Friday, February 11, 2011
Dominique Strauss-Kahn, managing director of the International Monetary Fund, has called for a new world currency that would challenge the dominance of the dollar and protect against future financial instability.
“Global imbalances are back, with issues that worried us before the crisis - large and volatile capital flows, exchange rate pressures, rapidly growing excess reserves - on the front burner once again,” Strauss-Kahn said. “Left unresolved, these problems could even sow the seeds of the next crisis.”
“When we worry about the deficiencies of the international monetary system, we are mostly worrying about volatility,” he added. There is “a sense that money sometimes flows around the globe in too-volatile a fashion and that countries need a more stable, more predictable external environment in order to prosper”, he said.
He suggested adding emerging market countries' currencies, such as the yuan, to a basket of currencies that the IMF administers could add stability to the global system.......read on
Travesty of a Mockery of a Sham, Phase II
The facsimile of U.S. "growth" now depends entirely on Central State manipulation and stimulus of risk trades and financial slight-of-hand.
The U.S. economy has become increasingly dependent on asset bubbles, financial legerdemain, credit expansion, Federal borrowing and the manipulation of risk trades to maintain the illusion of "growth." Compared to an economy based on organic demand and productive growth, the current U.S. economy is a travesty of a mockery of a sham, and has been since 2001.
There are a number of factors at work, but let's start with two: the ratchet effect, and the Keynesian Project.
In the ratchet effect, increases are easy and resistance-free: it's incredibly easy to hire more employees in bureaucracies, for example. But once the ratchet has advanced, it is nearly impossible to return to the previous tooth in the gear.
So for a city government to expand payroll from 10,000 to 20,000 employees was effortless, to reduce a 20,000 person payroll back to 10,000 is exceedingly painful.
The ratchet effect is a key feature of addiction. When one beer no longer creates a "buzz," then the consumer drinks two, and so on, until a six-pack is the new baseline. Below that level of consumption, the addict gets panicky, for the entire necessity of creating a buzz is at risk of catastrophic failure.
The U.S. economy is now addicted via the ratchet effect to unprecedented levels of Federal borrowing and Federal Reserve credit creation and manipulation. Let's set aside the fact that America's Central State has by some calculations guaranteed some $13 trillion in private financial assets via TARP, AIG's backstop, the takeover of Fannie Mae and Freddie Mac, etc.--roughly the size of the entire GDP of the nation.
Let's focus instead on the fact that the Federal government must borrow and spend 11% of GDP ($1.5+ trillion) every year, and the Fed must buy $1 trillion in impaired private assets or new Treasury debt annually (another 7% of GDP) just to create an illusory GDP growth of 2.5% a year. So we're spending/injecting 18% of the GDP to conjure a "growth" of 2.5%.
That means we're spending/injecting $7 to create $1 of "growth" in GDP. And thanks to the ratchet effect, there's no going back now without systemic disruption. Does anyone seriously believe spending $7 to birth $1 of "growth" is sustainable? If so, then let's eliminate that $1.5 trillion deficit spending and the Fed's $1 trillion-a-year purchases of impaired debt and Treasury bonds, and see if GDP "grows" via organic demand and production.
Everybody knows what would happen: the wheels would fall off the illusory "recovery." The "recovery" is precisely analogous to an alcoholic who claims to be sobering up but who is actually drinking seven beers a day to get a buzz when a few years ago he only quaffed two or three a day.
Here is the Keynesian Project in a nutshell. Unfettered Capitalism works in straightforward cycles: the organic business cycle of expansion, overcapacity and overleverege inevitably leads to a credit bust in which those whose borrowing exceeds their ability to service their debt go broke, and the dominoes of overcapacity and credit expansion topple as losses mount and consumption based on increasing debt falls.
Bad debt gets wiped out, along with "pyramid-scheme" type assets (mortgaged assets are leveraged to buy more mortgaged assets) and excess capacity. As production declines, workers are laid off and consumption declines, further pressuring impaired financial assets.
As Marx had foreseen, these cycles increase in depth and severity. Though Marx invoked dialectical theory and history rather than the ratchet effect, the basic idea is the same: Capitalism becomes increasingly dependent on financial capital, and the resultant crises eventually become severe enough to take down Capitalism as a sustainable productive system.
Keynes' proposed to counter these worsening business cycle implosions with massive injections of Central State borrowing and spending. The atmosphere of fear as assets, credit and consumption all contracted would be replaced by a revival of "animal spirits" (the magical elixir of Capitalism), consumption would be stimulated by direct government spending on capital projects and welfare (fiscal stimulus), and banking credit would be restored via stimulative Central Bank credit expansion (monetary stimulus).
But Keynes failed to grasp what Marx had intuited: the ratchet effect. Once the Central State ramped up deficit spending and expansive credit, then the organic economy became dependent on that new level of Central State spending and credit expansion.
As I described in the Survival+ analysis, in effect the central State rescued Monopoly Capital by partnering with it. This results in a financial/State Plutocracy which "saves" the organic economy by taking control of its income streams, credit creation and financial assets.
That is the U.S. economy in a nutshell: a travesty of a mockery of a sham. The consumer became dependent on easy, cheap credit and home equity extraction to maintain his/her consumption. The student became dependent on easy, cheap credit to fund his/her increasingly costly college education. Monopoly capital became dependent on financial slight-of-hand, the debauchery of credit, fraudulent mispricing/masking of risk, stupendously leveraged bets on risk assets, etc. for its swollen profits. Politicans became dependent on unlimited borrowing and spending to keep the illusions of competence, sustainability and "growth" alive.
State and local governments became casinos, dependent on skimming the profits from asset bubbles and financial fraud. Where did New York City's and New York State's rising revenues come from? By playing dealer on Wall Street's scam tables, skimming a steady share of the profits.
Where did California's bloated state revenues come from? The skimming of capital gains from the Ponzi-scheme real estate bubble.
The stock market rally circa 2003-2008 was merely Travesty of a Mockery of a Sham Phase I. In those glory years of the Central State/Cartel-Capital manipulation, it only required $2 of stimulus and credit expansion to blow $1 in asset bubble "growth."
But alas, the growth was bogus, illusory, a simulacrum of organic growth, a house of credit cards and fraud that toppled when one card's overleveraged precariousness was inadvertently exposed.
Now we are in Travesty of a Mockery of a Sham Phase II. As Marx had foreseen, the crises are ratcheting up: now it's taking $7 of State/Plutocracy intervention to conjure up a pathetic $1 in "growth." Both are now totally dependent on the substitution of bubbles and fraud for real productive growth.
What Marx failed to foresee was the Central State's rescue of Cartel-Capital via a partnership: the Central State is now as dependent on financial capital's maximization of fraud and credit expansion as the Financial Plutocracy is dependent on the Central State to mask and enable its expansion of income and control.
The problem is, of course, that the system cannot support borrowing and spending $7 to create $1 of "growth" for long: eventually, as in all business cycles, the cost of borrowing will exceed the ability of the borrower to service that debt. That's what Keynes failed to foresee: the way in which the partnership of Central State and Cartel-Capital requires ever greater credit and State debt expansion just to keep the system afloat, never mind growing.
If I loan you $1 trillion at zero interest, with no principal payments, then the cost of servicing that $1 trillion loan is zero. Pretty easy to service zero, isn't it? That's the core strategy of the Federal Reserve and the U.S. Treasury.
That's been Japan's "secret" for 20 years: as long as the lenders (the Japanese citizenry and life insurance companies, etc.) accepted near-zero interest, then the cost of borrowing additional trillions has been bearable.
But as soon as that $1 trillion requires a serious interest payment, then the ratchet-effect game ends. We are not there yet, but the endgame is no longer over the horizon.
What will TMS Phase III require? $10 in Central State stimulus for $1 in nominal GDP "growth"? Or will it be $20 for every $1 of bogus "growth"?
The stock market is a reflection of this ratcheting up of Central State/Monopoly Capital intervention and manipulation. The stock market took off in the mid-1990s in the "easy money" era, and that led to the Phase I bust of 2000-2001.
That required TMS Phase II, which led to the next asset bubble in 2007-08, and that orgy of fraud and credit/leverage expansion led to an even more severe Phase II bust 2008-09.
If the partnership attempts Travesty of a Mockery of a Sham Phase III, then the consequent bust should return the stock market to pre-Phase I levels: The Dow around 4,000 and the SPX around 400.
Neither the public nor the Standard-Issue Punditry (SIP) understand the addiction-like dynamics of the Central State/Cartel-Capital partnership's increasingly ineffective interventions on behalf of a facsimile of normalcy and "growth." Like the addicted junkie, the Central State/Cartel-Capital partnership is approaching the point where their "high" requires ever higher doses of smack.
Nobody knows when the higher doses finally become lethal, but we do know there is such a point.
Less than 45 days into 2011, it appears that this just may be the year of the paper recovery, but that doesn’t mean that lingering problems have been wiped away. At center stage now is the municipal bond market, which having grown tremendously as investors fled to safe havens in 2009, may soon find itself in a perilous situation.
The problem now is that the markets are struggling to find enough capital. Throughout the financial crisis, municipal bonds perceived to be less risky than other investments accepted cash in droves. This new investment was buoyed mostly by a large, Federal stimulus package that stood as an underwriter for new debt issuance. That is, states could issue more debt to take advantage of ultra-low financing costs before passing on the one-year expenditures to the Federal government.
Thus, first-year borrowing costs were nil, and so too were the long-term borrowing costs expected to be. However, as the markets recover with tons of paper cash, investors aren’t all that interested in low returns, nor do they believe municipal bonds to be worth the inherent risk they bring forth. While few municipalities have ever gone bankrupt, many are reaching breaking point this year, as the costs of running these cities grows exponentially while revenues continue their decline on poor housing values.
Municipal Bonds and Metals
Municipal bonds are considered to be what gold and silver have always been: a reasonable store of value and protector of wealth. The idea is that municipal bonds are generally very regular on their interest payments, incredibly safe, and also tax-advantageous. As a result, they became an investment staple of the insurance business and are still, to this day, one of the single most important assets to that industry.
However, with the markets in turmoil, and few knowing the extent to which they are exposed to municipal defaults, any future shocks will play out well for gold and silver holders. All things considered, gold and silver can provide near equal returns for investors from arbitraging and option contract sales.
Plus, when contracts are written against gold and silver owned by a company, the earnings are taxed as ordinary capital gains, not as collectibles. Thus, gold and silver present an opportunity for profits on rising inflation, as well as routine cash-flow for insurance companies, a necessity of any investment.
Small Muni Shift = Major Movement for Metals
Whether or not the business will shift entirely to gold, silver, or other commodities is of little concern, mostly because it requires only a small shift in assets for commodities to move quickly. The municipal bond market rests at a value of just under $3 trillion, a size that dwarfs the commodity markets and any above ground supplies for both gold and silver. If even a fraction of this cash were to migrate to an investment with similar risk profile and roughly the same risk-adjusted returns, then silver prices would have more upward trajectory than ever before. In 2010, less than $100 billion in funds were added to gold ETFs. That amount is just over 3% of the current supply of muni bonds.
Do the math. Silver and gold make sense.
Dr. Jeff Lewis
Supply side discussion of the Gold industry in Africa.......listen here
This week Max Keiser and co-host, Stacy Herbert, talk about eco-eco disasters, JP Morgan taking gold as collateral and Rand Paul's call for ending welfare to Israel. In the second half of the show, Max talks to investment adviser, Joshua Brown, about investing for freak weather and a dictator-free Middle East.
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