Japan Carry Trade Utterly Dead Now!

October 6, 2008

Elaine Meinel Supkis

The yen carry trade is dead. I'll be frank: the entire focus of the G7 nations is to restart this carry trade. Throughout the last three years, the G7 has ganged up on China over the value of the yuan while remaining utterly silent about the yen. Attempts were made to force China to not copy Japan. China ignored all this. Then, suddenly last summer, China began the relentless unwinding of the Japanese carry trade by the simple act of buying up yen. All news stories about the yen get things utterly backwards. They talk as if a strong yen is a good thing. It is not. It is pure hell for the dying status quo. It is why 'liquidity' suddenly vanished from G7 banks last summer. Time to take yet again, a deeper look into all this.

Yen Unbeatable as Credit Seizure Proves `Carry Trade Is Dead'

(Bloomberg) -- The same credit market collapse that drove Lehman Brothers Holdings Inc. into bankruptcy and sent bank borrowing costs in Europe to record highs is making the yen unbeatable.

Japan's currency was the best-performer in September and the only currency to appreciate against the dollar. Deutsche Bank AG, the biggest trader of foreign exchange, says the yen will rise 5 percent in coming months. New York-based Morgan Stanley is telling clients to buy the currency versus the euro and pound.

After seven years of providing the cheapest source of funds for investors buying higher-yielding New Zealand dollars, Australian dollars and Brazil reais, the yen is appreciating as $587 billion of subprime mortgage-related losses force banks to restrict credit. It strengthened 4.4 percent on a trade weighted basis in September, according to the Bank of Japan's effective exchange rate, the most since August 2007, when the seizure in capital markets began.

All across Japan, export industry executives are disemboweling themselves. AIIIEEEE! They scream. Not only is the global economy now shrinking, they can't do their little underhanded game for feeding endless credit into global banks via the carry trade. This flood of easy money fed the consumer frenzy that gripped many nations. The monetary base of the planet expanded hugely ever since the weak yen/0% Bank of Japan game began.

It was a great game while it lasted! It was endless fun! It was a global feeding frenzy. So much easy credit poured into the world's economy that every nation on earth except for Iraq and Afghanistan, boomed. It took me several months to figure out all this several years ago. Once I did figure out what those pirates were babbling about when they coyly mentioned, 'Japanese carry trade', I was thoroughly outraged and began my campaign to stop it.

This was done in the teeth of the entire G7 central bankers trying their damnedest to continue this fraud. From day one, I figured the incredibly low interest rates set by the Bank of Japan was directly connected to the ballooning FOREX reserves hoarded by this same bank. I then correctly connected all this to the growing export powers of Japanese industries. And all this was connected back to the fake depression in Japan. I then predicted that if the other G7 nations imitate Japan like China has done, this would create a deflationary spiral. The carry trade would collapse into everyone rushing towards the bottom to gain the export profit powers of Japan.

This, in turn, would cause the entire scaffolding of world trade to collapse. For Japan's entire business/government/central bank model is very flawed. Very flawed! It can be done by only one nation at a time. When Chinese economics experts figured out the Japanese scam, they instantly instituted it in China. This destabilized the game very much! So Japan's leaders conspired with fellow G7 leaders to stop China from imitating Japan. This led to a comical series of pronouncements, declarations, scream fests, howls of rage as the entire G7 shrieked themselves hoarse, hoping to scare China into stopping.

This game turned very ugly during the Tibetan riots and then the Olympics. The snarls and howls of rage turned into petty personal attacks on all the Chinese people, their accomplishments and their efforts and being a major economic and cultural power. The naked hate and fear was not personal, though, it was just a tactic to shove the Chinese into acting like the US: be the dupe of the Japanese carry trade!

This all failed as I also predicted. China sent a man into space where he did a space walk and waved the Chinese flag over our heads. This was an open taunt by China. It showed how they are moving ahead while NASA collapses and the US falls into dotage. Back to the Japanese carry trade: it was the easiest thing on earth. All the hell hounds, pirates and especially the army of gnomes saw this as a splendid back door into the Cave of Wealth and Death. They ran in, stuffed their bags and then ran off to instantly turn this free money into things and wealth objects before the money lost its value. They KNEW they were creating inflation and didn't care so long as they could run back into the Cave and get more and more and more.

It took no thinking, another delightful feature for them. Mindlessly, they ran in and out, happy as larks. Life was roaring good fun! All the barriers to creating wealth out of thin air fell! Inflation hit the things these gnomes, pirates and hell hounds love: price of top prostitutes, rare wines, fine artwork, yachts grew in size, palaces were traded or built, the price of jewelry and fine French gowns shot upwards. This was 'good' inflation: the rising value of goodies which they bid on at auctions is always a great thing for them.

Auction records were set, one after another, year after year. This flood of funny money fed the high-end markets and everyone servicing this sector grew rich, too. But the money didn't stay in this rarified area. It filtered downwards. The seamstresses going blind, sewing fancy dresses got more money. The chauffeurs driving the limos got more money. The doormen, the gardeners, everyone got more money. This flood of funny money rapidly filtered into the economy and caused obvious inflation of all things.

On top of this, the need to make this Japanese funny money make money effortlessly caused the gnomes to use this as the basis for lending in the housing industries across the planet. All housing was their target, they lent to slums as if they were palaces. They gave everyone this easy, cheap money. So long as the spread between 0% in Japan and 6% in the other nations remained intact, all was well. All the gnomes had to do was sit back and count the dollars as they flowed in, thanks to these cheap yen loans. The whole planet got clobbered by a tsunami of debt.

Bloomberg:

``The yen is a counter-cyclical currency,'' said Richard Benson, who oversees $14 billion of currency funds at Millennium Asset Management in London. ``When the global economy looks bad, the yen should do well.''

The currency lost 60 percent against the Australian and New Zealand dollars in the seven years ended June 30, and depreciated 24 percent versus the real and 20 percent to the British pound. The main cause was the so-called carry trade, where investors took out loans in Japan to take advantage of the lowest benchmark interest rates among the Group of 10 industrialized nations. They then sold the yen and invested the proceeds in high-yielding assets outside the country.

I will give credit to Bloomberg for explaining one half of the Japanese carry trade business. Of course, the yen is 'counter-cyclical'---it is the Black Hole of the monetary system. When the system reverses, it suddenly appears quite different. Black becomes white, down becomes up and the entire superstructure used by all the bankers in the world collapses. They can't just reverse gears. It is a messy business. Sudden reversals are very painful. The smarter currency traders figured by July, 2007, that the yen was doomed to grow stronger. So they bought yen which increased its tendency to grow stronger.

The Bank of Japan kept retaliating, using all the old tools to fix this. When the yen hit 96 to the dollar last fall, I said, 'About time!' But this was corrected swiftly by a concerted action of all the G7 central banks. A lot of the 'rescues' last fall were directed at KILLING the yen, not rescuing anything. It was an attempt to restart the Japanese carry trade status quo.

The dying dollar is making this nearly impossible. The recent gyrations in Europe and Japan this fall has been aimed directly at strengthening the dollar, not the yen! Last month, when their sweaty efforts worked, they were triumphant. The dollar shot up in value.

But the US trade deficit and the US government deficit makes this a faux strong dollar. Only with tremendous efforts can the rest of the banks keep the dollar strong in the teeth of obvious reality. The dollar can't be strong when its base is weak! So, let's go look at today's news to see how these contradictions are causing all systems to FREEZE as they are unable to let natural economic forces do what needs to be done to BALANCE things again.

Bloomberg:

The slowing world economy is also helping the yen by boosting expectations that central banks will lower borrowing costs. Policy makers in Europe, Australia, New Zealand and Brazil will cut interest rates next year, according to the median estimates of economists surveyed by Bloomberg.

Futures on the Chicago Board of Trade showed an 84 percent probability yesterday the U.S. Federal Reserve will lower its 2 percent target rate for overnight lending between banks by a half-percentage point at its Oct. 29 meeting. Traders saw no chance of a cut a month earlier.

The European and US banks must lower interest rates due to the falling values of all the goodies the gnomes lavished money on in the past. And all the homes that shot up in value in nearly every country on earth during the heyday of the Japanese carry trade are now dropping rapidly in value across the entire planet. So the 'cure' is more easy lending. This means the US government wishes to grant itself cheap lending even though all bankers know thoroughly well that when a borrower borrows too much, they have to be charged a higher and higher interest rate because they are in more and more risk of going bankrupt! Instead, everyone wants the US to be in deeper debt. So there we go!

In Japan, as I expected, the news of the rising yen means a collapse of their export economy. They are terrified. The Nikkei, which they kept very low during the time when all other stock markets were shooting to world records thanks to the Japanese carry trade, the Nikkei stayed ominously flat. And the owners of the majority of Japan's stocks wanted this. They wanted export PROFITS, not soaring stocks due to increasing debts.

Look: Japan was NOT awash with mergers, hostile take overs, etc. These drive up stock values! Instead, anyone who appeared in Tokyo with a bag of Japanese carry trade loans, seeking to dump debt onto a Japanese corporation was swiftly shown the door by the government and the Japanese courts! The low stock values was not due to a dead economy, it was due to severe restrictions and barriers to dumping easy money debts onto thriving Japanese export businesses!

Stocks: Nikkei Plunges To Lowest Levels In Nearly 5 Years

TOKYO (Kyodo)--Tokyo stocks plunged Monday, sending the Nikkei and Topix indexes to the lowest levels in nearly five years as investors remained jittery about the slowing global economy despite measures to quell the ongoing financial turmoil announced by U.S. and European authorities late last week.
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Forex: Euro, Dollar Take Freefall Vs. Yen Amid Financial Instability

TOKYO (Kyodo)--The euro and the U.S. dollar took a freefall against the yen Monday in Tokyo, with Europe's single currency briefly trading in the upper 139 yen range and the dollar in the upper 102 yen level amid continued financial instability.
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Auto/Electronics Industry Profit Outlooks Dim On Global Slowdown

TOKYO (Nikkei)--More Japanese firms, particularly those in the automobile and electronics sectors, are being forced to downgrade their profit forecasts for the current fiscal year due to growing bearish sentiment in Japan, the U.S. and Europe amid the widespread financial crisis.
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Majority Of Top Japan Firms Already Touched By U.S. Crisis

TOKYO (Nikkei)--The U.S. financial crisis has had an adverse effect on nearly 60% of Japan's major corporations, a recent Nikkei Inc. survey showed.

Japan hoped that if the US fell off the cliff after sopping up several trillion in easy money via the carry trade, they could simply shift to China and do the same to them. But unlike the US, the Chinese are not fooled by the LDP and recognize them as trade rivals and the sons and daughters of the Japanese Imperial Army that ravaged and enslaved China not all that long ago. The Japanese were forced, step by step, to curb this ambition. China insists on co-equal trade with Japan, not one-way trade.

The US government is run by traitors who embrace unbalanced trade and unbalanced budgets so we allowed everyone on earth to run trade surpluses with us. But not China nor Japan. Both are locked in a huge battle over who will run Asia and in turn, the planet. Japan is losing this battle for the simple reason, China's workers and peasants are growing wealthier while Japan's are growing weaker and poorer. No economic system can survive forever if they kill the economic powers of labor!

Japan Version Of Subprime Crisis May Be Emerging

(Nikkei)--Re-plus Inc., a rent guarantor, has gone bust amid successive real estate-related business failures, prompting worried industry officials to see the bankruptcy as heralding the possible onset of a Japanese version of the U.S. subprime loan crisis.

While the crisis has forced a large number of Americans to lose their homes, the officials warn that a similar consequence may be awaiting Japan.

Re-plus went down with liabilities totaling 32.5 billion yen. Although the sum is considerably smaller than the 255.8 billion yen left behind by Urban Corp. -- the biggest bankruptcy in Japan so far this year -- the rental home market is gravely concerned about the impact of Re-plus' failure due to its business model.
*snip*
A rent guarantor pays rents for clients when they are unable to pay them. Demand for the service has grown sharply among people unable to find co-signers.

Re-plus receives warranty fees equivalent to half of monthly rents from clients in the first year and 10,000 yen a year in the following years.

As long as the payment ability of applicants for the service is accurately examined, the business goes smoothly. However, the screening of applications is "lax" at many guarantors, said an executive at a real estate agent.

This story is typical: all nations have struggled to compete with 'cheap' Chinese labor by crushing the finances of their own workers. None were as ruthless as the Japanese. The paradox is, when a nation succeeds at this, the internal economy collapses. And since poor workers can't buy anything except the barest essentials, trade shrinks as they buy less and less. If only one nation, such as Japan, does this, it is OK. The exports still boom. But when everyone does this, exports collapse globally and we have an economic crisis.

The US and Europe dealt with this in the last 5 years by insuring that lending would be artificially low. This is still the game plan. Briefly, in alarm at the growth of the M3 numbers, Bernanke cloaked this statistical barometer of too much lending and raised interest rates rapidly in an attempt at stopping wild inflation. He failed because he was too late in doing this and because he is a total failure as head banker. He should have killed the Japanese carry trade rather than the M3 statistics! All he had to do was BUY YEN. The US FOREX reserves should have held more and more yen, at least 5 trillion yen over time. Instead, this was ignored. And this was a fatal mistake, both for Japan and the US. For this left only one way to balance the yen vis a vis the dollar: a grinding global recession.

Looking at US trade statistics over the last half century, it is painfully obvious that the only times the US trade deficit shrinks is during grinding recessions. Since Libra is now activated, she is determined that trade will balance no matter what. So she does it with her sword which she carries in her right hand.

Bank of Japan: savings deposits exceed loan balances by a record 145 trillion yen

According to the Bank of Japan, the balance of savings deposits at Japan’s banks now exceeds loan balances by 145 trillion yen. The gap between savings and loan balances is now at a record high.
As of July 31, 549 trillion yen sits in deposit accounts at Japanese banks, while 403.8 trillion yen is on the loan books. Back in 2000, the gap between deposits and loans stood at about 20 trillion yen.

Despite the planet's most miserly interest rates, the Japanese savings outstrip lending in domestic markets. This is simple: if Japanese banks never lend to any Japanese workers, any savings rate will dwarf lending! The US has the reverse, of course, being the opposite of Japan in every particular. Here, we have a disgusting savings rate of below zero due to excessive lending to anyone and everyone during the Japanese carry trade decade. This is ending and now, savings are beginning to rise due to the simple fact, bankers here can no longer give out loans.

Japan household spending down 4.0% in August; spending on services hit hard

However, data released today by the Ministry of Internal Affiars and Communications shows a 4.0% fall in Japan’s August consumer spending. This makes August the sixth month in a row that household spending has fallen in Japan.
Average spending at households with two or more persons came to 291,154 yen, down 4.0% from a year ago, while spending at households with a worker as head of household fell 1.9% to 322,501 yen. The only nugget of good news in the report was that wages at workers’ households rose 1.9% to 488,216 yen in August.

Spending is down but INFLATION there is up, by 2.4%. This is significant. The people with money to burn are now parking it in savings that earn no interest rather than spending. This hammers the working class of Japan even harder. They will lose jobs, see pay even worse than before. They will go hungry or die. Not that the export-addicted upper classes give a hoot.

Here is a story from Japaneconomynews.com' archives of last year: G7 lets Japan off hook; ECB’s Trichet: Carry trade poses risk
February 11, 2007

On Friday, US Treasury Secretary Henry Paulson said that Japanese Finance Minister Koji Omi provided other G7 finance ministers and central bankers with a ‘favourable’ report on the Japanese economy. Paulson essentially said that the yen’s value is in line with Japan’s economic fundamentals, dissipating any possibility that Japan would be pressured to take measures that would help boost the value of the yen against the dollar and euro.

Paulson expressed the opinion that it would be more prudent at this time to keep an eye on China, and to continue urging it to allow its currency to float freely. Mr Paulson summarized the main items that were discussed at the meeting by saying:

over the last two days, we discussed ways to keep the global economy growing in a balanced way, including stimulating domestic demand in Japan and Europe and pressing for greater exchange-rate flexibility in China.

Paulson is a TRAITOR. As I keep pointing out, none of the negotiators or leaders in the US are working to save us from ruination. They are the creators of this mess. They want the wrong things and are determined to get this no matter what. Paulson's Goldman Sachs buddies were desperate for the Japanese carry trade to continue last year and in the Fall, when he made this treasonous statement, all his efforts were aimed at weakening the yen and keeping that game going. The world's economy was NOT growing in a balanced way at all! The huge US trade deficit was obvious proof of this! No one could call trade 'balanced' under those conditions. The fact that this creep lied about reality is TREASON. I seriously want Paulson arrested.

Japaneconomynews.com: Unwinding of the carry trade not so scary?
May 8, 2007

On Sunday, Vice Finance Minister for International Affairs Hiroshi Watanabe came out and said that not only has the size of the so-called ‘carry trade’ been exaggerated, but that concerns over its unwinding has been overblown. Although Watanabe agreed that the carry trade might be valued at $100 billion, he feels that this is such a significantly small portion of the annual $500 trillion worth of trade in currency markets per year that the unloading of those funds would not have a significant impact on Japan’s economy:

It could move the market somewhat for one day, but the world won’t go upside down…The size and the impact of unwinding is over-exaggerated. That’s my understanding.

Watanabe declined to make comments regarding the effect of economic fundamentals on yen-based exchange rates, which we have to say is a wise move for anyone in the government.

CHANGE IN ANALYSIS!!!! Dear readers, I read all emails and comments very carefully. The wonderful editor of Japan Economy News just called me on the carpet about my last posting here! So here is our exchange:

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Whoa...

'the editor of this Japan Economy News service is a terrible analyst. He gets his facts straight but his analysis of these facts is totally off the wall. And his predictions are totally wrong since his philosophy and world view is skewered.'

I was not agreeing with Watanabe at all here - I thought I was deriding that position! I was pretty much 100% saying what you're saying. My prediction as well is that this would be a huge deal. I'm not sure what's so skewered about my world view...when I read what you have to say, it seems we're pretty close on that front!

My point in posting what was coming out of the mouths of these people is that they were wrong, wrong, wrong at the time. That was the whole reason I started writing on the topic.

Posted by: Ken | October 06, 2008 at 10:16 AM

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Ah, I see....look, when doing 'snark' one has to be VERY careful to use some sort of 'distancing' tool which shows you are not endorsing something. In other words, you have to use my tool, I make up all these cartoon characters and have THEM say things. I also add the very easy to type in 'HAHAHA' line which shows that I am laughing hard.

See? This is a stylistic problem that all snarkers fall into! They don't realize it is a literary mistake.

By the way, my apologies to you. I will change things in a minute, OK? Heh. And I actually do like your raw data stream. I intend to link to you in the future for this sort of thing. This is an honor, you see, sort of. HAHAHA. [illustration of the use of laugh notations here].

Or you could do the 'WWWWW' laugh icon. I know this is very popular in Japan.

Posted by: Elaine Meinel Supkis | October 06, 2008 at 11:51 AM
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I see this all over the web: misplaced snark. Only when it is one liners in a comment section where everyone knows each other and spends their time snarking, is it a safe practice. I have seen a number of writers end up in trouble when they pretend to be someone clueless only to be viewed as being the clueless one! So the laugh marks are warning signs that are very helpful. So on with the game! And I welcome Ken here and hope to link to him in the future. For we are all in the same sinking boat here and bailing as fast as we can!

I am including this tidbit because the editor of this Japan Economy News service is a terrible analyst. He gets his facts straight but his analysis of these facts is totally off the wall. And his predictions are totally wrong since his philosophy and world view is skewered. The looming unwinding of the Japanese carry trade which I warned everyone, would begin by July, was seen by him as a minor matter. No big deal. Overblown! HAHAHA. $500 TRILLION IN CURRENCY TRADE is a damn flood of funny money, I dare say! Reversing this $500 trillion flood of money is catastrophic because it is so big. And it got so big because everyone running banks wanted more and more credit via this mechanism. How wonderful.

Commodities R.I.P. as Leverage Vanishes, Growth Slows

(Bloomberg) -- Commodities markets are heading for the biggest annual decline since 2001 as investors exit leveraged bets and slowing economic growth erodes demand for raw materials.

The value of the 19 commodities in the Reuters-Jefferies CRB Index fell $280.6 billion, or 43 percent, from its July 3 peak, a loss larger than their total worth two years ago, data compiled by Bloomberg show. UBS AG, the Zurich-based bank that bought Enron Corp.'s energy unit in 2002, plans to exit most commodity trading. About 15 percent of investors in Boone Pickens's BP Capital LLC hedge fund may want their money back.

The same credit-market seizure that led to last month's bankruptcy of New York-based Lehman Brothers Holdings Inc. and the forced sale of Merrill Lynch & Co. is squeezing speculators who drove commodities to record highs. Slower expansion in the U.S., China and India is also undermining prices of crude oil, which fell 36 percent, and corn, down 43 percent.

``The day of steadily rising commodity prices is over,'' said Chris Rupkey, the New York-based chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. ``A lot of the demand for commodities has been speculation, and now that demand is falling away because of fear taking hold in the market.''

No longer is Japan flooding the planet with easy credit that has to flow somewhere. Obviously, the sudden surge in commodities was in the wake of the collapse of being able to move this flood of Japanese lending into housing. It had to go somewhere so it flowed into commodities. This destabilized all the governments of the planet. This is because rich people love to bid up the price of fine wines, palaces, etc but poor people CAN'T bid up the price of food and fuel! They are FORCED into this by the traders who raise the cost of everything by dumping easy credit into buying up FUTURES of necessities used by the peons at the bottom of the food pyramid of power.

This, in turn, fires up very dangerous forces. The workers and peons suddenly see a need to unite and fight their own governments. Tata Motors, for example, wanted to build a factory in India to make super-cheap cars. The people burned it down. The scheme for cheap cars has ended. In India, that is. By the way, my analysis of India being unable to industrialize as swiftly as China has been proven correct, again. My parents did a LOT of business for the government, in India as well as China. India always teeters on the edge of tremendous chaos. My parents were nearly killed in various riots and insurrections inside of India in the past.

The only thing they worried about in China was Madame Mao sitting next to them while watching performances in Beijing. Heh. Terrifying in the extreme.

India has had no real revolution that sweeps aside religious powers as well as the ruling elites. Until then, it won't be able to compete with nations that succeeded in this. Revolutions do matter, especially when it comes to breaking the back of despotic religions like Tibet used to have.

By the way, last year, I wrote a long piece about important statistical studies about global money growth. Time to review it:

From October 7, 2007: Time To Crunch UN Conference On Trade And Development Statistics

Here are some interesting charts from the UNCTAD people: the FDI (Financial Destination Investments) growth charts.

This first set of numbers show their earliest records. This chart was launched when the US dollar began to be traded as a commodity rather than reflecting some set value based on Fort Knox. Really! The dollar was based on the gold in Fort Knox once upon a time! Note the first numbers here: the flow rate. In 1972, it was only $13.5 billion. During the Nixon years, it increased every year until he was forced out of office. Then it dropped from $27 billion to $22 billion. I was curious about this so I ran through the whole set of data lists at the UN site. As I suspected, whenever the rates dropped, this coincided with recessions in the US for the most part. This is because we were the major economic force and all other nations were dependent upon our trade to make profits.

In 1981-1982, we had a recession. Volker raised interest rates very quickly to increase savings and kill inflation once and for all and on top of all this, there was the Iran/Iraq war which drove the price of oil up to its highest level ever. In 1981, the money flow rate was $69.5 billion. Two years later, it fell to $50.5 billion. So investment dried up pretty badly. This was a $19 billion dollar drop! This drop, a mere 10 years later than the beginning of this globalization use of funds, is $5.5 billion MORE than the total amount of flow in 1972! Wow.

The concept of 'globalization' took off right on the heels of the US weakening our currency at the Bretton Woods II meetings. The dynamics of inflation that ravaged our nation on the heels of Bretton Woods II caused our industrial manufacturers and our bankers to flee the US and seek greener pastures elsewhere. Labor unrest due to inflation increased the desire to move out of the US and our industrial leaders made a cold-blooded decision to depart and this has increased over time. This is why they don't care if we have inflation, if the dollar is weak. Nay, they benefit from this as we saw this month with them pushing Bernanke to weaken the dollar and increase inflation at home.

We can see from the above chart that the funds flowing around the world increased above the 1980 rate in 1986. The oil pumping nations were very flush with money now. Mexico, Saudi Arabia, the UAE, etc had a lot of money to spend. The US was in trouble with our currency yet again due to the 1980-1983 recession and wanted desperately to have new meetings whereby we could reduce this yet again against the yen and the German mark.

In 1990, the rate of flow was now a flood. The US had the Plaza Accords and Japan created a tsunami of outside investment so the increase is amazing. From $88.5 billion to $201.5 billion in less than 4 years! This is a rise of $50 billion a year! This amount is nearly 4X the total amount in 1972. From 1986 to 1990, the total increase was $113 billion. Wow. A great deal of this money was the surge in buying up the US by our trade partners. They had a tremendous amount of money. This was the years when the US worried that the Japanese would buy up everything.

This was a huge US fire sale. We were still buying lots of Japanese goods but the Japanese had lots of buying power due to the yen suddenly nearly doubling in value. The Plaza Accords set up the present FOREX system whereby we trade our currency as if it were gold or oil or shoes. The trick was, the value would be determined on a daily basis. The Japanese quickly discovered the downside of their strong yen: their trade ability collapsed.

1990, Iraq invaded Kuwait. The price of oil shot up, we had Desert Storm and the US real estate market collapsed along with the Japanese real estate and stock markets which began to fall at this point. The flow of money was cut by $46.5 billion in one year. But this was brief just like our recession was brief. By 1993, the money flow resumed its climb. This is also when Japan began to build up its huge FOREX reserves. This is also after the disorders in China from Tiananmen Square had faded and the doctrinaire hardliners in the CPC were routed and the reformers took over. The workhouse of the world was now open for business and seeking foreign investments. On top of this, the US was busy selling itself off. More and more of our industrial base was being outsourced and with NAFTA and the various WTO rounds, the US increased its aggressive deindustrialization/selling its home economic base to foreign powers.

In 2000, there was another recession in the US and world finance movement slowed again. Dropping from $1.5 trillion to $558 billion in just 3 years. This is a $942 billion dollar drop! OFF THE CLIFF! A 2/3rds drop. Greenspan dropped US interest rates to 1% during this collapse in world money movement. The oil pumping nations were hammered by Russia's sudden entry into world oil markets so Saudi Arabia nearly went bankrupt. Then a bunch of Saudis and Egyptians attacked the US and this make the recession here worse. Then the US declared war on a nation that didn't attack it: Iraq. The money the US began to spend wildly on housing, asset inflation, speculation and war caused the world money flow to accelerate again.But in 2005, it was STILL lower than in 2000! I think we can see something at work here!

What is going on? I invite all readers here to help me riddle this out. I think that everyone has the wrong impression about world trade and finances and I wonder if the super-low interest rates relative to the obvious global inflation of all raw materials has something to do with all this? This doesn't track the real growth item of the last 7 years: debt. I suspect that the growth in debt due to too-low rates in Japan, the US and China, is responsible for the lack of growth in international money investment flows! But I have no proof of this...yet.

Going back over these charts, note the cumulative stock market value rise: from $612 billion in 1981 to $10 trillion today. This is 16X bigger over just 25 years. This is nearly $9.5 trillion more in 25 years. This is an increase of $380 each year. So I would conclude that the rise in stock values is connected with the increase in money flow rather than direct investments. Namely, everyone including the Chinese are issuing stocks! And these are being bought by all and sundry and the sundry is very much a bunch of 'sovereign fund' nations like the oil nations such as Saudi Arabia, Russia and Norway. And the industrial nation of China.

So the flood of money is flowing into stocks. This is why the Chinese stocks are rising rapidly. Even the Japanese stocks are rising after they kept them in the cellar for a long time to keep out strangers. From 2000 to 2005, world stocks doubled in value! In 2000, the world's money flow was $4.5 trillion less than stocks. In 2005, it was far worse: $9 trillion less! This is an increase in differential that increased nearly $2 trillion a year! And this last 2 years which aren't on these charts, I bet the number is far greater since we have seen a huge surge in world stocks in the last year alone! I bet it is around $15 trillion. This is only one trillion more than the rise rate already. So I may go out on a limb and think, the number is probably around $17+ trillion!

This would be 29X the amount in 1980. The world has seen a massive increase in trade/debt/monetarization/cross-border finances. I would suggest, the biggest in history. And this whole thing rests upon the concept of the US empire soaking up all this money in the form of debts and consumerism! This is why the housing mess is destabilizing things. It isn't because Asians own these bad CDOs put out by our mortgage companies and banks. I was startled to see just the other day, how little exposure Asia has with all this. By far and away, the ones exposed are our own beloved Hell Hounds/Pirate Cove guys.

My articles are long but they also provide a gold mine of data and information. I constantly refer to my own information only because I embed lots of outside data within these stories. This tedious way of posting is very valuable. One doesn't learn much when there is only slight reference to data and historical records! Thanks for bearing up with me as we try to figure things out, together, swimming in this flood of information. I do appreciate greatly all the links and commentary people add here for it is most enlightening!

NOW FOR PREDICTIONS: The Derivatives Monster is going to probably eat AXA next.

AXA (Euronext: CS, NYSE: AXA) is a French global insurance companies group headquartered in Paris and founded in 1985 by Claude Bébéar. AXA is not the name of a single company but a group of companies independently organized and operated according to the regulations of many different countries.

The AXA group of companies are engaged in life, health and other forms of insurance, as well as investment management. The AXA group operates primarily in Western Europe, North America and the Asia Pacific region and the Middle East.
*snip*
AXA Isle of Man Limited was originally created as a subsidiary of AXA Sun Life in the United Kingdom, but since the Isle of Man is not a part of the United Kingdom it is regulated instead by the laws of the Isle of Man.

Unlike the United Kingdom, the Isle of Man does not require the same access to liquidity of funds in case the company runs into problems. AXA Isle of Man Limited advertises itself as a repository for citizens of the United Kingdom and the Channel Islands who seek to shelter their assets from high taxation.

AXA is the European AIG. And worse, it has a hole in its bottom: the Isle of Man is a Queen Elizabeth-owned entity. And it is a tax haven filled with pirates. And they are busying making themselves richer while making England poorer and deeper into debt. And no one regulates them so they, of course, like all their pirate buddies, sing, 'Sixteen Hedge Fund Hell Hounds on a dead man's chest, yo ho ho and a bottle of 1787 Chateau Lafite!'

Since they are drunk pirates, I assume they did very stupid things that the collapse of the world's banking systems now exposes them to dangers due to insuring all those crummy, idiotic credit default swap thingies. The only reason they didn't collapse the same day AIG fell was due entirely to the fact that AIG was FORCED to show their Derivatives Beastliness because of regulators demanding this while the Isle of Man pirates continue to hide their own mess in the dead man's chest. Which is Davy Jones' locker at the bottom of the liquidity seas.

Is It 1929 Again? By Robert J. Samuelson

There are parallels between then and now, but there are also big differences. Now as then, Americans borrowed heavily before the crisis -- in the 1920s for cars, radios and appliances; in the past decade, for homes or against inflated home values. Now as then, the crisis caught people by surprise and is global in scope. But unlike then, the federal government is a huge part of the economy (20 percent vs. 3 percent in 1929), and its spending -- for Social Security, defense, roads -- provides greater stabilization. Unlike then, government officials have moved quickly, if clumsily, to contain the crisis.

What's occurring now is a frantic effort to prevent a modern financial disintegration that deepens the economic downturn. It's said that the $700 billion bailout will rescue banks and other financial institutions by having the Treasury buy their suspect mortgage-backed securities. In reality, the Treasury is also bailing out the Fed, which has already -- through various actions -- lent financial institutions roughly $1 trillion against myriad securities. The increase in federal deposit insurance from $100,000 to $250,000 aims to discourage panicky bank withdrawals. In Europe, governments have taken similar steps; Ireland and Germany have guaranteed their banks' deposits.

The cause of the Fed's timidity in the 1930s remains a matter of dispute. Some scholars suggest a futile defense of the gold standard; others blame the flawed "real bills" doctrine that limited Fed lending to besieged banks. Either way, Fed Chairman Ben Bernanke, a scholar of the Depression, understands the error. The Fed's lending and the bailout aim to avoid a ruinous credit contraction.

The Washington Post pays good money for crummy commentary! I wish I was as stupid as Samuelson! He, like Bernanke, thinks the Great Depression was all about US economic conditions. It was really all about the collapse of the ENGLISH domination of the planet! It was all about the death of the pound which was the currency used for all global trade values! When the pound died, millions of humans died due to the resulting depression and the world war that sprang out of this mess. And England died due to going deep into debt for WWI. Ditto, Germany.

The period between when the pound died and the dollar took over was a period of great chaos! And so it is now: we are entering a chaotic period whereby all our partners try desperately to refloat the dollar. Just like the US struggled from 1920-1933 to keep the pound as the global trade currency power. We used every trick in the book and they all failed. This is because England, once the proud creditor nation of the planet, was a beggar nation after WWI. And the US was the creditor nation.

This is IDENTICAL to today. In nearly every possible particular. This is why fluffy, stupid stuff like Samuelson is so dangerous: we can't fix things if we misread history. We can change course but not if we are blind to which course to take! This inability to see alternate courses and choose a better course is a problem across the board at the top. The captains of the USS Titanic are utterly unable to see the obvious icebergs ripping our hull.

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Comments

[whine & cheese]

Interesting how the rich in europe are dumping their fortunes into gold and not dollars...

the rising dollar and yen are the result of deleveraging... once that ends, the reckoning shall begin!

[GK]

Absolutely Brilliant article!

It's slash and burn capitalism.

Slash down all the trees and countryside in England, burn all the coal, and then move to the USA.

Slash down the farmland for suburbs, burn all the oil and then move to China.

Leaving behind a trail of Debvistation.

Just think, 1 billion Chinese with a 1000 credit card bill = $1 trillion.

Can you imagine the Military contracts?

[ralph]

Leverage killed the commodities trade. However, Gold is NOT a commodity. Commodities are produced for consumption. Gold is NOT consumed, rather it is hoarded after being mined and smelted. This critical dynamic is important, because Gold is the currency that cannot be debased by govt fiat. Physical gold is in shortage, as well as physical silver. This is not leverage. Individuals are buying gold with CASH, which is what Gold really is. Gold will return as the center of commerce as it had been for 5,000 years until our asswipe President Richard Nixon and his banking gnome pals decided to de-link currency to metal. Now we pay the price as the US peso becomes wallpaper and toilet paper as well as the EURO,YEN,POUND,etc... They are all fake, and Libra is balancing the books. Got Gold?

[carli]

whine & cheese, spot on! And now that gold is becoming scarce we can expect that to happen soon.

ralph, US$ OTC derivatives accounts for 60% of all forex derivatives in the world. This would partly explain why they stopped publishing the M3 numbers...

[Tell]

Elaine

"enlightening"

You must read all in this link below...A lot of similarities to today.

Especially "The Scottish perspective" and the links in that section...

http://tinyurl.com/zebf2

[Shoshona]

So buy Yen??

[carli]

whoa Yen at 100! This is getting really interesting. DOW -526, half way to a Level 1 halt...

[Blunt Force Trauma]

Paulson plan: useless and harmful to democracy

http://tinyurl.com/44jpqb

Commentary: U.S. leadership challenged

http://tinyurl.com/3uzyar

[Elaine Meinel Supkis]

May halt trade today. The OPEC powers are pissed. They don't want oil below $100 a barrel. Iran warned the fat cat king in Saudi Arabia not to flood the markets.

[Blunt Force Trauma]

Elaine said:

"The OPEC powers are pissed. They don't want oil below $100 a barrel."

Well, they'll be unhappy to know that oil is down just over 4% to $89.69

[Buffalo Ken]

OK, a bit of humor for the dreary Wall-Street day.

In the middle of the picture you've got a

NWO

The "O" will hold (look where it is), the "N" will say no (as "n" is wont to do), and the "W" will have no-where to go. Poor W - stuck in the middle - why not flip around and become an M?

Another option might be to just take the "NWO" out of the picture or at least out of the center, but what do I know. This might straighten some of the bills up a bit....

Peace,
Ken

[Buffalo Ken]

Now if the above was a "code" I betcha there could be a whole zillion-quigunutillutollian ways (a whole bunch) of "decoding" it. Come up with your own. The "M" could be "Momma-Earth" for all I care - its a code and could be whatever you want it to be.

Language can have many meanings depending who's doing the reading - don't you think?

OK - sorry to interrupt.

[Buffalo Ken]

New York silver spot bid:

http://www.kitco.com/charts/livesilver.html

These charts are incrediblel and I'm sure each purchase/sell transaction is documented.

OK - now I'm back on topic (sort of). I mean the price of precious metals is kind of tied-into the prices of many other things don't you think?

Later,
Ken

[RobG]

That ordinary hockey mom only has a net worth of $1M, and a $500,000 house. Can't get any more down to earth than that: Financial Papers Show Palins’ Assets Top $1 Million

[blues]

It seems very peculiar that so many people think gold has enduring value. It's just shiny stuff. Energy, resources (including human) and productive infrastructure, if maintained, should have enduring value.

There is a financial side and a productive side. The financial side is as elusive and subtle as any metaphysical representation. It is comprised of deals, agreements, and such. When I think of war and revolution, there are the obvious associations with death and destruction. But another aspect is its ability to dissolve these deals and agreements. I think you could even argue that all these deals and agreements (the financial aspect) simply accumulate until a point is reached at which they become unsustainable. A sort of entropy sets in, and things stop working as they previously had. Then we get wars and revolutions. This is just an impression, and maybe it's not the basis of anything.

As money and power accumulate in the hands of a ruling class, the rulers seem to become more and more insane. They lose their minds. I'm from Connecticut, and while the richest people may not technically live there, they are there a lot. Their craziness is pervasive. Not all, but most of them really lose touch. The wars in the Middle East that our leaders have started have been disastrous in every way, on every level. Abandonment of our productive infrastructure has been an even greater calamity.

I think wealth is relative. For people on a tiny island with very limited resources, being wealthy may mean owning infinitely less than what would constitute wealth in a vast empire. Yet wealth means the same thing in each case. You cannot have rich rulers in the absence of poor peasants. That is, the poor peasants define the rich rulers, in the end,it seems to me.

Deep in the bowels of the national security agencies are people who have some comprehension of what is really going on. But they take their orders from the mad rulers.

And the markets started dropping the instant the bailout was passed, and it really looks like the bailout caused it all. At least that is how it will look to a lot of people.

[Buffalo Ken]

blues - i agree, but I hope the war stuff can be mostly avoided this time around.

I consider myself a "proud peasant", but that is neither here nor there I suppose....its just you were talking about peasants.

I'm not sure gold has "enduring" value, but I do think the value of gold has many, many twisted and bizarre but perhaps even natural-type connections. Many think gold has value and it does stay shiny and holds form well. It is simple to store.

Peace,
Ken

[DrKrbyLuv]

Fantastic article today Elaine, and to be sure, you have consistently warned about this for some time.

Things are beginning to quickly spiral out of control - Dow down almost 500 mid-day, oil below $90 and London down at historic levels.

When will they stop trading? I read that there is a new "fusible breaker" to stop trading upon huge drops.

http://tinyurl.com/49byp7
___________________________________

Canada considering joining the EU?

http://tinyurl.com/3jqrpl
___________________________________

Great links and discussion, thanks!

[Buffalo Ken]

Gold is hard to break (if disk-shaped like a coin); coins can be flipped; oh yeah, and gold also has some desirable electrical properties I seem to recall.

Anyhow, gold has value, but the value is relative to other things, which is where it quickly starts getting complicated given "gold's history"....opinions will vary don't you think.

I also think there are some serious hoards of gold around the globe for which ownership is dubious at best. Why not share some of the wealth?

Peace,
Ken

[Buffalo Ken]

Now there are some other "storage-locations" where everything seems to be on the "up-n-up". These are necessary I suppose.....its the ones that nobody really knows for sure that I'm a bit curious about. You know the ones clouded in so much secrecy. Secrecy is really getting annoying - don't you think? I do.

Peace,
Ken

[Blunt Force Trauma]

How China could wreck the US economy (rediff)

'The recent bailout package being approved in the US Congress needs to be viewed in the context of the spurt in the accumulation of forex reserves of China by about $500 billion in the last six months to about $2 trillion in aggregate.'

Full article:

http://tinyurl.com/5x93w8

[blues]

If I could buy gold, I would seriously consider transforming it into colloidal gold, which does cost a fair amount on the utility bills. But colloidal gold (or silver (do not eat the stuff!)) should be invisible to metal detectors. You could use agar or something to form it into "pottery."

Whattaya think Ken?

[Buffalo Ken]

blues - i think you are a bit crazy just like I am!

I also think we both have good intent, but I suppose I could be biased.

Peace,
Ken

[blues]

Another thought just rolled in. I always more or less assumed that the bottom would fall out when the Chinese wanted it to. I don't know the details of how they could make that happen, but they obviously have a lot of string they could pull. Well:

"The French foreign minister Bernard Kouchner has said Israel is expected to launch a military strike on Iran before it acquires a nuclear bomb, and urged the Jewish state to hold back in favour of sanctions."

The US seems to want very much to avoid an Israeli attack now. But the Israelis don't seem to care, and seem poised to attack. I assume China has many reasons to make this not happen. They also do not want the "Western" economies to crash, but that is more inevitable. So, the "Western" economies get a wiff of the grape, now. That would force Israel to reconsider, I would assume. This is pure speculation, but it does fit together, more or less.

[Tell]

Sunday, October 05, 2008

"Government of the City, By the City, For the City"

"This is in effect establishing openly the government of the city, by the city, for the city."

"Look at the team of business advisers which Brown has appointed alongside the NEC. This includes :"

"Marcus Agius - Chairman, Barclays
Sir Victor Blank - Chairman, Lloyds TSB
Sir John Bond - Chairman, Vodafone
Lord John Browne - President, Royal Academy of Engineering and MD of Riverstone Holdings
Sir Terence Conran - Chairman, Conran Holdings
Mervyn Davies CBE - Chairman, Standard Chartered
Dr. Chris Gibson-Smith - Chairman, London Stock Exchange and British Land
Professor Malcolm Grant CBE - Provost and President, UCL
Sir Philip Hampton - Chairman, J Sainsbury
Dr John Hood -Vice Chancellor, Oxford University
Lord Digby Jones
Anna Mann - MWM Consulting
Dick Olver- Chairman, BAe Systems
Professor Alison Richard -Vice Chancellor, Cambridge University
Lord Richard Rogers - Richard Rogers Partnership
Paul Skinner - Chairman, Rio Tinto
Sir Kevin Smith, CBE - CEO, GKN"

"There doesn't appear to be a thought given to appointing a representative from the trade union movement to advise on economic, employment or industrial issues."...

http://tinyurl.com/4lew7b

That tells us a lot of how this is all going,if that was in any doubt.

[Buffalo Ken]

I think there is always doubt and I think this is a good thing. How boring would it be if you "knew" what was going to happen. It would almost be as if you were dead because you would never be learning anything.

I think all sorts of "strings" are being pulled and they are pulling in all sorts of directions on many, many entities (small and large) back and forth. There is no way to know how this is going to "reverbate" but we ought to be smart enough to avoid "mass extinction" - not just for ourselves mind ya. That is part of the problem in my opinion - some might think we have become a "super-killer" species. Such species probably serve a function in the big scheme of things, but I was kind of hoping that wasn't going to be our fate. Cause if it is - kiss your ass good-bye. Killer species never last, at least not in my humble opinion.

Peace,
Ken

[RobG]

Pump it up, pump it up ....

Fed Boosts Cash Auctions to $900 Billion, May Do More

The Federal Reserve will double its auctions of cash to banks to as much as $900 billion

...snip

``It is pretty much all out war,'' said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., New York. ``They are pulling out all the stops to try and get borrowers and lenders to meet and do transactions once again.''

[Elaine Meinel Supkis]

It is hard to keep up but thanks for the links, this helps me TREMENDOUSLY. I can't believe all the goofy things going on.

What is wealth?

HAHAHA. The ancients knew! There is this story about King Midas: he went into the Cave of Wealth and Death and asked for eternal gold.

They granted it to him. For their amusement. They are demonic creatures.

So Midas went home and found that all he touched turned to gold. Including his food.

Then, he touched his most precious thing: his child. Who died.

This is a moral tale we MUST embrace totally. Wealth is dust if one dies or it kills those who we love the most. LOVE is the greater wealth, the greater power.

[Elaine Meinel Supkis]

Buffalo Ken, Blues lives near me. He is crazy as they come and also a total genius. He is a great guy. Good person to befriend. He likes you, I suspect.

[CL]

A perverse killer species that devours it's own children..

"We’ve come far down this road to oblivion, hustled along by lies, fraud, deception, distraction, fiendish exploitation of our own pathetic gullibility...and omission. How might we shatter the gullibility?
Imagine the American people...imagine us turning around and marching back toward truth. Can we still save the Republic, still save ourselves? The Big Bailout just blew us miles further, down the road."

http://tinyurl.com/52bx34

[CL]

Sorry, wrong url. Don't know why that happened.

http://tinyurl.com/3vflmt

[Tell]

"i think you are a bit crazy just like I am!"

Buffalo Ken

Your not crazy just different but then we are ALL different.

Peace,
Tell

[Elaine Meinel Supkis]

Viva la differance!

[Simon]

Funny thing about the Japan carry trade: most people pretend it does not exist, but see the usual suspects and you know:
The AUD， NZD and Brazil are all currencies used by Japan to park its money.
Now they're sinking like a stone due to all the money rushing back to Japan to defend the banking industry!
They are totally for expansion overseas, because they are scared to death of stuck on the island when all of Asia is gearing up economically.

[GK]

Holy S*&%! Lehman's CDS going to auction on Thursday?! Is the treasury going to buy this garbage?

Happy new year.

http://georgewashington2.blogspot.com/2008/10/thursday-is-d-day.html

Thursday is D-Day

Forget the stock market gyrations. Forget Bernanke and Paulson's ineffective, unconstitutional schemes.

Thursday's auction for Lehman's credit default swaps (CDS) is much more important.

Why?
Well, if banks are reassured by the CDS auction, it could do more to free up frozen capital than all of the Fed and Treasury's ill-conceived plans put together.

As Bill Gross, head of $721 billion dollar fund Pimco, says:

Credit markets are based on trust and when there is no trust, markets can freeze up . . . . Imagine yourself at the drive-thru ordering a Big Mac. At one window you order and pay, at the other – 20 feet ahead – you pick up your lunch. What if you thought that after paying at the first window, your 1000 calorie sandwich might not be waiting for you a few seconds later. You might not pay; business as usual might not take place. That is what is happening in the credit markets. They are frozen in “McFear.” After the failure of Lehman Brothers – an investment bank which took orders at one window, and promised to pay at another for trillions of dollars of those CDS, swaps, and other derivative “sandwiches” – institutional investors said that they’d prefer to stay at home and have peanut butter instead of risking their money ordering a Big Mac. And so their money goes into that figurative mattress instead of the register at McDonald’s, people are laid off, profits go down, bank loans become less available, our economic center cannot hold.

An auction occurred today to determine the value of Freddie and Fannie's CDS. While there were approximately $500 billion in CDS written against Freddie and Fannie, those who issued CDS will be repaid between 91.5 percent and 99.9 percent of protection they sold. In other words, the issuers of such CDS will only have to pay out between .1 and 8.5 cents on the dollar.

For a rough, back-of-the-envelope calculation, let's split it down the middle and call it 95% of $500 billion, which means that the issuers of Freddie and Fannie CDS will only have to pay out about 5 cents on the dollars, or about $25 billion total. That's a lot of money, but not catastrophic.

On the other hand, "investors who wrote protection on a Lehman default will have to pay out between 81 and 85 cents on the dollar."

No one has disclosed how many billions of dollars in Lehman CDSs are out there. And no one knows the exact payout amount which will be determined at Thursday's auction.

But it is known that "Lehman was one of the 10 largest parties participating in credit default swaps, the New York Times reports. The company’s most recent quarterly filing said it bought and sold $729 billion in derivatives with a fair net value of $16.6 billion." And a lot of people bought CDS betting on Lehman's failure in September.

D-Day

So Thursday is D-Day, where "D" is for "derivatives".

[Elaine Meinel Supkis]

Maybe trillions of dollars.

The entire concept of derivative swaps credits is bogus and should be outlawed. But first, they have to discover that this is impossible to bail out.

[GK]

Privately created money in a Fractional Reserve Banking system with Fiat Currency also should be outlawed.

Oh wait, the constitution already does this.

http://au.youtube.com/watch?v=4dpJL6ANnV0

[David]

I've been living in India for the past year, and Elaine's brief overview of it is incredibly accurate.

Gold is money. Money is useless except as a tool of exchanging value. Its a bit harder to trade an electricity grid for a few thousand cows, than it would be to give bars of gold.

But money is always politicized, and it will be interesting to see what the goverments of the world will do next.

[john]

Im just a small business man in Aus watching my the Aus dollar get devalued to 3rd world status and the cost of my Japanese holiday double and the financial markets melt like I will never see again. Suddenly every Australians "net worth" in a global sense fell 30%. Im no economist but have just not understood why the yen is so strong until now - lookin led me here. What I would very much like to know is how long will the buying pressure on unwinding the Japanese debt continue. Eventually surely the carry trade debt will be unwound and then what for Japan/yen and us all?