December 2, 2007
Elaine Meinel Supkis
Europe wants the good old days back when they exported to the US and the world. But they refuse to change the way they run their banking systems so they are reduced to whining about the Chinese. As usual, the Japanese join in this wailing for a strong yuan. All, quite futile. The US tries to find some way to give cheap loans to reckless homebuyers who bought way over their heads. But investors hate this but the Fed says, who cares about them or savers in general? As we race towards a Japanese-style 0% interest rate world, we wonder if this will make Russia and China very, very rich? Of course it will in the end.
Why America's Currency Is the World's Problem
The ailing US economy seems to be driving the exchange rate of the dollar inexorably downward, with serious consequences for the global economy. Politicians and central bankers are looking on helplessly as the economic outlook worsens by the day and European companies rack up huge losses.
Both Japan and China run trade surpluses with the US. So does Europe. Even as the euro got stronger, there was still this trade surplus which made Europe quite happy. They went off to the G7 Dwarfcons [conventions] with smiles on their faces. But alas, the crafty Asians managed to keep their own currencies relatively weak against the dollar. Side effect: they can beat the hell out of all of the European manufacturers and producers.
Heaven for Europe would be a strong euro and a trade surplus with the US. But this being a rather complicated world, they ended up vulnerable to Asian one-way trade. So they must make the euro cheaper and to do this they have to manipulate money somehow. Now, Europe has been on the forefront of the movement to have global banking and global monetary rules. Everyone was supposed to follow rules set up by the US and Europe. But there were some fatal flaws in this regime. Namely, the Asian nations could spend the last 50 years probing for ways to control currency values and thus, global trade. Unlike Europe and a lot of other nations who wrangled over trade treaty terms, the two Asian giants, Japan and China, worked out a New Financial World Order and have devoted a lot of time and energy applying it.
In a nutshell, they figured out that one should take trade surpluses and put this into FOREX reserves. Success breeds imitation and this new way of doing business is now sweeping the planet. Even the US has figured it out only, because we are the premier currency, we have to do the reverse. We can weaken the dollar by inflating it. The simple method is to make the M3 ratios grow and grow. So there are far more dollars floating around the planet than any time in history. This weakens the dollar nicely. And the reason it works is simple: everyone's financial system is set to operate smoothly ONLY if the USA buys everything and goes deeper into debt.
Europe's quandry has been turned into a nightmare. Asia doesn't even need the US market all that much if their currencies continually weaken alongside the dollar. So they are no longer bothering with hoarding dollars in their FOREX reserves, they are hoarding euros. This means the Europeans are trapped in a 'rising riches' quandry that is nearly impossible to escape. In old times, it was laughably easy. All they had to do was put up tariffs and barriers. But then, they would now be allowed to flood the US with imports. So it remains a terrible quandary.
It costs about four cents to produce a one-dollar bill -- a pittance, compared to the greenback's influence on the world's economy.The exchange rate of the dollar can boost the fortunes of companies and entire economies -- or plunge them into crisis. Its rate against the euro fluctuates by a few hundredths of a cent each day. But in the past five years that fluctuation has more often than not taken the US currency on a downward trajectory, causing consternation -- and now despair -- among people around the world.
Last Thursday, Thomas Enders, the CEO of Airbus, gave a speech to employees in building 261 at the consortium's production complex in Hamburg. He was there to tell them that a pain threshold had reached. The graph he had projected on the wall revealed the horrifying progression of the dollar over time. The US currency has lost 13 percent of its value against the euro since the beginning of the year. Conversely, the euro has risen in value, and for a short time last Friday it even approached the symbolic $1.50 threshold.
The 'despair in the world' is due to everyone wanting to have one-way trade. If they could wave a magic wand and make the dollar strong so they can finish destroying our economy, you can bet, they would yell the incantations, 'Dollarus elevatus!' and then destroy us totally. We, on the other hand, have a responsibility to NOT let them do this. In world trade, there is no such thing as 'allies.' There are rivals and then there are more rivals. This is the nature of capitalism. Anyone expecting friendship should join some of the various religions where everyone shares. Only even there, people won't share.
Refusing to understand the true nature of capitalism means going willfully into situations best avoided. The US has no obligation to run trade deficits with allies. None at all. Indeed, we need to recall the reasons why we should not do this at all. We protect world trade with our navy yet no one but us pay for this and now the Chinese are tweaking our tail over the use of ports in Asia. A reminder that our navy is a hostile force and is to be repulsed even as China runs huge trade surpluses with us.
At least the Chinese are open and honest about rivalries! Our former allies in the Cold War, on the other hand, want to have their cake and eat our cake, too.
Like so many in politics and business, Enders hasn't a clue what to do about the decline of the dollar, still the world's reserve currency. The speed of that decline is especially worrisome. In the last 10 weeks alone, the dollar has lost 12 cents against the euro. Jean-Claude Trichet, the president of the European Central Bank, says that he already recognizes "brutal movements" in the international monetary structure.
A rule of thumb: once some sort of status quo gets set in cement, it continues until it becomes impossible to prevent change. The dollar has been set on this course by Asian central banks and an army of hedge fund pirates and hell hounds to see how low it can go against the euro. Since everyone is betting it will drop, it drops! Until this changes, the passive European response of fluttering their hands and crying, 'Merci!' Or, 'Gott im Himmel!' won't stop this dynamic. Europe does have remedies but they are all hard medicine to swallow. And Europe wants the OLD status quo. The one where they pretended they were weak allies needing rescue and the US let them run huge trade surpluses
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a href="http://www.bloomberg.com/apps/news?pid=email_en&refer=&sid=a.n.BheticNQ"> Greenspan Was `Very Bad' Fed Chairman, Says Artus of Natixis
Alan Greenspan, who led the U.S. Federal Reserve for 18 years and was revered in the financial markets, was a ``very bad'' Fed chairman.That's the blunt verdict of Patrick Artus, chief economist of Natixis SA and one of France's most listened-to pundits: He is an economic adviser to the French government.
In his latest book (``Les incendiaires: Les banques centrales depassees par la globalisation'' or the arsonists: central banks overtaken by globalization), Artus, 56, blames Greenspan and other central bankers for being so focused on inflation that they failed to prevent real-estate and stock-market bubbles which, in turn, burst and caused pain.
HAHAHA. I always hated Greenspan and often wrote about his messes and yelled about it. During this long period lasting over a decade, all the professionals thought he was a god. He was great. A veritable Prometheus! Now they are ripping out his liver. A tad late, I would suggest. And pray tell, what was his crime?
Ah, dropping interest rates to almost the level of Japan! And note how these guys in Europe want the DOLLAR to get stronger, not the YEN. This is part of the riddle of the Monetary Sphinx: 'What cost a penny at sunrise, a dollar at noon and a trillion dollars in the evening?' The curious way the yen flies under the radar is troubling. Europe is being flooded with both Chinese and Japanese value-added goods. But they can't attack Japan because they imagine the Hermit Kingdom is their ally. So they attack only China. But knowing that China won't raise the value of the yuan unless Japan does the same, puts Europe in a quandary. So they have decided, the simple solution for the entire planet is to make the dollar stronger.
All they must do is soak up all our excess dollars. Via their FOREX reserves. Only they don't want to do this, it means saving money and they hate this. They want to spend. So on and on it goes. A never ending story. For toddlers and dreamers.
Japan's Finance Minister Seeks Faster China Yuan Rise
Japan's finance minister Saturday asked China to let its tightly controlled currency rise at "the fastest possible speed," aligning himself with other Group of Seven leaders pushing for quicker appreciation of the yuan.
The triangulation by Japan continues. To keep its trade victims quiet, Japan joins the chorus calling for the yuan to get stronger even as they hold secret meetings about all this with the Chinese. The Chinese dislike all this yapping but have learned to ignore it. They keep their eyes on the balls here and this battle over currency dominance will be ended ONLY if the US and Europe throw in the towel and call for a Bretton Woods III: the Capitulation to Asia. Japan wants to be on China's side in these negotiations but they don't want doors to slam shut in their face before this happens. So they are playing all sides at once.
I wonder if the West will figure this out? HAHAHA. No. Anyhow, the reason China wants negotiations is so they can hammer out some important accords which the US has refused to entertain one-on-one. The key issue being Taiwan. So they figure, if they push forwards until a very frightened Europe demands an international meeting about all this, they can come to it armed to the teeth with many proposals which will change the balance of power.
``The No. 1 risk of across-the-board loan modification is losing investor confidence in mortgage backed-securities markets,'' Tom Deutsch, deputy executive director of the American Securitization Forum, said in an interview in Los Angeles yesterday. ``If they no longer invest in mortgage-backed securities, you cut off the credit available for refinancing, you cut off the lifeblood of being able to give better loans.''
Investors and savers are being asked to bankroll everything. The Fed has no solution to the messes launched by Greenspan turning on the financial spigots. Of course, this didn't start with Greenspan. The larger historical forces at work here are nearly as old as I. The entire financial system has broken down and far from being fixed, the band aide being applied are like knife cuts. They will guarantee worse messes, blood everywhere. I was driving around today and saw many vehicles on the road as people were frantically Xmas shopping. But everywhere I looked, I saw abandoned housing projects where there were once dairy farms. The price of milk has gone up and up and the farmers have vanished. The signs of a greater economic mess were obvious but people are oblivious to this. We want to go shopping.
The scheme to not give investors the interest rate returns they expected is just like the Federal Reserve working hard to make certain savers using bank accounts can't get any interest, either. This is part of the New Japanese World Financial Order: savings get nothing, nothing at all. People who can latch onto funds from the central bank get to make huge profits since they pay no interest on loans. And this system works only so long as you don't care if the people die like in Zimbabwe. And of course, the businesses collecting these loans are using them for export purposes only.
Only the USA is the destination for all this! If we run on a zero-interest regime, all we do is see our economic system die like it did in the 1930's! If anyone wants that, they should have their heads examined.
There are still investors out there who hope to recoup on all those Alt-A loans. They don't want the government to terminate this via fiat. They hope that at least 60% of the people holding teaser rate loans will refinance at a higher rate. They don't want to have this mess fixed at all except if the government could please dump all this into Fannie Mae and Freddie Mac. Of course, both of these are now going bankrupt thanks to previous dumping regimes. So that option is fading. I suppose the 'compromise' will be some sort of Alt-A*Mac loan scheme. The government insures the interest rates.
This transfers the problem to our government which is deep in debt and struggling with war costs while actively working to attack more countries that haven't attacked us. Or money for our navy so we can sail to Hong Kong to be insulted.
Three-Month Libor for Euros Soars to 6 1/2-Year High
The cost of borrowing euros for three months rose to the highest since May 2001 as banks sought funding over the year-end amid an ongoing credit squeeze.The London interbank offered rate, the amount banks charge each other for such loans, rose 3 basis points to 4.81 percent, its 13th straight day of gains, according to the British Bankers' Association. That's 81 basis points more than the European Central Bank's benchmark rate, the biggest gap ever.
Interbank rates rose even after the ECB took additional steps to soothe money markets by extending the maturity of its regular refinancing operation through the end of the year. The bank's Governing Council yesterday decided the extra measure was necessary to ``satisfy the banking sector's liquidity needs'' for the year-end holiday period.
It is now painfully obvious that the EU/US/UK banking crisis, far from over, is getting worse. Not as spectacularly as last summer but the trend is bad. Of course, the bourses celebrate this as a golden opportunity to pressure national banks to lower interest rates to Japanese levels. They dearly would love to imitate Japan.
Russia keeps piling up gold reserves
Russia's gold and currency reserves stood at an all time high of 459.6bn on November 23, up 0.8 percent or $3.8bn from the previous figure. As reported earlier, between October 5 and November 16, the Bank of Russia's reserves surged $34.8bn, or over 8 percent, as the bank was buying up dollars on the home market. As a result, Russia has continued to close the gap separating it from the world's leaders in terms of reserves, China and Japan. China now boasts $1.434 trillion in reserves, up $101bn in the third quarter and nearly 45 percent in the first nine months of 2007. Japan's current reserves exceed $945bn.On November 21, Alexei Ulyukayev, Deputy Chairman of the Bank of Russia, said that Russia's reserves could rise to $470bn by the year-end, as they had been gaining momentum. However, just a week later, on November 28, Deputy Prime Minister Alexei Kudrin said that Russia could see a $150bn rise in international reserves this year, which suggests that they could even drop in the near term as their total rise has already exceeded Kudrin's estimate.
Putin's party rode to victory on a growing economy, successful international politics that expanded Russian power and instilled fear in Europe, an old foe, and the accumulation of sovereign wealth continues. If Russia adds $150 billion a year, in 10 years, Russia will be holding $2 trillion in its FOREX reserves. The Chinese, at a rate of $100 billion a year, will be at $2.5 trillion in 10 years. The US, sitting on $66 billion in FOREX reserves, is quite passive about all this. We imagine, we just declare bankruptcy, haul out the Amero after we take over Mexico and Canada and then we can thumb our noses at Russia and China.
Last summer, the US and Europe orchestrated this hysteria about how terrible FOREX reserves are. Our bankers told the world that these mega-reserves were silly and even economically weakened the holders. This campaign to deter anyone from following Japan's lead failed miserably. As we go into this banking crisis, we all must remember who is saving money. It isn't us.
Moody's Says Citigroup SIV Debt Ratings Under Threat
Moody's Investors Service said $64.9 billion of debt sold by Citigroup Inc.'s structured investment vehicles was cut or placed on review for a downgrade as part of a review of $130 billion of SIV debt.The ratings company surveyed 20 SIVs since Nov. 7 and expanded its review after noticing ``significant additional deterioration'' in asset values, according to a statement today. Links Finance Corp., a SIV sponsored by Bank of Montreal with $19.1 billion of debt, may have its ratings cut, Moody's said.
SIVs, which sell short-term debt to buy longer-term, higher- yielding assets, were shut out of the short-term market as losses on subprime mortgage securities prompted investors to retreat from all but the safest of securities. Unable to finance themselves, three SIVs have defaulted and others are being bailed out by their sponsors. The world's 30 SIVs have more than $300 billion of assets.
More math: if Russia is saving $150 billion a year, they will have over a trillion in 10 years. So if our various financial giants lose $64 billion a year, after ten years, we are what? $640 billion in the hole? Everywhere I look, I see massive losses. This isn't coming near the possible $500 trillion in derivatives. But if the losses start hitting $2 trillion a year, in 250 years we come to zero. Only the losses which started very small, are now following the laws of the square root. They double each cycle. So this isn't simple accumulation
The revaluation of these SIVs is, itself, causing them to lose value. So each time the value is restated lower, these SIVs become even less worthwhile and the drop is now on the scale of Eddie the Eagle doing the ski jumps at the Olympics on behalf of England.
Putin is popular and Bush is trying to starve babies to death.
Culture of Life News Main Page
The Times today has a heart breaking story about far flung Citigroup predations and the truly astonishing foolishness of local financial officials.
They bet the future on some snake oil. Astounding!
Posted by: Frank | December 02, 2007 at 08:05 PM
The Governator has been trying to work a plan with Countrywide and a few other lenders to prevent foreclosures here in California. Housing Bubble pointed out the idiocy of going to those who were a big part of getting housing into this mess and hoping they will now get us out. That, and if the ARM's are magically changed into fixed rates then what does that do to the MBS already sold ?
Posted by: Al | December 02, 2007 at 08:16 PM
Elaine,
I wonder whether it is actually possible for Europe to retreat back by putting up tariffs & barriers. If they do, they fall into the trap Japan set up for itself in the 19th Century ...at that time, everyone in Japan winds up poor and economy in terrible depression!!!
How ironic - 200 years ago, the Europeans forced Japan and China to 'open up' for international trade and now, they plan to retreat behind trade barriers themselves with China and Japan taking over as the international and successful trading nations dictating the terms and conditions for the next century!!
We already know Africa, ASEAN already sign up together with parts of South America and ME. Russia - definitely the big boy to this party. India and Australia are now trying to crash into this party..
We are definitely living in interesting times.. the shaping of the New Asian Economic Co-Prosperity Order..we should document this for our future generations!!!!
Posted by: OC | December 02, 2007 at 08:51 PM
Elaine,
Have a read on the latest article from the Telegraph:
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/11/28/ccrock128.xml&page=1
China wins from credit crunch fallout
As the British would say: The game's afoot!!
And it is not the end of even round 1!!
Posted by: OC | December 03, 2007 at 01:35 AM
Report out of southern China today that police had to use batons and dogs to keep thousands of factory workers from leaving their factory jobs to go on strike because of rising food costs.
Posted by: Teddy | December 03, 2007 at 09:46 AM
Yes, Teddy, how true.
During the Great Depression, Ford workers were given a lot of lies whereby they believed they would get pay raises but instead, Ford [like TOYOTA TODAY] didn't give raises, they forced everyone to work overtime for less pay.
The workers went on strike, the military came in and KILLED them in this massacre which was quickly forgotten by Americans. Ditto, miners. They went on strike, they DIED. Via our military. This is how all states operate.
I hope the workers of China unite and fight back. That will be good for them ANY set a good example for us.
Posted by: Elaine Supkis | December 03, 2007 at 01:23 PM