Tsunami Of Red Ink Slams In Global Banking Systems

Surfers suffer super surf

January 16, 2008

Elaine Meinel Supkis

China tries to stop global inflation but fails because the US, Japan and Europe all want global inflation. Time to discuss the Horns of Dilemma again and to use the analogy of water flow and dams. World stock markets are collapsing rapidly alongside real estate markets. This is classic and very much like the timeline for the Great Depression. Only in this case, the US is more like Germany or England back then. We are the debtor nation causing this collapse. But we have a lot of help from our 'allies', all of whom have trade surpluses with the US. And the US Congress just got a report about how China is buying a lot of our government debt. No mention of #1 buyer, Japan, of course.

Asia Day Ahead: U.S. Stocks Fall; China May Slow at Worst Time

China is starting to gain control of its turbocharged economy, just as a U.S. slowdown raises the risks of doing so.

A narrowing trade surplus and declining money-supply growth are among the first signs that the world's fourth-largest economy is pulling back from its fastest expansion in 13 years. The government has raised interest rates six times in a year, restricted credit, frozen some prices and let the currency appreciate to damp growth and inflation.

The risk is that, with months of effort to cool off China finally taking hold when the U.S. is already flirting with recession, both main engines driving the global economy may power down at the same time.

The economy is all about direction and volume of flows. Many, many things flow all at the same time and keeping track of these flows is important for all regulators. Imagine if a man is in charge of the sluice gates at a dam. When it rains hard, he opens the sluice so the water doesn't top the dam and cause it to collapse, for example. This might flood lower lying lands below the dam but this is better than the dam breaking and destroying everything. Taking this in account, home builders have to map out flood plains and then either not build there or build proper buildings that can handle floods caused by the dam's sluices opening during storms. Also, the dam operator has to worry about droughts and close the sluice gates to conserve the water behind the dam. But again, there is a price to pay. The people below won't get as much water and therefore, must take this into consideration, too.

When all parties do stupid things so that there is NO WAY the operator of the sluice gates can do anything at all, we get disasters. For example, in the great Johnstown Flood in Pennsylvania 100 years ago, the rivers were swollen so badly, the operators didn't open the sluices to the dam and the water flowed over the top and the dam collapsed killing thousands of people in a terrible roar of deadly water. The US government refused to evacuate the people living in the flood plains of New Orleans below sea level and thousands died in Hurricane Katrina.

The operators of dams and levees are responsible for the people living below or near them for NO ONE would be living there if there wasn't these levees and dams! In the case of economic flows, the dam operators have to work together to prevent floods, hurricanes and dam collapses. This sounds pretty easy except for human nature: everyone wants to get the most, the fastest, and so the temptation to flood the dam with rains of funny money is irresistible. Indeed, it is such a temptation, seldom does any dam operator turn it down.

This is why we have business cycles. The dam operators let a flood of red ink pour into the economic lake behind the dam. The lake begins to rise. Instead of controlling the incoming red ink by raising interest rates, if the dam operators are tempted or threatened by the King and his Court, they must let this flood of red ink come into the lake and not regulate the lake's level, we get 'crashes' which is when the dam collapses due to the weight of the red ink behind it. It is very sad, watching one empire after another, making the exact same tragic mistake.

In the case of today's 'free trade' nexus with the US empire playing the role of the glutton sucking down all the world's resources while paying for all of it via red ink, we have the terrible situation where a defeated empire, Japan, has happily opened the taps to infinite red ink via the carry trade. The US absolutely refuses to confront Japan about this, nay, the US desires this very badly. So the red ink has poured into the world's economic lake which is actually an ocean.

So we have a storm like Katrina brewing, the red ink ocean is hammering the dams and levees erected by the King and his Court and this is all about to be shattered.

China is doing the opposite of what the US is doing right now. China has increased bank reserves so they are now much higher than the US, Europe and Japan have today. This is very significant. It changes the flow of the red ink. In other words, China has tried to drain the ocean-sized lake for they figured out [I have to take a laugh here for they heard me rant about all this during the Reagan years] the first sign of an impending dam collapse is the sudden rise in the price of necessities like energy and food.

The US, being run by criminals and traitors, won't do what China is doing because the dam operators have unilaterally announced, they don't think the waves of red ink spilling over the top of the dam means anything at all. Indeed, the value of manufactured goods isn't rising so why worry about it? They don't want to gage the inflation of things people must have to stay alive as important, only the things we want when we are flush are counted. Below is a graph designed by 'Fake Ben' which clearly shows how stagflation works:

The Fed's 20-Year Misguided Monetary Adventure

For decades economists have struggled to explain stagflation. How can inflation accelerate if the economy is slowing? The economists at the Fed think of monetary policy within the context of a two-dimensional Phillips Curve. When the economy grows, so does inflation. When the economy contracts, disinflation occurs.

I added the bull here. The horns of dilemma are simple to understand if you are not working for the Federal Reserve: the building of the dam I spoke of above, allows people to live on the flood plains if they are careful. But if the towns and building inspectors are corrupted by the developers who want to build easy houses on flat land rather than on hillsides, allowing houses to be built right up to the most dangerous flood zones, these places become heavily populated. People living innocently in houses that will flood don't know that the dam operators will kill them if they release even a small amount of water during a flood!

So when a flood comes, everyone demands the operators not open the sluices and drain the lake.

So it is here: the Fed MUST keep flooding the system with red in and NOT drain off this excess finances. We used to pass it onwards to China but China has basically decided to open the sluices. So the money is going to flood into...the low lying parts of the US economy! The flood of Japanese carry trade money that inflated asset markets in the entire world and the US enjoyed this flood of free money. We happily bid up the price of all our houses built on this flood plain created by the Federal Reserve when they dropped interest rates below sea level [inflation rate]. The inflation that Japan has prevented at home has invaded the entire planet and China is now stopping this by raising the reserve rates of the banks, for example.

Meanwhile, first the US and now, Europe, are madly trying to prevent China from stopping this massive wave of inflation. Europe doesn't see the worst of the inflation which has been caused by a rise in the cost of energy due to the strong euro. But even they are having increasing inflation which hits the working class much harder than the upper classes. So to keep everyone on the flood plain happy, the ruling class is going to drop interest rates so MORE red ink can flow into the overflowing lake!

Meanwhile, the Japanese dam regulators have built a secondary dam around Fortress Japan. They have had no inflation at all for these last 7 inflationary years. None. True, inflation pours into Japan but it has been dried up via destroying the buying power of the people via wage cuts! So...Japan pours out cheap loans like crazy, the inflation being turned into red ink instantly but only after it is channeled out of the separate dam controlled by the Bank of Japan. And it has also poured out massive exports while not allowing hardly any imports, again, isolating the Japanese lake from the world ocean.

The US should get all the parties involved to come to Basel or one of the places where there are lots of military police and top security to shelter them from the screaming mobs, and confront Japan over all this while promising to work with China and follow the ancient banking rules that protect us from dam collapses. This means, of course, the US must live within its means.

Which we don't want to do. We would rather have the dam collapse than do that!

ABN Amro Dismisses ECB Tough Talk, No Longer Sees Rate Increase

ABN Amro said yesterday the Frankfurt-based ECB will keep the benchmark rate at 4 percent this year. Previously, ABN Amro had predicted two increases. Last week, after Trichet promised to act ``preemptively'' to tame inflation, Societe Generale said the key rate would remain unchanged after previously predicting an increase. Dresdner Kleinwort said it now expects a rate cut.

HAHAHA. See? Europe will not do the right thing. Far from acting 'preemptively' they are passive watchers who see the red ink pouring over the Free Trade dam and don't give a damn. Indeed, they are tempted by the example of the US and Japan, to defy China and lower rates. Japan has even admitted, inflation is no longer under any sort of control as workers finally get pay raises. But they openly and irresponsibly said they would keep rates at rock bottom and maybe even drop it from 0.5% to 0.10% again! Just to boost sales!

And the hysterics running the US are screaming for rate cuts. It is across the board. Red ink is pouring over the dam, the screams of the people on the flood plain below are getting louder. Houses worth millions of dollars are being destroyed all over America. So they want more...RED INK!!!

This is why we are in a fix that can't be fixed. We could imitate China but instead, are worried that China won't join the US and Europe in a death pact with Japan.

McKinsey warns US may lose financial leadership

By Gillian Tett in London

The US looks poised to lose its mantle as the world’s dominant financial market because of a rapid rise in the depth and maturity of markets in Europe, a study suggests.

The change may have occurred already, not least because US markets are beset by credit woes, according to research by McKinsey Global Institute, a think-tank affiliated to the consultancy.

“We think the differential growth rates are so significant that it is quite likely Europe has overtaken the US,” said Diana Farrell, author of the report.

“They are now neck and neck, which means exchange rates are very important. It is a real change.”

Europe's 'growth' is mostly the euro being used by the US, Japan and China in their little currency war whereby all three major economies were trying to weaken their currencies against each other. China has switched gears and is now making the yuan stronger. Quite rapidly, actually. Things are so out of control now, China just may give up on trying to keep the yen stronger than the dollar and simply flee. But the news this week shows the yen strengthening so I expect the new plan to force the yen upwards is still in action.

Japan poised to rescue Wall Street banks

The three wealthiest Japanese finance houses are set to step into the worsening sub-prime carnage as the “silent investment partners” of Wall Street and Europe's stricken banking titans.

Senior sources at the “big three” Tokyo megabanks told The Times that they had readied a combined cashpile of as much as $10 billion (£5 billion) and were open to negotiation with any struggling Wall Street bank that approached them for a cash infusion.

Japan prefers to keep a very low profile because they still need to pretend they are in a depression. HAHAHA. The depressed banks of Japan who also are behind the world's #2 FOREX reserves fund, are slyly offering to help the Western banks they are destroying! Isn't that cute? Of course, my battles with people like Roubini and Setser to get them to pay attention to Japan, failed. They and a host of others in the US still, to this day, imagine Japan is in a depression and not an engineered Fortress situation! How on earth can the most depressed country on earth still be the world's #2 economy? Eh? And be outside, not inside, the present banking collapse in the West? Indeed! And for them to even say this proves conclusively, I was right! And I love being right.

Japan To Take Wait-And-See Stance On Stock Plunges, Yen's Rise

TOKYO (Kyodo)--Japanese ministers took a wait-and-see attitude Wednesday toward stock plunges and the yen's steep rise against the U.S. dollar during the day, which were triggered by rekindled credit fears and growing worries over the future course of the U.S. economy.
************************************************
Stocks: Nikkei Dives More Than 3%, Closes At Lowest Level In More Than 2 Yrs

TOKYO (Kyodo)--Tokyo stocks closed sharply lower Wednesday with the key Nikkei stock index diving over 3 percent on a stronger yen, credit fears stemming from U.S. mortgage meltdown and frustration over a lack of political leadership in Japan.
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MUFG Forecasts Y50bn In Subprime-Related Losses For FY07

TOKYO (Nikkei)--Mitsubishi UFJ Financial Group Inc. (8306) now projects it will suffer more than 50 billion yen in subprime mortgage-related losses for the current year through March, well above the 27 billion yen loss it forecast in November, company sources said.
***********************************************
YEN ADRIFT INTERVIEW: Japanese Yet To Enjoy Stronger Yen

TOKYO (Nikkei)--The Japanese have become a curious people who shun their currency's appreciation because they have never been given a chance to truly enjoy the fruits of a strong local currency, Yukio Noguchi, a well-known commentator on economic issues, said in a recent interview with The Nikkei.

Ah, the quaint and strange Japanese! HAHAHA. Always unusual, never follow the normal rules of normal humans. Right!

I love propaganda. If I were Japanese, I would be very enraged by this childish and nasty analysis by Yukio. Always, the industrialists and exporters who rule Japan via the LDP tell us that the Japanese people are different, their snow is different, their bodies don't use the same chemistry as ours, etc. This is cover for malicious and deliberate LDP policies that help exporters and harm the Japanese people. Of course, the pathetic Japanese people can't enjoy a stronger yen because the LDP is desperately trying to devalue the yen! They don't want Japanese buying IMPORTS, damn it! Very simple to understand.

Also, Japan tried to explain their total absence in the current banking crisis as 'we have no exposure to the sub prime mess in the US.' But of course, like much of what they claim, is pure fiction. As the days go by, the banks and financiers in Japan cough up the truth like a cat getting rid of a fur ball. Grrracccck. So here it comes: the amount is double what it was supposed to be two months ago. I bet in two months it will double again. Easy prediction to make.

Back the to US: our government is full of fools or traitors. This latest report to Congress proves this.

US Congressional report:

Some U.S. policymakers have expressed concern that China might try to use its large holdings of U.S. securities, including U.S. public debt, as leverage against U.S. policies it opposes. For example, various Chinese government officials are reported to have suggested that China could dump (or threaten to dump) a large share of its holdings to prevent the United States from implementing trade sanctions against China’s currency policy. Other Chinese officials have reportedly stated that China should diversify its investments of its foreign exchange reserves away from dollar- denominated assets to those that offer higher rates of returns.

The report constantly, after mentioning China holding US debts, has Japan in parenthesis. Why isn't this report talking about the dangers of Japan running our foreign policy? Just a short while ago, in history's view of time, the Japanese were doing lots of business with us and then they did a sneak attack! And fought us tooth and nail in WWII. NO ALLY IS ALWAYS AN ALLY. This should be engraved onto every doorway to the State Department's offices. Yes, selling our souls to China is stupid. But selling it to Japan is just as stupid if not more so. Indeed, selling our debts to ANY aliens is TREASON. The US should either balance the books or sell it to only Americans. We did this in the past.

Rule of thumb: countries selling their government debts to aliens tend to go bankrupt because it is easy to do. The US will be no exception to this rule. When Germany did this, England and France followed suit instantly in 1931. Then we went down the tubes into the Great Depression. The depression was barely biting in 1930. But after 1931, we slid down the slippery slope so that by 1933, our banking system collapsed. The US plans to go bankrupt. I feel it in my bones. The talk today by all our political leaders and our emperor is all about dropping interest rates, attacking Iran and handing out huge sums of government goodies we can't afford unless we sell China these debts.

So far from fixing things, we intend to make it worse even as the flood of red ink we are causing is roaring over the top of the dam.

We've run out of bubbles

Are the bulls in hibernation?
I'll begin the new year with this comment: There are no bullish interpretations for the stock market's action thus far. This tells us that 2008 will be the year when reality finally overtakes the Goldilocks crowd.
Of course, we should expect the bulls to regale us with stories about a proverbial second-half rebound -- the possibility of which is approximately zero, in my opinion. We should also expect believers in that hypothesis to spark a rally from time to time, based on hopes of surprise interest-rate cuts and on actual cuts.
But their efforts will become progressively less effective.

The mainstream media is finally noticing what is going on. This is when the panic sets in. All the people living on the floodplain are now running for safety. Only the government is driving around in trucks with speakers yelling, 'Don't panic! We will give everyone MORE red ink. This will prevent the dam from breaking!'

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Comments

[Pluto]

As the days go by, the banks and financiers in Japan cough up the truth like a cat getting rid of a fur ball. Grrracccck.

Gee, thanks Elaine. That's now lodged permanently in my brain.

[Elaine Supkis]

My cat Fluff is a true inspiration. He has his own bed right next to this keyboard. Is sitting there right now.

[Yusef]

What a beautiful and brilliant explanation of these complex events. Thanks.

[jbvo]

The dollar was down 6% against both the yen and yuan at year end 2007 vs. year end 2006.
The two currencies are being moved in tandem, a trend which has continued into 2008.

[Elaine Supkis]

True. I believe this is happening because the Chinese decided on 17/7/7 to do this. They even talked about doing this. Last July, the Japanese openly said, they wanted the yen to be 130 to the dollar by October.

This is because the two G7 meetings last year, both times attacked ONLY China for their currency value and NOT Japan. So China demanded they be more fair and they refused. Since then, the flow of money in the world has been greatly altered. By China as we can now see very obviously. The Japanese today are howling with agony over the rising yen as I show in their headlines from the Nikkei ever two or three days.

[NorkaWest]

Our current social and political leadership are absolute proof positive that Darwin's Theory of Devolution is correct.

[Elaine Supkis]

Or rather, to be popular, one has to do dangerous and utterly irresponsible things. But then, this is the logic of consumerism which is quite different from capitalism.

[OC]

Hi Elaine,

This has a slightly darker view to Volcker' era:

http://www.financialsense.com/editorials/engdahl/2008/0116.html

THE FINANCIAL TSUNAMI PART II:
The Financial Foundations of the American Century
by F. William Engdahl

Well, at least one of them are beginning to see the light:

http://www.321gold.com/editorials/willie/willie011608.html

Threat of Sovereign Wealth Funds by Jim Willie CB

[Assissotom]

Really great site with alot of good information!! Keep up the good work!!!!

[OC]

The Dragon is running for high ground!! Probably going to kill the stock market to save his precious neck!!

Check out this article:

http://www.financialsense.com/editorials/guild/2008/0115.html

INFLATION IS BECOMING A WORLDWIDE PHENOMENON
And it is getting worse as the U.S. and
European economies slip into recession
by Monty Guild

He is paying 5% more than other stock exchanges for gold! That is what US did for silver!!

Looks like it's back to gold backed certificates if the Dragon has the final say!!

[shargash]

Most conventional economists believe that the coming economic collapse will cause commodity prices to collapse. This means we don't have to worry about inflation. So get those helicopters airborne and commence the dropping of money!

I think this is a very bad misreading of the commodity market. We are in the early stages of a global fertilizer shortage. Global climate change is slashing yields. Oil production already lags demand and is going to decrease from here on. Here is a quote from Bush from Saudi Arabia, when asked about getting the Saudis to pump more oil: "If they don't have a lot of additional oil to put on the market, it is hard to ask somebody to do something they may not be able to do." Everyone expects the Saudis to rush to the rescue, but the Saudis are tapped out. We are one natural disaster or one political crisis away from a 70's style oil crisis.

There are other factors keeping pressure on prices as well (e.g. hoarding of strategic metals by China). Just as in the 70's, the current batch of economists don't realize they're operating under different conditions. We're at a very dangerous point, and TPTB are doing the wrong things.

[Elaine Supkis]

I am hoarding stuff. The Chinese are hoarding stuff. In inflationary times, people hoard necessities. The Fed announcing they will pour more useless money into consumerism equals inflation.

Tax cuts slits the throat of the USA goose.

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