Scylla And Charybdis: Depression And Inflation Are Unavoidable

More car crashes on Long Island this year due to speeding.
May 9, 2008

Elaine Meinel Supkis

As the Fed open window to lending to banks allows a flood of Funny Money™ to return to the system, Japan's top economic advisors have recommended the government shed 80% of foreign reserves which are mostly US dollars rather than make a Sovereign Wealth Fund like China. This would kind of destroy the dollar, by the way. But instead, all of Asia without exception, have renewed buying and holding US dollars and assets so their own currencies can drop in value in concert with each other. Japan has ceased working with the other G7 to strong arm China into strengthening the yuan. Everyone is trapped in a system where everyone will be hurt when the US goes bankrupt. But now the conversation behind closed doors is, 'How do we salvage something for ourselves when this happens'. And as usual, I suggest the US should have a massive, strategic retreat from our mad empire and its wars before it is too late. And Bush insults India, claiming they are the cause of global inflation, not Japan or the US.

Edward Ulysses Cate, aka The Great Red Dragon:

The Fed: " In addition, the Fed could theoretically combat the credit crunch by buying securities or extending loans without limit without causing the federal-funds rate to fall to zero, something that could fuel inflation or distort markets."

Whoa, Nellie! Did I read that right? . . . buying securities or extending loans without limit . . .?

Remembering that the Feds have always said that they are owned by their member banks, this looks like they'd like Congress to legally give them an "unlimited credit card" to be used to buy anything and everything the member banks want, and extend those loans into never-never-land where loans never have to be paid back.

At the beginning of Chapter One of the 1889 Great Red Dragon book, it plainly stated that the goal was to "own the earth in fee simple." I've always wondered how that could be accomplished. So if the Feds can dish out unlimited loans to Barclays and others, along with help from the Bank of England, then well-connected private equity funds, hedge funds and other fronts could be funded with unlimited monopoly money. The mergers and acquisitions could continue unabated until nothing is left to purchase.

Latest Fed Reserve total borrowings from the new windows:

I remember back in the old days of about ten months ago: the Fed had to open this new window so that the entire G7 banking system could borrow infinite funds while handing over, as collateral, useless paper that was worthless. The bankers said, they were 'testing' this new window to see if it would work and were worried it would punish them. For they are supposed to be the ones handing out loans, not the Fed!

Well, the 'test' worked. No one panicked and pulled savings out. Well, HAHAHA. They did. Indeed, the rate which savers have removed savings is rapidly climbing to infinity as we can see in this chart! Everyone is unloading and the Fed is hoovering it all up. This transfer of all OBLIGATIONS to the Fed is rapid. And won't stop. The banking crisis is INCREASING.

We cannot trust anyone who has money to translate into new forms. All these people from Soros and Buffett to all the pirates, politicians and rulers, all these people are in full-lie mode. They are very fearful that someone who is saving money will notice something is very, very wrong. And getting wronger by the minute.

Us bear buffs have been watching this particular chart now since November. I remember when it shot up to three times the size of the biggest borrowings in the history of the Fed. Wow! We were all aghast. Then, each month, the amount climbed. I predicted it would hit a trillion by next January. And indeed, it will, if not sooner.

When the borrowings from this new window hit $40 billion, we were all amazed. We, the denizens on the web who seldom get to appear in the mainstream news. Since last month, this has now DOUBLED! Wow. It is probably already over the $100 billion mark and rapidly climbing. Looking at this chart, we see that it never, ever passed $5 billion and that was in the chaos of Volcker killing inflation the hard way. Otherwise, there was this big peak on 9/11 when the government propped up the system. That seemed big at the time. Now it is barely a tiny blip. Anyone writing the history of the decline and fall of the US empire will use this graph to illustrate the complete collapse of the entire banking system. Note that in the 1930's, there was no blip like this. Bernake and his buddies will claim, the depression was due to lack of a sudden surge in borrowings against the Fed and so this caused the depression.

Of course, back then, money became more and more valuable even though the amount of gold a dollar bought declined by half! Huh? The dollar was actually devalued but since the banks weren't lending and the central bank wasn't giving away money like crazy, inflation collapsed into deflation. Today, this isn't happening. We are having raging inflation! Isn't that great. Like the Greek myth of Ulysses' voyages, our banking system has to sail between the Scylla of inflation and the Charybdis of depression. Of course, the way to sail past these two hazards is to be a very good sailor and be very smart and to make the right choice.

Odysseus was told by Tiresias that he would have a choice of two paths home. One was the Wandering Rocks, where either all make it through or all die and which had been passed only by Jason with the help of Zeus, but he chooses the second path. On one side was a whirlpool, called Charybdis, which would sink the ship. However, on the other side of the strait was a monster called Scylla, daughter of Crataeis with six heads who would seize and eat six men.

The advice was to sail close to Scylla and lose six men but not to fight, lest he lose more men. However, he did not dare tell his crew of the sacrifice, or they would have cowered below and not rowed and everyone would have ended up in Charybdis. Six men died, and Odysseus announced that the desperate cries of the wretched betrayed men were the worst thing he had ever known. Undoubtedly, this affected morale and left the survivors feeling mutinous.

As usual, the ancient stories are very close to the truth. The whirlpool is where things get sucked into the Outer Darkness. Depressions are deadly. Certainly, they kill off workers and launch wars. The Great Depression ended up creating an orgy of deaths starting with artificial and real famines that killed many millions of Asians and Russians. Then came WWII. Starting with the Japanese invasion of China. Around 100 million plus people died premature deaths in that hideous eruption of violence.

The bankers and rulers vacillate between the lust to start WWIII and the fear that it will, like WWI and WWII, lead to revolutions and the annihilation of the ruling elites. So they chose the route whereby a portion of the population is eaten by the Scyllian Inflation monster. Depressions lead to idle workers. But inflation speeds up things. So everyone is inflating...except for the Japanese and the Americans. Or rather, this is a schizophrenic approach to this monstrous choice: both Japan and the US are encouraging inflation while pretending there is no inflation. So we get this horrid hybrid, 'Stagflation'. Stagflation is both a whirlpool and a balloon at the same time. It is very hard to slay or avoid. The rescue operation by the Federal Reserve is very inflationary. But the destruction of asset values because no banks are lending to nearly anyone means we get deflation of all previously valuable things like SUVs, houses, etc. All the junk owned by the masses and often, their only wealth.

This graph means we should be all having a national conversation about what is happening in the banking system. People must understand, the Federal Reserve has FEW reserves! And thus, this $100+ billion in sub-inflation rate lending is very inflationary.

Japan should sell 80 percent of FX reverses to cut risk

Japan should steadily sell off 80 percent of its foreign reserves rather than set up a sovereign wealth fund to actively manage this money, said a former government official who advised then-Prime Minister Junichiro Koizumi on economic policy.

Mitsuru Taniuchi, now a professor at Waseda University in Tokyo, said there was a growing risk of valuation losses due to currency moves because Japan's reserves are now the world's second-largest behind China at more than $1 trillion.

"It would be appropriate to gradually sell them, possibly over several years, while monitoring the market," the former director-general of the Cabinet Office's research bureau told Reuters in an interview.

"If we sold $800 billion quickly, it would of course disrupt the market."

The fact that high former Japanese officials are now saying, 'Ditch the dollar! Throw it into the maw of Charybdis!' is a sign that the end is nigh. Of all the contrarian financial reporters online, I must be one of the very, very, VERY few who focuses on Japan and the yen. Correctly, I may add. This is now proving to be correct. Even though China has exploited cheap labor to flood our markets, Japan has done this on EXPENSIVE labor! This is due to the simple mechanism of having high taxes in Japan, low or no lending to workers so they can go shopping or even have children anymore. And to make lending super-cheap for Americans. And to do this, they must have a weak yen and also a huge FOREX reserves.

Note the caution of the Japanese financial advisor here. He would dearly love for Japan to go crab-wise into world markets while dumping a heroic and huge amount of dollars. This, of course, is supposed to happen in a fantasy world whereby someone who speaks Chinese or Arabic, buys up all these now-useless dollars. Of course, this is pure insanity. The new head of the Bank of Japan has repudiated the Koizumi approach and is now openly conspiring with the Bank of China to deal with the dollar. The US should be in total hysterics seeing the world's two biggest holders of US dollars holding secret meetings to discuss how to deal with these damn dollars.

These holders of over $2.5 trillion US dollars which dwarf the Federal Reserve's holding of $74 billion in international reserve assets and foreign holdings. According to the IMF, Japan is holding $1,015,587,000,000 while no one has any idea how much China is holding, we just know it is an amazing amount and the biggest fund on earth. So let's put all of this together: If the Federal Reserve's open window which is connected to the Outer Darkness cause $1 trillion in Funny Money™ to flood into our empty bank vaults AND Japan sells off 80% of its FOREX trillions which would be nearly a trillion dollars, this makes $2 trillion in money now circulating in the world's economic systems. Of course, if Japan dumps the dollar, the Chinese will NOT buy it up.

For this is the signal for the next step in the 50 year plan the Chinese hatched while studying economics here in the US and while they were arguing about capitalism with me at the dinner table. So I will issue yet another warning to the State Department: I TOLD YOU GUYS THIS WOULD HAPPEN. The US has NO WAY to escape this except one: cease our empire and do a strategic retreat as fast as possible and stop importing oil. Period! This is the only outcome we can survive.

The other is WWIII. True, the Chinese will then dominate Asia and Russia will dominate Europe. But that is their problem. Both Russia and China are capitalist systems with a vengeance so if Europe and Japan, etc, want to survive, they have to have diplomatic relations and good business relations with both empires and all will be well. Neither of these empires wish to invade anyone right now. They do wish to be in control and frankly, they earned this! We lost it due to stupidity.

But killing America, turning our great nation into a nuclear nightmare mess, will not give us our SUV lifestyle back! This is gone, everyone. Gone with the Wind. We can't go back. Best to go forwards and rebuild. We can dominate the Northern and Southern Hemispheres. We can't dominate the entire planet. It is bankrupting us.

But Japan has the option of trimming its reserves by selling foreign assets, Taniuchi said.

If Tokyo were to do that, the Ministry of Finance, which manages the reserves, should say so in advance so that it could avoid surprising the markets and instead create the view that the sales were aimed at trimming currency risk but not at guiding the yen higher, he added.

Taniuchi said that although Japan missed a golden opportunity to sell dollar assets in the reserves when the dollar was stable near 120 yen until the middle of last year, it is still a valid approach.

After the dollar fell to a 13-year low below 96 yen as the U.S. credit mess deepened, Finance Minister Fukushiro Nukaga said in late March that unrealized losses on Japan's foreign reserves amounted to about 18.5 trillion yen ($177 billion) when the dollar was around 100 yen.

The Japanese are panicking as their assets disintegrate as Scylla Inflation eats them. Inflation never protects assets that are valuable in non-inflationary times. Inflation kills property while it grows like a cancer in food and fuel. The Japanese don't have the food or the fuel. So they are rightfully frightened. Even though their stupid 0% interest rate business is the ultimate cause of global inflation. So they want to sneak out the back door, leaving the US and the Chinese to clean up this mess. I say, no way in hell should they be allowed to do this any more than the EU should allow the US to do this.

The March madness when the yen suddenly reached its real value vis a vis the dollar was, as I pointed out back then, a nightmare for Japan. They have to have a weak yen! Back last July, they had a very weak yen until the Chinese forced the yen upwards. This is why they talk regretfully about not dumping all their American assets at that time! Of course, they couldn't. The crisis began after 7/7/7. It was already too late. And this was when Japan was boasting, they would drive the yen down to 130 to the dollar! So they were filled with hubris. They thought they controlled global currencies when China, the world's biggest FOREX holders by far and away, controlled global currencies.

I will also note that Japan, during all of 2007 and even into 2008, have been buying and holding more and more reserves, according to the IMF, an extra $30 billion. So far from divesting themselves, they bought even more in a hysterical lunge to weaken the yen. Only after they surrendered to China via a series of secret meetings with bank officials and now, the leaders of Japan and China, has the yen finally begun to weaken to the great relief of Japan.

Only they KNOW the plan! They KNOW the dollar is doomed! So this is why a top advisor is suggesting Japan cut its losses and dump it all and run away. Perhaps he is also being nasty and clever: this might hurt China who holds a lot more! I will also note, once Japan surrendered to China, they began talk about IMITATING CHINA and starting a Sovereign Wealth Fund. I have reported on the SWF issue for years. Last year, the G7 conspired to tell the SWF nations, these funds were useless and stupid. And would be destroyed by US inflation anyway. Or the depression in asset values of all non-food and non-energy stuff. I laughed at that notion. Even if assets decline, the SWF would buy them all up anyway and after the inflation is done killing the US middle class, it will turn into a Japanese-style depression and the remaining currency will be valuable. And the US will be broke. Simple, isn't it? So in the end, the SWF nations will survive, the US will die. The debts owed by the US will vanish but so will our wealth.

Japan's reserves ballooned after yen-selling intervention worth a record 20 trillion yen ($191 billion) in 2003 and a further 15 trillion yen in the first three months of 2004, as the government waged a campaign to prevent a rapid rise in the yen from derailing Japan's then-fragile economic recovery.

Tokyo has stayed out of the market since then.

It is very interesting to see open lies. Tokyo pretended to not be meddling in the markets after openly doing so from 1996-2004. Japan lied to the US and the other G7 nations, they would stop filling their FOREX reserves and play nice. This was so the US and EU could hound China over currency issues and their FOREX reserves. But when the yen began to strengthen rapidly starting in July of 2007, the Japanese resumed huge FOREX hoarding yet again. And this reporter wasn't told this nor researched the information like I do. This is very irritating to me. But then, I am nearly alone in understanding what is going on here. The facts prove me right and the reporter wrong.

Korean Won Posts Biggest Weekly Loss in Two Months; Bonds Fall

South Korea's won completed the biggest weekly decline in two months as the central bank signaled it wants a weaker currency to help spur economic growth. Government bonds fell.

The currency touched the lowest since November 2005 after Bank of Korea Governor Lee Seong Tae yesterday said the trade deficit will widen and gross domestic product forecasts will be lowered in July. The won, the world's worst-performing major currency this year, is undervalued by about 8 percent, said Mark Mobius, a fund manager at Templeton Asset Management Ltd.

``We've had comments from policy makers hinting at a preference for a weaker currency,'' said David Mann, senior currency strategist at Standard Chartered Plc in Hong Kong. ``In Asia, the won has been hardest hit by higher oil prices and a widening deficit.''

Even though China, Taiwan, Korea, Japan and nearly all the Asian export nations import oil and other commodities, they are ALL insisting on weaker currencies. The yuan and yen have been dropping like rocks and now the others are following suit. The US cannot escape the export trap we are in via weakening the dollar by creating gross inflation at home. For we, too, are being hammered by high energy and commodity prices! And we are still with a huge trade deficit! Let's look at the trade statistics from the US government itself:

U.S. International Trade in Goods and Services
MARCH 2008

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total March exports of $148.5 billion and imports of $206.7 billion resulted in a goods and services deficit of $58.2 billion, down from $61.7 billion in February, revised. March exports were $2.6 billion less than February exports of $151.1 billion. March imports were $6.1 billion less than February imports of $212.8 billion.

In March, the goods deficit decreased $3.5 billion from February to $68.6 billion, and the services surplus was virtually unchanged at $10.4 billion. Exports of goods decreased $2.5 billion to $104.7 billion, and imports of goods decreased $6.0 billion to $173.3 billion. Exports of services were virtually unchanged at $43.8 billion, and imports of services decreased $0.1 billion to $33.4 billion.

In March, the goods and services deficit decreased $4.8 billion from March 2007. Exports were up $20.0 billion, or 15.5 percent, and imports were up $15.1 billion, or 7.9 percent.

So, our deficit in trade was 'only' $58.2 billion for one month? Oh, joy. That is only $698.4 billion for the year! At that rate, if we do this for ten years, it is only a $7 trillion deficit with our dear trade partners! Anyone who thinks this is good news is nuts. Of course, last year it was worse last year. At one point, we were running a trade deficit of nearly a trillion dollars a year if it was running more than $70 billion a month.

The game is still for all our trade partners selling manufactured goods, namely in Asia, to devalue their currencies vis a vis the dollar and the euro while the US is also trying this in vain. But if the yen drops, this has no effect on oil or other commodities! But if the DOLLAR drops, all these shoot upwards and this wipes out the advantages of the US in trade since we import lots and lots of oil. Canada, equally alarmed last fall when the loonie shot up to $1.20 to the dollar for one day, have played the 'weak currency' game just as hard as Asia.

Now for more funny news from the world's most inept diplomat, Bush Jr:

Now, Bush blames India for rising food prices

Prosperity in countries like India is "good" but it triggers increased demand for "better nutrition" which in turn leads to higher food prices, US President George W Bush said.

The comments come close on the heels of US Secretary of State Condoleezza Rice's controversial statement that "apparent improvement" in the diets of people in India and China and consequent food export caps is among the causes of the current global food crisis.

At an interactive session on economy in Missouri, Bush argued that there are many factors for the present crisis, only one of which was investment on biofuels like ethanol.

Good grief. Arrest him, will you, Congress? Why wait for this fool to utterly destroy us? The madness of fat American SUV gas guzzlers snapping at Asians for 'driving up prices' due them competing for scarcer resources is just...insanity personified. The US trade statistics benefits from food price hikes! This is why our trade deficit is only $50+ billion rather than last year's $60+ billion a month! So we have a $120 billion boost in trade thanks to high food prices. India is the one who should be complaining only they run a big trade surplus with the US. Isn't that fun?

G-7 Central Bankers Stymied by "Crude Oil Vigilantes"
BY GARY DORSCH

The “Group of Seven” central bankers, who control the money spigots in 2/3’s of the world’s economy, huddled with their colleagues from China and Russia behind closed doors in Basel, Switzerland this week, haunted by the “Crude Oil Vigilantes,” who threaten to unravel G-7 schemes to rescue troubled global banks. Earlier today, the price of West Texas Sweet traded as high as $124/barrel, doubling from a year ago, and guiding Chicago Corn futures to all-time highs.

European Central Bank chief, Jean Trichet, chaired a meeting of central bankers from the “Group of 10” industrialized nations on May 5th and acknowledged that, “Inflation risks are significant under the influence of oil and energy price increases, commodity price increases more generally, and food and agricultural products. This is perceived in all economies without exception. This is no time for complacency for central banks in any respect,” he warned.

As usual, Gary Dorsch has good analysis and unlike most commentators, he also tracks news about the yen and realizes it's great importance in the scheme of things. So I always recommend reading him.

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Comments

[mad mike]

there is no limit to human greed and folly.(tm)
HAPPY CABBAGE FOR EVERYONE! happy cabbage is what elaine calls "funny money(tm).
i have a canon digital rebel. in fact i got 3 of them- the 6, the 8 and the 10. some lenses. all made in japan. no such animals made in the usa. good products though. i am a machinist. a poor career choice. my shop makes small run custom hydraulic blocks mass volume manufacturers in china wont touch. niche markets new future.
mass consumer items all gone. but take my word for it. you dont want to work in manufacturing. nasty, dirty, low wages, no respect.
the big boyz make their own money. ex gold-man-sackers in gov-ment hand it out to cronies at the old firm. wish i had a gig like that. which means we need zero taxes.
because we get zero service. look at new orleans. and all those earthquakes? who ever gets clobbered aint getting helped.why give all the crooks mentioned here your money to steal? best waste it yourself instead of those rats wasting it for you. i expect bad things to happen. food shortages. fuel shortages. race riots. tanked dollar. canceled elections. martial law. soon very,soon.just today in the town of west mumford in the great state of new jerky i saw a gasoline station with a hand lettered sign proclaiming "out of gas". what does that tell you? TSHHTF!
kooky corzine our gov-ner in the great state of new jerky is a super delegate. although hillary won new jerky he is voting for obama. when the powerful moneyed folks vet someone you have to wonder why.
i figger none of the above are good for the country. all are human and none are gods. although one may be "the chosen" (for you). but like i sed it can go either way. ever see "escape from l.a."? which will make more
FUNNY MONEY(tm)? obama or poe lease state?

[Royal Dutch]

excellent article thank you elaine.

[rockpaperscizzors]

Did it ever occur to those morons who voted for our MBA Gordon Gecko preznit that he would do to the USA what he had done to the businesses he ran, hollowed out and dumped into the trash bin? Anyway, as the world is squabbling over food and energy, China, Russia, and Europe are carving up the fallen empire's USA cadaver. Listed below Asia Times bad news articles.

China's submarine progress alarms India

...According to reports, commercial satellite images indicate that the Chinese are building a massive strategic naval base on Hainan island, in the South China Sea, south of Hong Kong
...A reputed British daily has described the base as a "vast, James Bond-style edifice capable of concealing up to 20 nuclear-powered submarines and which will enable China to project its power across the region".
http://www.atimes.com/atimes/South_Asia/JE09Df02.html

An oil-addicted ex-superpower
....Less than a month ago, the United States similarly lost its claim to superpower status when a barrel of crude oil roared past US$110 on the international market,
...The fact is, America's wealth and power has long rested on the abundance of cheap petroleum...the role of abundant petroleum in fueling the global reach of US military power. For all the talk of America's growing reliance on computers, advanced sensors, and stealth technology to prevail in warfare, it has been oil above all that gave the US military its capacity to "project power" onto distant battlefields like Iraq and Afghanistan. Every Humvee, tank, helicopter, and jet fighter requires its daily ration of petroleum, without which America's technology-driven military would be forced to abandon the battlefield. No surprise, then, that the US Department of Defense is the world's single-biggest consumer of petroleum, using more of it every day than the entire nation of Sweden.
...Russia's gusher
If anything demonstrates the critical role of oil in determining the fate of superpowers in the current milieu, it is the spectacular reemergence of Russia as a Great Power on the basis of its superior energy balance. Once derided as the humiliated, enfeebled loser in the US-Soviet rivalry, Russia is again a force to be reckoned with in world affairs. It possesses the fastest-growing economy among the G-8 group of major industrial powers, is the world's second leading producer of oil (after Saudi Arabia), and is its top producer of natural gas.
http://www.atimes.com/atimes/Global_Economy/JE10Dj05.html

G7 loses grip on global policy to O5
http://www.atimes.com/atimes/Global_Economy/JE09Dj03.html

In the grand american tradition in handling the stresses of this administration, I better spend the 'tax rebate' while it's still worth something.

[blues]

Not only that! We keep hearing this "superpower" bullshit from every direction. Wake the fuck up! We are long, long past the point where the notion of a "superpower" can mean anything. All our technology now belong to them. They can turn our beloved corn crops into nanodust at the drop of a hat. Not just Russia, or China. Argentina could easily do it. With plausible deniability to boot.

We've exported a bargefull of matches to hundreds of children who live in a tinderbox. The smartasses just outsmarted themselves a few times too often.

[Elaine Meinel Supkis]

We are the #1 brats with the blowtorch.

[GK]

Here is your 'invetation' letter to the Iraq Oil Expo!

http://www.iraqenergyexpo.com/invetation_letter.php

It is my pleasure to invite you all to the IRAQ ENERGY EXPO AND CONFERENCE, October 17-19, 2008.

The year 2008 marks a tremendous new opportunity for investment in Iraq’s upstream and downstream oil and gas infrastructure. To help facilitate this process, the Government of Iraq is working tirelessly to pass the new hydrocarbon law. As a result of this landmark legislation, companies from around the world will be able to participate in increasing Iraq’s oil and gas capacity in the 2nd largest oil reserve in the world.

As a result of this momentous achievement, and on behalf of the Iraqi Government and the Ministry of Oil, we would like to invite all international oil companies to participate in this historic event. The location for this international exhibition will be the newly constructed Baghdad Convention Center at the Baghdad International Airport.

The Ministry of Oil and its technical staff are very interested to see the latest technologies in this ever-changing industry. In return, the Ministry is prepared to provide detailed explanations of its needs for the coming years. Your participation at the expo is essential to helping us understand your company’s capabilities. We look forward to seeing you there.

Dr. Hussein Al-Shehrestani
Minister of Oil