy signal. I'm talking about the Moving Average Convergence Divergence, better known as the MACD.

The MACD can be looked at over different time frames (for example, hourly, daily, weekly or monthly). I'm taking a long-term perspective here and looking at it monthly. In the chart below, the MACD is calculated by subtracting a 26-month moving average from a 12-month moving average of the Dow Jones Industrial Average (DJIA). I plot the difference of those moving averages (red line below), and then calculate the nine-month moving average of that line (dotted line). This dotted line is the signal line. When the signal line crosses above the MACD, it's a buy signal. The most recent buy signals are marked by the red dots (I only consider one signal every 12 months).

Historical Analysis: Going all the way back to 1900 on the Dow, this is just the 25th MACD buy signal. Below is a table showing annualized returns for the Dow following these buy signals. The second table below is for comparison, and shows typical Dow returns since 1900. In the short term, you will see the signal shows no outperformance to the market. In fact, the three-month returns following a signal have tended to underperform the market at other times. But once you get out to six months, especially at the one year mark, you see quite a bit of outperformance. The market has averaged a gain of about 14.5% in the year after a MACD buy signal. This is way better than the typical market return of less than 7%. Furthermore, the market was positive one year later 83% of the time after a signal. Compare this to 64%, which is the percentage of time the market has usually been positive a year later.


25 October 2009

"they have failed to address the financial sector’s overall size"

Hat tip to Duncan

Gillian Tett: “Was October 2008 just a dress rehearsal?”

A lot of investors I know lamented the loss of Gillian Tett. As the Financial Times’ capital markets editor in the runup to the crisis, she had provided very insightful into some of the more arcane goings-on in the financial markets. I’ve had reason to look at her older commentary (circa 2004-2005) and some of it is freakishily prescient. But then she got promoted, she went to work on her book, and her writings were less frequent and just not as crisp.

Well, we may be getting the old Miss Tett back, and we all should be careful what we wished for. This article is very much like some pieces she wrote in January 2007…..and she says we’ll know better if the “reflate the economy by creating an asset bubble” strategy will work in 6 months.

Um, first we have the ugly 6 month parallel. The real break in the credit markets started in July 2007….6 months out from her January 2007 pieces.

Second, she indicates that most observers recognize the rally is not the result of fundamentals (duh!) but the result of excessive liquidity chasing assets. She adds this:

Now, some western policymakers like to argue – or hope – that this striking rally could be beneficial, in a way, even if it is not initially based on fundamentals. After all, the argument goes, if markets rebound sharply, that should boost animal spirits in a way that could eventually seep through to the “real” economy….

Yet, what worries me is that it is still very unclear that that pile of damp wood – aka the real economy – truly will catch fire, in a sustainable way.

Tett is being way too cautious. Someone tried this very experiment once and it was a complete disaster.

In 1985, the US bilateral trade deficit with Japan had gotten so bad that even the “free markets” oriented Reagan administration felt it had to do something about it. The result was the Plaza accord, a coordinated currency intervention to push down the greenback.

It was narrowly too successful and broadly a failure. The dollar fell further than anyone wanted it to, over 50% versus the yen. In fact, two years later, another coordinated intervention, the Louvre accord, was implemented to drive the dollar back up.

Even though US imports from Japan fell, US exports to Japan barely budged. The trade barriers were structural. But the Japanese now had a very pricey currency, and their exports to other countries fell also.

So the authorities figured they’d try to stimulate consumer spending via asset appreciation. Notice how Japan’s problem then is analogous to China’s now: an economy that depends on exports with insufficient consumer spending (of course, one problem in Japan that everyone seems to forget is the small size of their homes. How can you consume a lot if you have restricted living and storage space?). The idea was that the wealth effect would lead people to spend more and raise the level of domestic growth, offsetting the fall in exports.

We know how that movie ended.

Asset bubbles beget more bubbles unless the authorities shrink the financial sector. Tett’s colleague Wolfgang Munchau wrote earlier in the week:

This is exactly what the economist Hyman Minsky predicted in his financial instability hypothesis.** He postulated that a world with a large financial sector and an excessive emphasis on the production of investment goods creates instability both in terms of output and prices.

While, according to Minsky, these are the deep causes of instability, the mechanism through which instability comes about is the way governments and central banks respond to crises. The state has potent means to end a recession, but the policies it uses give rise to the next phase of instability….The world has witnessed a proliferation of financial bubbles and extreme economic instability that cannot be explained by any of the established macroeconomic models. Minsky is about all we have.

His policy conclusions are disturbing, especially if contrasted with what is actually happening. In their crisis response, world leaders have focused on bonuses and other irrelevant side-issues. But they have failed to address the financial sector’s overall size. So if Minsky is right, instability should continue and get worse.

From Tett:

Earlier this month, I received a sobering e-mail from a senior, recently-retired banker. This particular man, a veteran of the credit world, had just chatted with ex-colleagues who are still in the markets – and was feeling deeply shocked.

“Forget about the events of the past 12 months … the punters are back punting as aggressively as ever,” he wrote. “Highly leveraged short-term trades are back in vogue as players … jostle to load up on everything from Reits real estate investment trusts and commercial property, commodities, emerging markets and regular stocks and bonds.

“Oh, I am sure the banks’ public relations people will talk about the subdued atmosphere in banking, but don’t you believe it,” he continued bitterly, noting that when money is virtually free – or, at least, at 0.5 per cent – traders feel stupid if they don’t leverage up.

“Any sense of control is being chucked out of the window. After the dotcom boom and bust it took a good few years for the market to get its collective mojo back this time it has taken just a few months,” he added. He finished with a despairing question: “Was October 2008 just a dress rehearsal for the crash when this latest bubble bursts?”

I daresay this missive reflects some element of hyperbole. But I have quoted it at length because the question is becoming more critical. Six months ago, the financial system was in deep distress, reeling from a meltdown. Now despair and panic have been replaced not simply by relief – but, in some quarters, euphoria. Never mind the high-profile rally that has occurred in the equity markets; what is perhaps most stunning is the less visible rebound in debt and derivatives markets, as risk assets have displayed what Barclays describes as a “stellar performance”

23 October 2009


China has begun to show its patterned behavior. They buy gold precisely at weak technical points, thus maximizing accumulation at optimal price. They buy gradually, thus permitting the market to bring more supply at prices as they ratchet higher. The Chinese Govt has become entrenched in an accumulation program of gold, expected to become a part of whatever new global reserve currency evolves. But as they buy in quantity, the price goes up in direct response, frustrating their intention to collect as much as possible, before any collapse of the USDollar. The Chinese are reportedly amplifying their purchases at points of weakness, dictated by technical analysis. In effect, the Chinese could be using a reverse strategy from technical analysis methods, dictated by chart patterns, by pressuring the bid harder with more purchases when the technical indicators say they should be selling. They would thus position themselves opposite to the USGovt, which routinely smacks gold down prior to USTreasury auctions, or when the USDollar threatens to break below support. They would also position themselves opposite to professional traders, who tend to follow the technicals and USGovt official control banter. The Chinese will continue to obstruct the gold interventions, as the US-UK fascist tagteam loses control.

Another Chinese market factor will work to put more money in gold investors hands. Their A-shares for mining firms have jumped 150% to 200% in recent months. So investors in certain stocks can redeem some profits to accumulate the real thing, gold bars. Qin Weihuan is a researcher at China Gold Assn. He told China Daily, “In the past, gold prices dropped back after it hit over $1000 per ounce. But I believe this time the price has really breached the $1000 ceiling and will stay at these levels for some time.” Qin believe gold has entered a new ‘Era’ as inflation fears and uncertainly over the world financial system will prompt investors to look for safe havens in bullion. China will soon take full control of the gold market, and render the global monetary crisis centered upon the USDollar ballistic.


Fraudulent games have expanded in the gold market. In the last few months, much publicity has come (except to mainstream media) of how the COMEX can legally use Street Tracks GLD shares from their Exchange Traded Fund to satisfy short futures contracts in need of a buyer. Instead of rolling over the short contract, they ‘close it out’ by placing a GLD share in offset. So the corrupt pyramid of short gold futures contracts has been co-mingled with GLD shares from the ETFund. Challenges will soon come. The COMEX players and controllers do not locate and purchase gold bullion in order to satisfy the short contracts. They essentially infect the GLD shares instead. So would the real gold depository of the Street Tracks GLD fund please stand up???

In the last couple weeks, the London CME officials have had a terrible time avoiding a default. Some large players want the gold from their long futures contracts, in gold bullion from physical delivery. The Bank of England and one other unidentified central bank from the European Union have tried desperately to supply the delivery demand. In the process, they have provided and handed over more than a little ancient substandard gold bars. The London CME officials even offered a 25% dividend bonus if the gold contracts were satisfied in cash, rather than gold delivery in physical form. This entire incident centered on very high volume for gold also, not a trifling amount. Sounds like gold is worth $1300 per ounce to me!

This story grows worse, and again involves the Street Tracks GLD fund. Likely accounting fraud accompanies other efforts to confiscate their GLD backing of deposits held in gold.
The counter-parties in deep trouble are JPMorgan and Deutsche Bank, each heavily short gold and unable to produce it in the face of delivery demands. Central banks are probably aiding the plunder of private gold accounts. All integrity is at risk of being lost. Simultaneous irregularities have taken place during the LBMA ‘gold delivery incidents’ and official Gold Bar Lists maintained by the Street Tracks GLD exchange traded fund. Evidence points to the GLD gold bullion inventory taken to satisfy the London demand for gold delivery. Independent audits have begun in earnest by large private interests (mostly Arabs). Word came today the JPMorgan is accepting gold bullion in order to establish margin foundation for commodity futures trading accounts. They are indeed desperate, since a margin failure for clients would produce to JPM the gold.

So one might conclude that GLD shares are corrupted by virtue of satisfying the COMEX gold futures short contracts. So one might conclude that GLD deposits of gold as backing for the fund are corrupted by virtue of selling their gold bullion to the Gold Cartel in satisfaction of futures contract delivery demands. That seems to undermine the entire GLD fund, and to expose it as an Exchange Traded FRAUD. Fraud in physical gold deposit management is not the sole province of the Untied States and the Untied Kingdom. An Asian Depository has found ‘Good Delivery’ gold bricks to be gutted and filled with tungsten, another heavy metal. See Rob Kirby’s article entitled “Central Banking: A Blight on Humanity” (CLICK HERE) and also “Blight on Humanity Addendum” (CLICK HERE). What great financial forensic analysis work!

GET OUT OF THE 'GLD’ AND ‘SLV’ FUNDS, WHICH ARE IN ALL LIKELIHOOD DEEP FRAUDS THAT HOLD SHRINKING BULLION IN DEPOSITS. In time the GLD might be exposed as having little or no gold, and certainty inadequate amounts to back their fund for legitimacy. In time, my forecast is that the GLD fund will eventually sell at a 25% discount to the gold spot price, due to suspicion of fraud in its gold deposit management. Later, my forecast is that the GLD fund will eventually sell at a 50% discount when the investor lawsuits pile up and formal challenges are lodged. The weapon to pry open the vaults will be discovery and ordered independent audits with teeth. The final chapter of the GLD in my view will be its liquidation, with extreme discounts paid to angry investors. Their laziness and stupidity will be worthy of a footnote in history. The managers of the GLD fund and that for the SLV silver fund, are both main members in the Gold Cartel. JPMorgan is custodian to the GLD fund. Barclays manages the SLV fund. Those who believe the tactics and activity behind the curtains are different are indescribably naïve. They too deserve a meat cleaver outing with Sir Darwin on personal wealth.


Copyright © 2009 Jim Willie, CB

Silver, ‘Bullion’s Bridesmaid,’ May Outpace Gold ~ Bloomberg

Oct. 20 (Bloomberg) -- Silver may outpace gold through mid- 2010 as a recovering global economy increases industrial demand, said Citigroup Inc.

The CHART OF THE DAY shows the ratio of gold to silver. An ounce of gold bought 59.4 ounces of silver on Oct. 14 when gold for immediate delivery jumped to a record $1,070.80 as investors sought an alternative to the weakening dollar and a hedge against inflation. That compares with 48.5 ounces when gold first exceeded $1,000 on March 13 last year and 43.6 on April 19, 2006, the lowest level in the past 10 years.

“Silver is set to benefit from stronger gold, but also the improving outlook for global industrial production,” said David Thurtell, a London-based analyst at Citigroup, in an interview. “I think the gold-to-silver ratio can get to the low 50s.”

When gold reached $1,000 for the first time, silver traded above $20 an ounce, compared with $17.82 now. Silver has already climbed 56 percent this year, more than double the 21 percent advance in gold. Gold is on course for its ninth straight annual gain while the U.S. Dollar Index, a gauge against six major currencies, has fallen 7.4 percent this year.

“The dollar’s decline has been pushing gold to a series of record highs,” Harjas Wadhwa, vice president for New Delhi- based AUM Capital Market Private Ltd., said. “If gold moves higher from here, you’d expect silver to outperform,” he said. “It has a lot of catching up to do” since “bullion’s bridesmaid” was more than $20 an ounce when gold first surpassed $1,000, he said in a report.

Industrial applications such as electrical switches and batteries accounted for 50.3 percent of silver demand in 2008, compared with 40 percent five years earlier and 51 percent in 2007, according to The Silver Institute. Use in jewelry comprised 18 percent, followed by photography with 12 percent. “Net investment” about doubled from 2007, to 5.7 percent of demand, according to the Washington D.C.-based institute. The world economy will expand 3.1 percent next year after shrinking 1.1 percent in 2009, the International Monetary Fund forecasts.

21 October 2009

Le' proprietor speaks...

Interview with Jesse at the Café Américain
I am Australian and Australians have a unique political heritage. Starting off as a penal colony prevented the evolution of excessive idealism here; turning it into a more prosaic concern for simple justice in the face of unaccountable power. This desire for a "fair go" took root in an environment that was harsh, when one would likely require the help of fellow citizens in fire and flood and in this strange mix of republicans and colonialists it evolved into a of polity of rather pragmatic and self reliant people with a "socialist" impulse where required.

When I went seeking others who saw that the conventional paradigms were bogus bubbles I found them on-line and mostly American but astonishingly saw that most of those who saw these problems did so in naive and simple terms, socialism was the enemy, science informed arms production and Web 2.0 but not the difficult questions of medicine and society; I saw so often only more individual modes of denial.

Finding others on-line who were able to see past this shameful and just to-to convenient real time national and personal myth-making to a calmer place of integrity and balance that drew on the best of ourselves and our common western cannon and turns it to the problem of a balanced and secure life in a thoughtful and careful way (avoiding the certainty and hubris of empty nationalism) with a quite acceptance that we can learn from everybody (and a simple chart) has been a great comfort.

Which is just a long way of saying why, I for one, celebrate Cafe American.

"The easiest road to corruption is through self-delusion." - Jesse
Interview with Jesse at the Café Américain

By Ilene

Ilene: Jesse, thank you for doing this interview with me. I’ve been visiting your Americain Cafe now for over a year and have greatly enjoyed the experience. Your site makes me feel like I’m in a real Cafe and have just picked up an interesting article to read with my coffee. However, as it is a virtual meeting spot, we haven’t been formally introduced yet. Will you tell me a little bit about yourself and how the Cafe got started?

Jesse: I am pleased that you are enjoying the Cafe as it has been intended. Too much information about the markets and the economy is hurriedly snatched and gulped down, like American ‘takeaway.’ Sometimes it is valuable to sample information from diverse sources, taste it from different methods of preparation that do not hide its true flavor, and digest it properly. Otherwise we tend to move from bite to bite, with a broadly shallow appreciation of current events, driven by those who shape the mainstream menu offerings.

In 2000 I had taken an early retirement from corporate work, where I had been a vice president at a Fortune 500 company. My intention was to take ten years off to study economics in greater depth, but primarily to spend more time with my family.

I had always been fascinated with economics from the time I had studied it at the university when I went back for an MBA. I am originally an engineer by trade with a background in mathematics and the natural sciences, and while finance was my favorite subject, economics was a fascination. It was clearly a nascent science, full of competing theories, and struggling to find a footing.

Even with my limited background, I could tell that we were approaching an historic period in economic history. The bubble in tech was obvious to anyone who was able to read a chart, and look at the rationale for the boom with a historically skeptical eye.

I had started to study bubbles and crashes in 1998. One of the benefits of traveling for business is that one can become a voracious reader, and so I read quite a few books on bubbles and crashes to supplement what I already had known.
In 2000 I discovered the world of financial chat boards. It was interesting to find a group of people who also did not believe in ‘the bubble.’ This was a chat board at a place online called ‘Fall Street.’ I had been studying technical charting for some time, and looked into most of the methods. I liked the classic charting method, and gained quite a bit of knowledge from Ken Shaleen. I found my own style of charting with what I called ‘the Babson method’ which had been used by the economist, Roger Babson.

There were requests to see these charts, which I was generating on a variety of timeframes. I started posting the charts, which included quite of bit of hand drawn features, for viewing at Yahoo Geocities at a site simply called Jesse’s Charts.

Early in 2001, I started taking things I wrote for the chat board and turned them into small essays, and placing them as text images along with the charts on this site, since the chat board was impermanent and not readily searchable. At that time, blogs were not so readily available. The name of the site was changed to Jesse’s Crossroad Cafe.

The site was intended to be entertaining and visually appealing, often funny, as well as informative. This made it more interesting to me to produce, and the idea was to educate people while providing an interesting diversion. Education does not have to be dry and painful to be effective. There is a wonderful experience to be had in the joy of learning, the ecstasy of understanding. It merely needs some encouragement to occur.

The format on Geocities was a single page, with a background wallpaper and music that changed every few days. The documents and charts were presented as links arranged around the page. It was visually appealing but difficult to maintain and with no search or long term archiving capability.

Yahoo Geocities decided to end their site hosting business in the autumn of 2007, and essentially shut down the Crossroads Cafe over a weekend. At first I was devastated as all the information I had stored there was lost.

I decided to find a new venue, and blogging seemed an even more effective method of providing information of various types in an attractive format with searchable qualities.

Le Café Américain as it is today opened in February 2008. And so here we are today.

Ilene: Are you planning on going back to the corporate world any time? Or will you continue with your studies, blogging and quest to educate people, or all of the above?

Jesse: I am not sure. My ten year hiatus is ending next year. What I do next will depend on where I am needed the most, and I imagine on who would have me. I will be ready for something new, but will always continue with my studies and reflection, meditation, as I have done all my life. It is always a matter of degree. The first six months in a new position are always intense with new learning. I have thoughts of writing a book or two, perhaps some essays, but one has to first think of something essential to say.

Ilene: I’d be willing to bet that you’ll find essential things to say…. As an avid reader of your blog, I sense some skepticism of the equity market’s recent ascent. Do you have any thoughts on where this market is headed?

Jesse: It is always difficult to forecast the short term direction of the US equity and bond markets, but it is especially so now because the Fed and Treasury have provided unprecedented amounts of liquidity to a relatively small number of Wall Street banks. The Fed is openly monetizing debt, and buying the long end of the curve! Because of the way in which rescue has been structured, the banks have little or no incentive to lend the money to commercial interests, but have plenty of incentive to chase beta by speculating in the markets.

The government and associated pundits and analysts also have an incentive to see the bond and equity markets rally because this is viewed as a ‘good sign,’ a way for the economy to rebound and carry the US past its financial crisis and the collapsing credit bubble. .

Without a reform of the financial system and a rebalancing of the economy there can be no sustained recovery. The Fed and Treasury are debasing the dollar in the hopes of masking their past policy errors. This is shaking the global currency regime which has been in place since World War II to its foundations.

So, will the stock market continue to rally? It can, as long as the world keeps accepting dollars, and the Fed pursues the quantitative easing, and the banks are free to trade for their own accounts with sophisticated programs that add no value, but transfer wealth from the many to the few.

Eventually the markets will reflect this economic reality, and the trend will revert to the fundamental mean. When this happens it may be quite painful for all of us. But predicting the time that it will occur is difficult, except to say that it will almost certainly be when the Fed must raise interest rates to save the bond and the dollar. Perhaps earlier than this, if people realize that the market has become a liquidity driven Ponzi scheme without fundamental underpinnings in the productive economy.

This may be triggered by some exogenous event, something that happens from outside the system, which causes the pyramid scheme to collapse. An oil shock would do it for example. It would even distract the public from the underlying causes and the need for reform.

Ilene: Your writing captures the frustration that many people may feel watching the stunning series of events leading to the financial meltdown/so-called recovery. I see our Constitution subverted, new powers created out of nothing, a system of justice turned upside down, and a free market that never really was (causing me to rethink many of my prior views). If you agree with my assessment, how would you explain how this could happen?

Jesse: From discussing this with much older friends, too many of whom have by now passed away, and from my own personal observation of large organizations, I would say that there is always some element, some minority percentage of people, who are amoral and possessed with a need to have many possessions for their own sake, and power over others.

They are often very verbally proficient and quick-witted, good on their feet. They tend to view other people as objects, and do not hesitate to act in a manner that most people would consider to be unthinkably dishonorable. To them the ends definitely justify the means, and the ends are all about the accumulation of more people and possessions to try and fill the great hole in their beings. Some of them are simply as they are because their father or mother did not like them, and they need to prove them wrong, that they are worthwhile. And so they have a neurotic need to gain power over the people and situations because they are afraid. It’s very sad really.

These people are mildly sociopathic, and generally miserable people to be around, but are normally restrained by the rule of law and social conventions.

But at some times the conventions of an organization or a society become weakened, through war or financial stress and crisis, and this relatively small group begins to assume more positions of power, often indirectly through other public personalities. Other people who are merely opportunistic and weak-willed, socially immature, fall in with them, acting as their enablers and supporters.

They see how things are going, and say to themselves, "Why be good? Why be honorable? If these others can gain power and position and possessions why should I not do the same? If I do not, someone else will do it."

This is where we are today. It has its roots in the ‘me generation’ of the 1980’s and the ‘greed is good’ culture that came with the counter-reaction to the altruism and idealism gone bad of the 1960’s in the economic shocks of the 1970’s and the recession of the 1980’s.

It was a remarkable achievement of American democracy that it resisted the allure of statism such as overtook Italy, Japan, and Germany in the 1930’s. Much of the criticism of FDR is from those who were disappointed at their failed coup to bring fascism or communism to the States. I thought FDR did a remarkable job of steering what was then a ‘middle course’ and was branded as a traitor to his class for it.

In retrospect many are harsh in their criticisms, but considering what other countries experienced, the US did quite well with his leadership, and like it or not the people loved him for it, and the elite monied interests hated him for it. Of course, there are always the masses of the ignorant that are only too eager to mouth slogans and selectively odd notions fed to them that they think make them sound wise in a contrarian sort of way.

Left or right, it is all about being successful by advancing over another, by taking what they have, by possessing them, objectifying them, setting yourself apart from ‘the crowd’ whom you secretly despise. For the most part these may be smart people, but in life they are mediocrities, banal in their tastes, unoriginal and unloved, unloving. But they are focused by their mania. Could one find a more banal group of failed mediocrities than the National Socialist party leaders? And yet they almost succeeded in conquering much of the civilized world by corrupting a weakened nation.

After years of traveling, and seeking to meet people, I have come to the conclusion that people all over are essentially the same. But cultures can be different, because as an organization they reward and approve certain behaviours and discourage and admonish others.

Japan is very different culturally from the US. But I have met Japanese businessmen who were as egotistical and self-centered in private as an American scion of Wall Street might be publicly. But they tend to be restrained by their culture, and not held out as objects of admiration.

I do not believe in ‘conspiracy’ per se. But different types people tend to find each other, people with similar tastes and attitudes, and work together to achieve their similar ends when they are not fighting amongst themselves. It really is a sickness of the mind and the spirit, similar to any other sickness that needs to prey on others to satisfy its abnormal needs. It is because it involves financial and material goods, rather than physical abuse or physical theft, that a relativistic society can tolerate it, allow it to flourish.

It becomes a much more serious problem if amoral egoists begin to gain influence over the government and the media, and undermine the restraints on the will to power, their culture of emptiness. It only takes a minority of the people to give in to the darker impulses of fear and greed to support them, and for the majority to do nothing in response, and an entire nation can become slowly corrupted, allowing monstrous things to occur.

I would say that things in the US began to deteriorate in the middle 1990’s when Bill Clinton was in the White House. This was when we saw the overthrow of the last of the reforms put in place at the end of the Great Depression. Clinton was an egotistical verbalizer, a chronic abuser with a shocking set of personal habits that appear to be compulsive. And he was replaced by an amoral mediocrity that could view torture and the Constitution as impediments or enablers to his will. Now the US has another high IQ verbalizer, who may be sincere and inexperienced, but unfortunately has surrounded himself with the same elitist group of corrupt statists that enabled the Clintons.

Ilene: What do you mean by “elitists?”

Jesse: Elitists are self-identifying, powerful people in business and politics. Those who consider themselves the elite, based on their wealth, their bloodlines, their university, their personal connections. They are certainly not egalitarian or humanists. They tend to worship power above all, and hold those who have less power in disdain. They have a decided lack of sympathy for their fellow humans, preferring to consider them as objects if at all.

By the way, it is a common characteristic that they cheat, they break the rules, they often flout the law as a matter of course. This type of person views the rules as something to be imposed on the common people, the others, those who need to be ruled by them. If you don’t believe me, start looking into their backgrounds. Everyone may cheat now and then, but for some people it is a way of life, an affirmation of their privileged status. It can almost become a game.

In the UK, it is hard to see daylight. Tony Blair was an egoist verbalizer, and it will be too bad if he gains power over the EU. Gordon Brown is truly frightening. The Tories are intellectually and morally bankrupt, but Labour is corrupted.

The answer of course is for society to begin again to restrain the minority who would serve the will to power, and discourage their demimonde of followers and enablers. The only way to do it is to put justice back into place, restraints on the risk-reward calculations of corruption. There really is little downside to white collar theft and graft, if you are ‘connected.’ Move on, all will be forgiven, we do not have time to enforce the rules in an emergency or a crisis. Besides, he is a ‘goodfella.’ One of our crowd. One of us.

The politics of the US today remind me of the competing crime families we saw in Chicago and New York at various periods in US history. Obviously they can gain enormous power, and the influence of their corruption can run deep. And just as obviously they can be taken down through a concerted effort by cutting them down at the roots.

Ilene: But doesn’t the trend seem to be one of ever-increasing power and wealth in the hands of the minority elite, who use their wealth and power to acquire more – how can that be stopped?

Jesse: The good news is that they are a minority, and they do not run the country and the world. There is always a minority of those who break the law, who subvert society, and there is the means to stop them from succeeding.

Their strength is their weakness. The focus which permits some people to succeed also gives them a ‘tin ear’ for the effects of their greed. In other words, they always go too far, and begin to blatantly start breaking the law, and acting in ways that are obvious wrong. And when there is a public revulsion to their deformity, they just do not get it.

One has to restore a rule of law, an atmosphere in which there are risks for wrongdoing. It is a classic case of the need for reform after a period in which rule breaking has flourished. It is a familiar story throughout history.

The Wall Street banks must be restrained from gaming with the public money. The markets must be a level playing field in which insiders and larger players do not engage in fraudulent trading practices. This requires honest regulators above all, who have not accepted jobs and favors from insiders. Self regulation does not work, because the easiest road to corruption is through self-delusion.

The flow of money from special interests to politicians via lobbyists and campaign contributions must be stopped through campaign financing reform and scrupulous disclosures. Those who accept money from special interests over which they have a public stewardship are a cancer to a society.

The media must once again be managed by diverse elements, and not a few corporations.

People must once again be willing to tell the truth, to stand for what is right, to speak for the ideals which govern the country under the Constitution, without fear of retribution or penalty. Our treatment of ‘whistleblowers’ is often shameful.

Obama was obviously elected in the US as a reformer, and he is failing. Is he corrupt, or merely naïve? No matter. If he does not perform he will be replaced, by a third party if necessary.

I am a little less optimistic with regard to the UK, probably from a personal ignorance, but there is always hope.

America is a revolutionary country, and it still maintains a love of freedom and a dedication to its founding principles, even though at times it may seem to lose its way.

Reform is a response to a specific set of deteriorating conditions, some specific wrongs. It is when the majority of average people begin to restore a balance to their society by no longer being afraid to call certain behaviours ‘wrong’ and unacceptable to their society.

Who is to say what is wrong? There is a wonderful thing in America, its Constitution. It sets out the basic principles of freedom in a marvelous way. It is not perfect. It does not contain all the details, which are to be found in the body of laws that surround and support it, and those who swear to preserve, protect and defend it.

It starts by simply saying ‘no’ to those who would rule us by fear and discouragement. To say no to private prejudice and greed, which cause us to turn a blind eye to injustice. Daylight is a good disinfectant. Secrecy is not the normal condition in a free society.

Periods of time can be dangerous, because there are sometimes wolves in sheep’s clothing. Hitler was put forward as a strong reformer. He was elected by a minority, and suspended the rule of law. So a nation will be wise in whom it selects to lead it. If it holds on to its principles, in the case of America, the Constitution, then it can stay on the path to reform.

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The Ascent of China ~ Niall Ferguson

The U.S. is an empire in decline, according to Niall Ferguson, Harvard professor and author of The Ascent of Money.

"People have predicted the end of America in the past and been wrong," Ferguson concedes. "But let's face it: If you're trying to borrow $9 trillion to save your financial system...and already half your public debt held by foreigners, it's not really the conduct of rising empires, is it?"

Given its massive deficits and overseas military adventures, America today is similar to the Spanish Empire in the 17th century and Britain's in the 20th, he says. "Excessive debt is usually a predictor of subsequent trouble."

Putting a finer point on it, Ferguson says America today is comparable to Britain circa 1900: a dominant empire underestimating the rise of a new power. In Britain's case back then it was Germany; in America's case today, it's China.

"When China's economy is equal in size to that of the U.S., which could come as early as 2027...it means China becomes not only a major economic competitor - it's that already, it then becomes a diplomatic competitor and a military competitor," the history professor declares.

The most obvious sign of this is China's major naval construction program, featuring next generation submarines and up to three aircraft carriers, Ferguson says. "There's no other way of interpreting this than as a challenge to the hegemony of the U.S. in the Asia-Pacific region."

As to analysts like Stratfor's George Friedman, who downplay China's naval ambitions, Ferguson notes British experts - including Winston Churchill - were similarly complacent about Germany at the dawn of the 20th century.

"I'm not predicting World War III but we have to recognize...China is becoming more assertive, a rival not a partner," he says, adding that China's navy doesn't have to be as large as America's to pose a problem. "They don't have to have an equally large navy, just big enough to pose a strategic threat [and] cause trouble" for the U.S. Navy.

18 October 2009

Misguided Monetary Mentalities ~ Nolan

Nobel Prize economist Paul Krugman – of Princeton and the New York Times – wrote a noteworthy piece this week: Misguided Monetary Mentalities (NYT 10/12/09).

“One lesson from the Great Depression is that you should never underestimate the destructive power of bad ideas. And some of the bad ideas that helped cause the Depression have, alas, proved all too durable: in modified form, they continue to influence economic debate today.

What ideas am I talking about? The economic historian Peter Temin has argued that a key cause of the Depression was what he calls the ‘gold-standard mentality’ By this he means not just belief in the sacred importance of maintaining the gold value of one’s currency, but a set of associated attitudes: obsessive fear of inflation even in the face of deflation; opposition to easy credit, even when the economy desperately needs it, on the grounds that it would be somehow corrupting; assertions that even if the government can create jobs it shouldn’t, because this would only be an ‘artificial’ recovery.

In the early 1930s this mentality led governments to raise interest rates and slash spending, despite mass unemployment, in an attempt to defend their gold reserves. And even when countries went off gold, the prevailing mentality made them reluctant to cut rates and create jobs. But we’re past all that now. Or are we? America isn’t about to go back on the gold standard. But a modern version of the gold standard mentality is nonetheless exerting a growing influence on our economic discourse. And this new version of a bad old idea could undermine our chances for full recovery.”

First of all, Dr. Krugman states that “the bad ideas that helped cause the Depression… continue to influence economic debate today.” Well, let’s say they were actually “bad ideas.” Even then his implication would be only somewhat true. There may be some feeble little impact on what has regressed to one lopsided “debate.” But, regrettably, ideas regarding sound money and Credit long ago lost their influence on actual economic policymaking.

Dr. Krugman, like so many economists of our time, is an inflationist. He, like so many before him, sees easy Credit and the government printing press as the solution to unemployment and other economic problems. And - in our age of electronic “money” and unbounded global finance - there are apparently no longer any bounds to U.S. fiscal and monetary stimulus.

Messrs. Greenspan and Bernanke are inflationists. The inflationists have been running the show since easy Credit was employed to juice the system after the 1987 stock market crash. The consequences of that bout of policy-induced excess led to a more potent inflationist policymaking elixir in the early-nineties to mop up the financial mess. Since then, ever more emboldened Credit inflation has been required to battle crisis after crisis after crisis. Easy money and Credit – the bane of Capitalism – were allowed to overwhelm the workings of the system. The point of Trillion dollar deficits and zero interest rates has been reached – with the undeterred inflationists now bent on this sorry state of affairs continuing indefinitely.

By now, one would hope the inflationists would challenge their own views, doctrines and Mentalities. Instead, they trumpet the same old failed policy responses – only in much larger dimensions and with greater conviction. And that is precisely the flaw in inflationist doctrine: once it gets rolling it becomes extremely painful to rein in the forces pushing for only greater inflation. The more spectacular the inflationary boom and bust - the more strident the inflationists become.

History is strewn with enough collapses, worthless currencies and social upheaval that I find it ridiculous that the inflationists would today be taking shots at sound money and Credit. It is the inflationists Clinging to Misguided Monetary Mentalities. The principle of sound money and Credit has no reason to have to defend itself.

Inflationism doctrine is riddled with failings: Easy Credit distorts system pricing mechanisms; foments destabilizing speculation; spurs societal wealth transfer; distorts the underlying economic structure; fosters financial fragility; and debases the currency – to name just a few. History – including recent history – validates this analysis.

Yet there are two particular facets of today’s inflationism that make “Keynesian” policymaking extraordinarily dangerous. First, the global backdrop is one of unchecked Credit and the absence of any disciplining global monetary regime. Policy mistakes are free to run longer and with enormous global financial and economic consequences. Second, policymakers and pundits herald incredible post-Bubble policy responses, while failing to recognize that aggressive stimulus is, once again, fostering problematic Bubbles. For too long the inflationists have been negligent in their disregard for Bubble dynamics.

From Dr. Krugman: “Consider first the current uproar over the declining international value of the dollar. The truth is that the falling dollar is good news. For one thing, it’s mainly the result of rising confidence…”

While confidence in the global reflationary backdrop may be rising, the dollar is in trouble. And many dollar apologists will claim the greenback has no immediate replacement and thus will retain its status as the world’s reserve currency. This line of reasoning misses the key point: the dollar reserve global monetary “regime” has broken down as a mechanism for supporting stable global Credit and economic performance. Unchecked global finance now rules, a consequence of the massive and ongoing devaluation of the world’s reserve currency.

Only the inflationists could argue the dollar’s current predicament is “good news.” I don’t see it. I don’t view a world economy rebalancing or becoming more stable. Instead, we’re witnessing the unleashing of another furious global boom and bust cycle. Crude oil traded above $78 this week as gold responded to the weak dollar by surging to an all-time record high. U.S. wealth is being shifted overseas, and Americans’ savings are being devalued. We are losing financial power by the day. Good news? More easy Credit to the rescue?

The inflationists are keen to argue that, with “inflation” remaining so low, policymakers enjoy unusual latitude to stimulate. By this point, haven’t we learned that rising CPI is not a primary contemporary risk associated with ultra-loose monetary policy? The mispricing of risk, unchecked speculation, asset-Bubbles, financial fragility, and economic maladjustment have already proven themselves as deleterious effects of loose money. I group these types of responses to unstable finance (“money and Credit”) as “Monetary Disorder.” Anyone watching global markets these days must recognize that Monetary Disorder remains powerfully entrenched.

Krugman Concludes: “We do seem to have avoided a second Great Depression. But giving in to a modern version of our grandfathers’ prejudices would be a very good way to ensure the next worst thing: a prolonged era of sluggish growth and very high unemployment.”

The first Great Depression was triggered by financial collapse – a historic boom and bust. The jury is still out on the second. The inflationists believe their policy prescriptions strengthen system underpinnings. I believe another bout of global Credit and speculative excess increases the likelihood of eventual financial meltdown. And I believe a dollar crash significantly increases the risk of a very problematic U.S. financial crisis. Worse than benign neglect won’t suffice. Dr. Krugman doesn’t think it makes any sense to consider raising rates. I don’t think it makes any sense to disregard the reality that fiscal and monetary policy went to dangerous extremes.

The time has come for a more level-headed and even-handed approach. As much as they abhor the notion of sound money and Credit, the inflationists need to back away from their dogma before it’s definitely too late. A prolonged period of slow growth and sluggish employment is not the worst-case scenario.


17 October 2009

GEAB N°38 is available! Global Systemic Crisis – The European Union at a crossroads in 2010: an accomplice or a victim of the collapse of the dollar?

The major trends at work in the 4th and 5th phases of the global systemic crisis (the decanting phase and the global geopolitical dislocation phase) are unveiling every day (1). Everyone has now realized that the United States is being swept into an uncontrollable spiral involving widespread insolvency of the country and gross incompetence of the U.S. elite in implementing the necessary solutions. The foretold US default is well underway as exemplified by the falling dollar and the flight of capital from the country: only the name of the liquidator and the recognition of the bankruptcy are still missing, but it shouldn’t be long now. Following the example of its leader, the Western bloc (which Japan has undertaken to move away from, implementing completely new political, economic, financial and diplomatic policies (2)), is in total decay symbolized by NATO’s coalition in Afghanistan (3).

According to LEAP/E2020, in 2010, the European Union having four strategic core requirements, will be compelled to take a number of urgent decisions in a context of a fast collapse of the Western camp that could be summed up as the US Dollar’s fate. The decisions taken by the EU will define the role the Europeans will be playing in the post-crisis world: either they start to appear as key-players in recasting tomorrow’s world and bring forward their own vision of the future, seeking the partners they need with no exceptions; or they remain the willing victims of a sinking Western Bloc, blindly following Washington's descent into hell. In the first case, the EU fulfills its historic purpose of restoring the Europeans’ command over their collective destiny; in the latter, it would just prove to be the Western equivalent of the Comecon (4), a futureless appendix of the protective superpower.

Heavy trends are already visible which, according to our team, have began to push Europe in a number of predictable directions. However, the intellectual weakness of Europe’s present political leadership (in the EU and member-states alike) compels us to soften our forecasts.

In all cases, since the EU is the world’s largest economic and trade power (5), the continuing development of these trends will soon impact directly on a large number of major economic, financial, and strategic factors: exchange rates, commodity prices, growth, social systems, budget balances, global governance…

In this 38th issue of the GEAB, besides ‘strategic and operational recommendations to survive the crisis’ and their ‘crisis-related country-risk anticipations for 2009-2014’, our team has decided to analyze these four requirements to which the EU will be compelled to find answers full of consequences:

1. Addressing the failure of the monetary system based on the USD and not becoming helpless when 1EUR=2USD
2. Avoiding exploding budget deficits like those in the US and UK
3. Responding to the aggravation of the Iran/Israel/USA crisis and war in Afghanistan by defining a specific European position
4. Learning to deal independently and constructively with the new key players of the post-crisis world: China, India, Brazil and Russia in particular.

It impossible to envisage waiting later than 2011 to deal with everyone of these crucial aspects (crucial for both the Europeans and the rest of the world). Just imagine what would happen if the Europeans remained passive beyond 2010, while faced with these four requirements:

1. If the Europeans are content to watch the Dollar sink, their exports to the US and the dollar-pegged countries will fall dramatically, exacerbating the economic and social crisis in the EU.
2. If the Europeans, their leaders in particular, are content to let public deficits swell, like France is currently doing, the Eurozone will soon become prey to profound disagreements between Northern and Southern Europe.
3. If European leaders are content to follow the Israel/Washington line in dealing with Iran’s nuclear issue and to fall in behind the Obama administration regarding Afghanistan, they will soon be faced with growing public dissatisfaction which they are not prepared nor in a good position to face, a guarantee of serious political instability in every member state.
4. If the Europeans are content to refuse independently debating the interests they have in common with the Chinese, Indians, Brazilians and Russians, they willingly deprive themselves of any means to bring forward their perspective on the previous three issues, as no significant move can be accomplished without them (6).

Historical change in China-India share of global GDP (1500-2008) - Sources: Bloomberg / Gluskin Sheff - 2009
According to our researchers, 2010 is certainly a crucial year for the Europeans and their collective future. The relationship of the EU, and particularly of the Euro, with the dollar will be decisive for the Europeans, as much as for the Dollar and the global monetary order altogether. Not that the Europeans chose the year (2010) or the subject (the Dollar) (the leaders of the Euroland would certainly prefer to go on with their « business as usual »), but History is very ironical in calling the US “allies” bluff: sinking now with Washington or swimming without Washington.

In the image of all the developments involved in the ongoing global systemic crisis, time is going through a process of contraction: events are happening a lot faster. On this subject, we are surprised to hear various « experts » describing Robert Fisk’s article entitled « The Demise of the Dollar » (7) - where the author suggests that the Russians, Chinese, French, Japanese and Gulf oil-producing countries would be discussing the idea of pricing oil in a currency other than the US Dollar within nine years - as eccentric. According to LEAP/E2020, the only surprising element in this analysis is in the nine year delay. In fact, this development will occur much earlier, within two years, under the pressure of events.

In order to realize the extraordinary speeding up of History created by the crisis, let’s remember what kind of a place the world was nine years ago. Nine years ago, G. W. Bush had recently been elected; 9/11 would take place in two years from then; the US were neither stuck in Afghanistan nor in Iraq; Katrina had not yet destroyed New-Orleans; one Euro was worth 0.9 USD; Russia was a country adrift the EU was preparing a constitution meant to be popular; China was a poor international player; the US economy was shown to the world as an example and the United Kingdom was preaching ultra-liberalism throughout Europe; Wall Street’s investment banks seemed invincible,… the list could go on and on. What is highlighted is that each of these events seemed unthinkable to most “experts” just a few weeks before they happened. Therefore it is, in fact, very naïve to consider that it will take nine years until oil is priced other than in dollars, a currency utterly dependent on central banks’ will (increasingly a « bad » will, by the way) to buy, buy and buy more just for the sake of its survival.

As early as the second quarter of 2009, central banks from all over the world undertook to stop accumulating US dollars (dollars accounted for 37 percent only of their currency purchases while they account for 63 percent of their reserves) (8). As early as July 2009, close to USD 100 billion worth of net capital fled the US (9), at the precise moment when the US was claiming to be able to attract more than USD 100 billion a month to help finance the federal deficit (not to mention the other deficits).

In this situation, a fundamental question must be asked: who is really buying these USD 100 billion worth in Treasuries each month? Certainly not US citizens, indebted beyond any reason and left without savings or credit. Certainly not foreign private investors, more and more concerned about the economic health of the US. Certainly not the Chinese, Russian or Japanese central banks, more concerned about curbing their purchases of long-term bonds, and even starting to sell their Treasuries or exchange their long-term bonds against short-term ones. Strangely enough, the Bank of England alone seems to still have this appetite (10). Therefore, we are left we the “usual suspects’, i.e. the Fed and its network of « primary dealers ». “Money printing” is taking place on a far greater scale than acknowledged by the Fed under its official policy of « quantitative easing ».

Change in foreign purchases of Long-Term US securities (1979 – 2009) - Source: Market Oracle / Sean Brodick - 09/2009
As the US announced a federal budget deficit of USD 1,000 billion a year over the next decade (11), who can honestly believe that the rest of the world would accept nine more years being paid in funny money? Maybe those who found it impossible that Wall Street could collapse in September 2008? Or those who thought Obama would change America and the world (12)? Or else those who persist in thinking that the American consumer will rise from his ashes and fuel the « impossible recovery » (13)?

Unlike last year, no panic will come to the rescue of the dollar. This time, the US currency is seen more as a sham than as a safe haven. Indeed decoupling of the rest of the world (Asia, South America and Europe in particular) is underway (14) and it is precisely the reason why 2010 is such a crucial year for the Europeans. If they don’t do anything about it, the Euro will become a safe-haven currency and it will rise until it suffocates the European economy. The Eurozone must therefore become more aggressive and discuss with the other big economic and financial players how to avoid the Euro soaring against the Yuan, the Yen and all the other currencies of its trade partners.

On this aspect, the EU doesn’t have a choice: it cannot be lasting policy to purchase billions of USD every day that lose value every day as a result of the increasing pace at which they are printed (15). Moreover, the EU is in the strongest position to negotiate with the IMF for the suppression of the US right of veto and for sharing power with the « re-emerging » powers (16).

Relative weight of big players in global wealth - Source: IMF - 2009
As usual, external events will push the Europeans to act in a united and proactive manner. In the present case, according to LEAP/E2020, the issue of the Dollar will be a powerful stimulus for European action in 2010. History, whose only “sense” is the sense of irony as often recalled by our team, is apparently ready to give the Europeans the role everyone thought would be played by the Chinese…