Ho, ho, ho…. global currency talk is once again filling the air waves…

As outlined in several prior posts, one way to get a modicum of inflation going again would be to introduce a new currency so as to devalue the currency it replaces. This is one of the oldest tricks in the book and one that has been used often in the recent past (think Argentina, Zimbabwe…) and again very recently with the introduction of the Euro for example. At this stage of the game however, nothing short of somehow altering or even replacing the global reserve currency is going to help.

In recent months rumors have filled the airwaves at regular intervals regarding potential strategies that could be implemented: the Amero, adoption of the UN’ Special Drawing Rights (SDRs) and even rumors of a two tier devaluation of the US Dollar differentiating between US$ held overseas (to be devalued more) and US$ held within US borders.

What is clear is that governments are running out of options to restart the inflationary cycle and this would be a desperate last ditch attempt that would buy us some time. But that’s all it would do. Buy us some time because as per the latest BIS report, outstanding global financial obligations are still running at US$600Trillion whereas global GDP is running in the ball park of US$50Trillion and is dropping fast. The elephant in the room therefore is still the debt mountain we have built in 100 years of aggressive, pervasive and persistent inflation pumping in the US$ monetary system (the US$ being the world reserve currency of course).

Here is Jesse’s Cafe Americain with his comments and an article written by Martin Wolf in, of all places, some Persian Gulf daily:

http://jessescrossroadscafe.blogspot.com/2009/12/what-will-new-world-reserve-currency.html

Here is the UN’s own Trade and Development Report 2009 – true to form of course, always late to the penny-dropping party and always misguided in the final conclusion. But at least they’ve brought the issue up finally.

http://www.unctad.org/Templates/WebFlyer.asp?intItemID=5006&lang=1

In the needlessly wordy, overly pompous lump of platitudes and redundant ideology that passes for a “report” at the UN, what you want to read is chapter IV: “Reform of the international monetary and financial system”. You will find the link at the bottom of the page under “quick links”. It is a PDF file and I seem unable to attach a link for you but I will post below their own highlights.

To be sure the report is actually reasonable in its initial chapters despite a glaring piece of ignorant pablum right at the start of the report when the luminaries that are the UN researchers state that:

“The crisis proves that free financial markets do not lead to optimal social and macroeconomic outcomes.”

Of course, the UN conveniently disregards the fact that in economies where, for example, the choice of monetary system is not submitted to the people for ratification, where interest rates are manipulated arbitrarily by political decree, where in order to pander to special interest groups companies are not allowed to fail, where governments arbitrarily decree that corporate and commercial law must be suspended in order to save the system and where governments arbitrarily appropriate public funds, where industries are protected and subsidized even though they are not economically viable, how free can the market really be?

But, in all honestly, the report does get better as you go along… to a point:

“… because speculative investments do not generate increases in real income. […] Financial globalization implies a de facto loss of national policy autonomy […] The current international reserve system does not provide for any disciplines on surplus countries and on deficit countries that issue reserve currencies. (Ed. you don’t say!) […] In the absence of symmetric interventions in currency markets, the system has a deflationary bias… […] Any reform of the inter- national monetary and financial system has to address the issue of SDR allocation (Ed. this is the allusion to a new reserve currency).

This is the point at which after having identified many of the shortcoming of the present monetary system, the bright crayons that are the experts in the UN box, go on to offer solutions that are nothing but variations on the floating exchange fiat theme… ergo… more of the same…

I expected no less from the UN so, here it goes:

“Unconditional countercycli- cal access to IMF resources would help prevent excessive currency depreciations. […] Achieving a stable pattern of exchange rates stands a bet- ter chance within a multilat- erally agreed framework for exchange-rate management. (Ed. of course the UN says it is desirable but does not say how to achieve that concretely. Also, the UN completely disregards the fact that government continuously intervene in the currency markets; what else is Quantitative Easing? Why set up Euro/Dollar swap lines of credit with foreign governments?… what a bunch of crock!!) […] An exchange rate system based on the principle of constant real exchange rates would tackle the problem of destabilizing capital flows at its source (Ed. these nitwits propose floating exchange rates by any other name i.e. more of the same)

So, after a reasonably good start even if peppered with pablum, the UN report goes on to propose more of what we already have but maybe with a new currency or a revalued global reserve currency and then, disregarding all the crap they have dished out in what is essentially a piece of trashy literature that aims to justify the grossly ludicrous salaries and benefits paid to an over staffed, under employed, unjustifiably proud, over arrogant, group of vain and ineffective “professionals” that couldn’t hack it in the real world, they conclude with one pearl of wisdom:

“A further accumulation of external debt obligations by the United States would make the world economy even more fragile.”

Of course, if you follow this blog, you will know that I contend that like Climate Change, the UN is nothing but a tool of inflation. I don’t mean to detract from the group of true idealists that are employed here and there within the organization and that are genuinely unaware of the ultimate purpose of the UN. But all the UN is, is a tool meant to create circulation of great amounts of money in an attempt to maintain a positive multiplier effect of the currency. That is the reason the UN must spend money regardless of the political/economic/social conditions it encounters in the areas where it operates. Have you ever heard the UN not to disburse on a project because the local government had been found out to be corrupt? Of course not. The UN must disburse because failure to deploy those sums would mean a reduced budget for the following year. And I can assure you that no UN department is going to stand for that. The UN will always outspend itself in an effort to acquire ever more resources year in year out. That is par for the course in a monetary/political system predicated on inflation.

But inflation is teetering on the brink of the deflationary cliff these days….

How far can a global war be?

2013/2015 is my prediction in the absence of radical political economic change in direction.

Take me to task then.

Government action is plain for all to see

There are few efforts at dissimulating what are clearly illegal actions by our governments. The question is why, if things like the housing market or the general economy are improving, do we still need to support Fannie and Freddie or, for that matter, why we are still allowing banks to disregards mark to market rules. More importantly, why are our governments still engaging in Quantitative Easing which in effect is nothing but buying paper from yourself with currency you’ve just created yourself.

More to the point. If Quantitative Easing was such a good idea, then why not engage in the practice on a regular basis? Surely if QE is a viable strategy, then we could just do it every day of every week of every month of every year. Soon, poverty would be a thing of the past, everyone would have enough food to satiate their hunger and nobody other than the creators of the currency would really need to work for a living. Problem solved.

Treasury removes cap for Fannie and Freddie aid

… this, may I remind you, is to save a company which, not two years after the Enron debacle, in 2004 was unable to publish its accounting books for a period of 18 months. That’s eighteen months. And back then, nobody thought something might be amiss…

http://news.yahoo.com/s/ap/20091224/ap_on_bi_ge/us_mortgage_giants_ceos_20

How much more blatant can criminal behavior get?

Oh and, by the way, … continuing the tradition of rewarding failure…

Fannie and Freddie CEOs to get up to $6M in pay

http://www.sltrib.com/business/ci_14066302?source=rss

…. tic, toc…. tic, toc….

Geithner: We will not have a second wave of financial crisis…

Typically, something is not true till official government sources deny it…

http://wallstreetpit.com/13141-geithner-we-will-not-have-a-second-wave-of-financial-crisis

And of course, the opposite is also true: i.e. when government peddles a concept as being true it typically is not (anyone for global warming? Which, by the way, is now conveniently termed climate change).

Lets see how this prediction pans out.

Curtailing public spending… a precursor to war…

OK… now wait for the scandals to keep piling up and the masses will revolt… same goes for California, Spain, Ireland, the UK, France Italy….

Social unrest has the pesky characteristic that makes it contagious and causes it to spread cross borders…

http://www.theglobeandmail.com/report-on-business/greece-passes-austerity-budget/article1411266/

The count down to global war is on… 2013/2015 latest

Debt ceiling to be raised

This is going to be interesting.

If you read this essay and this essay, you will know I contend that we have reached the limit of how far we can expand inflation and that as a consequence, our Dollar based fiat monetary system is now broken. The most immediate concern is that deflationary environments bring about the insolvency of government.

Some of you will retort that governments have always been bankrupt but that somehow we’ve always come out ok.

What you are missing is the logic of inflation in a fiat monetary system characterized by floating exchange rate.

For as long as a government is able to borrow progressively more money, then its unfunded liabilities can be kicked down the road. Think of the pension trust fund. The money has been paid in all right. But government has used that money. Physically the money is no longer there; it has been spent. What governments count upon is inflation. Essentially, government feels free to spend today what it thinks it can repay back tomorrow in devalued currency. That in a nutshell, is what Western governments have been doing.

The above works for as long as inflation can be maintained on a positive trajectory and for as long as sovereign participants to the monetary system can and want to purchase each other’s sovereign debt (that is the meaning of floating exchange rates – i.e. the value of a currency is predicated on a basked of other currencies thus relying on sovereigns buying each other’s sovereign debt)

But pushing inflation into a system artificially, aggressively, pervasively and relentlessly over decades necessarily results in distortions, aberrations and criminal behavior. Thus, towards the end of the inflationary cycle, nominal profits progressively show up in fewer and fewer sectors until at the very end they show up only in the financial sector as the entity that is first in line for the use of fiat money.

The point at which nominal profits disappear from most sectors, is the point at which unemployment and social costs soar and is also the point at which tax revenue declines. This is the typical environment in which the power elites are also shown to be willing and consenting participants in unlawful and criminal enterprise.

Here is the problem.

As tax revenue declines, the ability of sovereigns to expand debt is hampered. On one hand declining tax revenue puts a dent in the budget that leads to credit worthiness revisions. On the other hand, as governments apply more of the tactics they think have enabled them to induce inflation into the system till recently (i.e. more spending on public projects, bailouts, military) they worsen an already critical fiscal situation.

This is the point at which sovereigns are either unwilling and/or unable to purchase each other’s debt.

The USA today have opted to increase the debt ceiling by $1.8Trillion.

Even assuming other sovereigns were willing and able to buy US debt, 1.8Trillion is a gargantuan chunk that would be tough to palm off during good times let alone during a crisis when all sovereigns are busy bailing out their own industries and banks.

Considering that the Fed has already been the purchaser of last and only resort of US debt in the past 8 months, it will be interesting to see who will buy any of this 1.8Trillion and how much of it. If the Fed should once again be the largest buyer as it has been in the recent past, the balance sheet of the entity responsible for the global reserve currency (the Fed) is going to show that the international monetary system is totally and utterly broken.

http://www.reuters.com/article/idUSTRE5B849020091210

No good arguing for hyperinflation at this rate…

Istithmar (Dubai World) liquidates Union Square W Hotel for $2Million. Original purchase price was $282Million in 2006

http://dealbook.blogs.nytimes.com/2009/12/09/dubai-forced-to-check-out-of-w-hotel/

Japan revises GDP growth (lower)

http://www.nytimes.com/aponline/2009/12/08/business/AP-AS-Japan-Economy.html?_r=1

CaLPERS fund real estate holdings drop in value by 48% year on year

http://www.latimes.com/business/la-fi-calpers9-2009dec09,0,7319259.story

All the above circumstances and many more around the world mean a re-evaluation of asset prices lower. Lower asset values trigger cost cutting thus feeding unemployment. Rising unemployment causes rising social costs. However, just as social costs are rising, lower asset prices and rising unemployment result in diminished tax revenue.

So, we are at war and we are expanding the war. We are bailing out banks and companies to the tune of dozens of Trillion Dollars. Due to declining asset prices various layers of derivatives will come due (may I remind you that outstanding financial obligations globally stand at $500Trillion and that global GDP is somewhere in the neighborhood of $50Trillion and dropping like a rock) and through it all, our governments tax revenue is disappearing…

… and if that were not enough, our governments have no dosh stashed away anywhere. In fact, funds such as the US pension fund that in accounting terms is in surplus, in real terms the money has been spent. It is not there physically. Meaning that the US government has already borrowed and spent the sums you  thought you had saved. And may I remind you that this type of borrowing does not show up as “debt” on the accounts of the Federal State.

Inflation has a mathematical limit. Once at the limit, traditional inflation goosing techniques only serve to bankrupt the state.

World war by 2012/2015

Audit the Fed

 

Main stream media on deflation

http://www.bloomberg.com/apps/news?pid=20601068&sid=ame31IjWda6w

Here is a concept that is commonly misunderstood. From the article:

“A sustained price drop might set off a chain reaction in which lower profits force employers to pare wages and payrolls. That would erode consumer demand, exacerbating wage cuts and firings.”

A sustained price drop only reduces nominal revenue. Consequently, wages will have to be pared back.

Good.

But why would lower prices engender lower consumption? If prices and wages drop simultaneously, on a relative basis there would be no change to consumption.

The problem is debt.

Deflation reduces the nominal value of commercial revenues and wages. However, debt and debt service amounts remain at the same value as when they were first generated.

Government finances suffer the same fate. Deflation brings about reduced tax collection and  the bankruptcy of government.

So unless someone somewhere does not find a way to restart the credit markets and inflation at rates approximating anything like the period 2000/2007 Western governments are bankrupt with no possibility to postpone the day of reckoning.

War it is then.

Curtailing public services continues unabated… tic,toc… tic,toc

http://www.businessweek.com/magazine/content/09_48/b4157034230199.htm

“Now Detroit must use the revenues from its three casinos—MGM Grand Detroit (MGM), Greektown Casino, and MotorCity Casino—to cover a $4.2 million monthly payment to the banks before a single cent can go to schools, transportation, and other critical services (emphasis added).

[…] 

Without a federal fix, strapped municipalities like Detroit could be forced to slash vital services even more. The city’s public schools, which had been putting off paying textbook suppliers and other vendors, aren’t likely to see their funding rise now that banks are taking a bite out of the city’s budget.”

Page two has way too many relevant passages to excerpt. Read it. It is what is happening throughout the Western world.

If government should force anyone to do anything, it should force banks to write off the debt with a provision that when things should pick up again in the future, they could lay claim to part of the original sum.

Gold bullion looking ever better