Currency Wars and the Dollar Dropping Hegemony

London Telegraph

Image: Daryl Cagle

As the US Federal Reserve meets today to decide whether its next blast of quantitative easing should be $1 trillion or a more cautious $500bn, it does so knowing that China and the emerging world view the policy as an attempt to drive down the dollar.

The Fed’s “QE2″ risks accelerating the demise of the dollar-based currency system, perhaps leading to an unstable tripod with the euro and yuan, or a hybrid gold standard, or a multi-metal “bancor” along lines proposed by John Maynard Keynes in the 1940s.

China’s commerce ministry fired an irate broadside against Washington on Monday. “The continued and drastic US dollar depreciation recently has led countries including Japan, South Korea, and Thailand to intervene in the currency market, intensifying a ‘currency war’. In the mid-term, the US dollar will continue to weaken and gaming between major currencies will escalate,” it said.

David Bloom, currency chief at HSBC, said the root problem is lack of underlying demand in the global economy, leaving Western economies trapped near stalling speed. “There are no policy levers left. Countries are having to tighten fiscal policy, and interest rates are already near zero. The last resort is a weaker currency, so everybody is trying to do it,” he said.

Pious words from G20 summit of finance ministers last month calling for the world to “refrain” from pursuing trade advantage through devaluation seem most honoured in the breach.

Taiwan intervened on Monday to cap the rise of its currency, while Korea’s central bank chief said his country is eyeing capital controls as part of its “toolkit” to stem the flood of Fed-created money leaking out of the US and sloshing into Asia. Brazil has just imposed a 2pc tax on inflows into both bonds and equities – understandably, since the real has risen by 35pc against the dollar this year and the country has a current account deficit.

“It is becoming harder to mop up the liquidity flowing into these countries,” said Neil Mellor, of the Bank of New York Mellon. “We fully expect more central banks to impose capital controls over the next couple of months. That is the world we live in,” he said. Globalisation is unravelling before our eyes.

Each case is different. For the 40-odd countries pegged to the dollar or closely linked by a “dirty float”, the Fed’s lax policy is causing havoc. They are importing a monetary policy that is far too loose for the needs of fast-growing economies. What was intended to be an anchor of stability has become a danger.

Hong Kong’s dollar peg, dating back to the 1960s, makes it almost impossible to check a wild credit boom. House prices have risen 50pc since January 2009, despite draconian curbs on mortgages. Barclays Capital said Hong Kong may switch to a yuan peg within two years.

Mr Bloom said these countries are under mounting pressure to break free from the dollar. “They are all asking themselves whether these pegs are a relic of the past,” he said.

China faces a variant of the problem with its mixed currency basket, a sort of “crawling peg”. Commerce minister Chen Deming said last week that US dollar issuance is “out of control”. It is causing a surge of imported inflation in China.

Critics in the US Congress say China could solve that particular problem very quickly by letting the yuan rise enough to bring the country’s $180bn trade surplus into balance.

They say the strategy of holding down the yuan to underpin China’s export-led model is the real source of galloping wage and price inflation on China’s eastern seaboard. The central bank has accumulated $2.5 trillion of foreign bonds but lacks the sophisticated instruments to “sterilise” these purchases and stem inflationary “blow-back”.

But whatever the rights and wrongs of the argument, the reality is that a chorus of Chinese officials and advisers is demanding that China switch reserves into gold or forms of oil. As this anti-dollar revolt gathers momentum worldwide, the US risks losing its “exorbitant privilege” of currency hegemony – to use the term of Charles de Gaulle.

The innocent bystanders caught in the crossfire of Fed policy are poor countries such as India, where primary goods make up 60pc of the price index and food inflation is now running at 14pc. It is hard to gauge the impact of a falling dollar on commodities, but the pattern in mid-2008 was that it led to oil, metal, and grain price rises with multiple leverage. The core victims were the poorest food-importing countries in Africa and South Asia. Tell them that QE2 brings good news.

So the question that Ben Bernanke and his colleagues should ask themselves is whether they have thought through the global ramifications of their actions, and how the strategic consequences might rebound against America itself.

Russia Opens Pipeline for Siberian Oil

By Isabel Gorst

Vladimir Putin, the Russian prime minister, on Sunday opened a new pipeline to export east Siberian oil to China that will help Russia reorientate its oil trade towards the east.

The pipeline, running 67km from Skovorodino in east Siberia to China’s north-eastern frontier, is an offshoot of a new oil export route Russia is building to the Pacific Ocean, providing a strategic window on the fast-growing energy markets of Asia.

“This is a vital project for us as we begin to diversify our sales of strategic raw materials,” Mr Putin said. “So far we have delivered most oil to Europe … The Asia-Pacific region has received insubstantial volumes.”

Russia began exporting oil this year from a new export terminal on the Pacific Ocean built to serve fields in east Siberia, one of the world’s last untapped oil provinces. Some Kremlin-friendly oil companies have been granted tax breaks to speed development of east Siberian reserves and offset a decline in production in other regions.

Transneft, the Russian oil pipeline monopoly, completed the construction of a pipeline from Taishet in the Irkutsk region to Skovorodino last year, the first stretch of a planned 2,757km pipeline to the Pacific. On completion in 2012, the pipeline will be capable of carrying up to 1.6m barrels of oil a day, about one-third of Russia’s current exports.

Julia Nanay, senior director at PFC Energy, the Washington-based oil consultancy, said the pipeline would give Russia flexibility to focus oil trade on premium markets. “There is more money to be made by exporting to Asia than to Europe. By building the spur to China, Russia is acknowledging commercial realities,” she said.

Russia accepted a $25bn (€19.6bn, £16bn) loan from China in exchange for future oil deliveries last year, cementing its energy-trading relations with the world’s fastest growing oil consumer. The deal entitles China to import 300,000 barrels a day of Russian oil for 20 years starting in 2011.

Transneft said last year that Russia would boost its daily oil production by 1m barrels to 11m b/d after 2012, providing enough oil for exports both ways.

But analysts have warned that Russian oil production, after rising to an all-time record of 10.2m b/d this month, will begin to fall next year as a decline accelerates at mature fields.

Copyright The Financial Times Limited 2010. You may share using our article tools. Please don’t cut articles from FT.com and redistribute by email or post to the web.

Bilderberg Gives Green Light to Attack Iran

PrisonPlanet.com

The 2010 Bilderberg agenda has been revealed by veteran Bilderberg sleuth Jim Tucker and it paints a picture of crisis for the

War with Iran may be around the corner now that Bilderberg has given the official approval.

globalists, who are furious at the increased exposure their gatherings have received in recent years, as well as being dismayed at their failure to rescue both the euro and the failing carbon tax agenda, but more alarmingly according to Tucker, the majority of Bilderberg members are now in favor of military air strikes on Iran.

American Free Press muckraker Tucker has proven routinely accurate with the information he obtains from sources inside Bilderberg, which makes this year’s revelations all the more intriguing.

According to Tucker, Bilderberg luminaries are dismayed at the fact that “many important people” are not attending this year because, due to increasing exposure, invitees are “getting in trouble at home” and constituents are embarrassing them by asking irate questions such as “what are you doing with these monsters?”

“All these people are exposing us, we get all this mail and calls,” Tucker paraphrased Bilderberg members as complaining.

This dovetails with the revelations overheard by Guardian journalist Charlie Skelton at the Hotel Dolce Sitges before the meeting began when he heard conference organizers lamenting the fact that protest numbers are growing at Bilderberg events each year and that they represent a “threat” to Bilderberg’s agenda.

In addition, prominent Bilderberg Zbigniew Brzezinski, the man who warned recently that a “global political awakening” was threatening to derail the move towards global government, was expected to be in attendance at this year’s meeting.

Tucker named his source as an international financial consultant who personally knows Bilderberg members and has done business with them for the past 20 years.

Turning to Iran, Tucker said that many Bilderberg members, including Brzezinski, were in favor of U.S. air strikes on Iran and were “leaning towards war,” although 100 per cent of members were not supportive of an attack.

“Some of them in Europe are saying no we shouldn’t do it but most of them are in favor of American air strikes on Iran,” said Tucker, adding, “They’re tilting heavily towards green lighting a U.S. attack on Iran.”

An attack on Iran would provide a welcome distraction to the globalists’ failings in other areas and would also allow them to war profiteer, pointed out Tucker.

On the subject of the euro, Tucker said that the Bilderberg elitists were determined to save the single currency even as it collapsed to a new 4-year-low at $1.19 against the dollar yesterday afternoon. As we have highlighted, the globalists are panicking at the euro’s fall and the ECB keeps intervening to try and hasten its decline. If the euro were to cease to exist, it would all but derail the ultimate agenda for a global currency because the perceived stability of using one currency for a plethora of nations would be discredited.

“The euro is important because it’s part of their world government program, they’re very downbeat because they’ve fallen so far behind,” said Tucker, explaining that the globalists had planned by now to have the European Union, the American Union and the Asia-Pacific Union already up and running.

With regard to the climate change agenda, on which subject Microsoft founder Bill Gates was personally invited to the conference to discuss, Tucker said that Bilderberg were still intent on pushing it in pursuit of a carbon tax despite the fact that the whole move was massively eviscerated in the aftermath of the Climategate scandal.

Tucker quoted one Bilderberg member as all but admitting defeat on the mission to hoodwink the public into paying taxes in the name of fighting global warming.

“On climate change, we’re about whipped,” said one of the elitists in attendance.

However, Tucker said that the globalists were working on putting out more climate change propaganda “even as we speak”.

On the issue of the BP oil spill, the Bilderbergers made it clear that President Obama’s apparent “outrage” at BP and his threat of criminal procedures against the company was an little more than an act and that British Petroleum, who have been represented at Bilderberg meetings in the past by people like Peter Sutherland, former non-executive chairman of BP, were still “one of our brothers,” according to the elitists.

The future of oil prices are always an important topic to Bilderberg and the leaks Tucker and other investigators relayed from previous Bilderberg meetings were proven accurate when oil prices hit $150 a barrel in 2008, which was precisely what Bilderberg had called for.

“Gas prices are going to be nice and cheap this summer,” said Tucker, adding that they would start to rise again to the $4 a gallon level around November when artificial scarcity is created.

On the march towards anti-democratic global government, Bilderberg members stated that America must be “Europeanized” and turned into a giant socialist welfare state with health rationing and higher income taxes.

Tucker said hat Bilderberg were intent on mandating a bank tax paid directly to the IMF to fund global governance and a global treasury department under the IMF, and that this would then merely be passed on to the consumer.

In summary, Tucker said that this year’s conference was the most downbeat and pessimistic Bilderberg meeting in history, with massive exposure of their agenda acting as a roadblock to the ultimate goal of an authoritarian world government run by the elite, for the elite.

BP, Federals Hid Massive Oil Spill Video

Just as everyone suspected, BP and the Federal Government of the United States were and still are truly ‘in bed’.  Recent video released on ABC, shows that BP hid early video feeds from not one, but at least three oil leaks gushing out millions of gallons of crude into the waters of the Gulf of Mexico.

The calculations of thousands or hundreds of thousands gallons a day were not even close to the disaster covered-up by two criminal entities that, from the very beginning decided to censor the video feeds, but that now are blaming each other for not making it available to the public.  According to ABC, BP now alleges the Coast Guard had the video in their hands all the time, while the Coast Guard itself says BP did not give them permission to make the video available.

See ABC’s report below.

In the meantime, it is estimated that British Petroleum will collect, despite the oil disaster, a total profit of $ 10 billion for 2010.  BP assured shareholders that not only will they have their investments multiplied, but that the company is a strong financial position to sort out all expenses related to the oil spill cleaning work.  The cost of the spill has been estimated in the tens of billions of dollars.

According to the Raw Story, “BP’s dividend ratio is now at 7.4 percent per year, more than twice the average payout of companies listed in the S&P 500. This means that US investors who hold BP stock effectively earn 7.4% interest on their shares — more when US tax law is taken into account — in addition to any gains or losses as a result of price shifts in the stock’s value.”

The Cycle of Debt Deflation

Before It’s News

One of the most famous quotations of Austrian economist Ludwig von Mises is that “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.” In fact, the US economy is in a downward spiral of debt deflation despite the bold actions of the federal government and of the US Federal Reserve taken in response to the financial crisis that began in 2008 and the associated recession. Although the vicious circle of debt deflation is not widely recognized, precisely what von Mises described is happening before our eyes.

A variety of positive economic data has been reported in recent months. Retail sales rose 0.4% in April 2010 as consumer spending rose and the US gross domestic product (GDP) grew at a rate of 3%.  In May 2010, home sales rose to a five-month high and consumer confidence rose 17% (from 57.7 to 63.3). Industrial production rose 0.8% and durable goods orders rose 2.9%, more than had been forecast. However, the modest gains reported represent the continuing adaptation of economic activity at dramatically lower levels compared to the pre-recession period and most of the reported gains have been substantially manufactured by massive government deficit spending.

Despite the widely reported green shoots, in May, the unemployment rate rose to 9.9% while paychecks in the private sector shrank to historic lows as a percentage of personal income, and personal bankruptcies rose. Roughly 14% of US mortgages are delinquent or in foreclosure, credit card defaults are rising and consumer spending hit 7 month lows. To make matters worse, the reported increase in consumer credit, in fact, points to a further deterioration because consumers appear to be borrowing to service existing debt. Outside of the federal government, which is borrowing at record levels and expanding as a percentage of GDP, and outside of the bailed out financial sector, debt deflation has continued unabated since 2008.

Money Supply vs. Debt Service

A contraction of the broad money supply is taking place because the influx of money into the US economy, i.e., lending to consumers and non financial businesses, has fallen below the rate at which money is flowing out of general circulation as a function of debt service (interest and principle payments on existing debt), thus a net drain of money from the broad US economy is taking place. As a result, additional borrowing, as consumer spending falls, appears to be servicing existing debt in a pattern that is clearly unsustainable and that signals a further rise in debt defaults in coming months.
M3
Chart courtesy of Shadow Government Statistics
The estimate of the broad money supply (the Federal Reserve’s M3 monetary aggregate) is crashing and the Federal Reserve’s M1 Money Multiplier, a measure of how much new money is created through lending activity, fell off of a cliff in 2008, and remains practically flat-lined.
MULT
Chart courtesy of the Federal Reserve Bank of St. Louis
The contraction of the broad money supply points to a potential slowing of economic activity and indicates that consumers and non financial businesses will be less able to service existing debt. Despite easing somewhat in March 2010, credit card losses are expected to remain near 10% over the next year and mortgage delinquencies, are currently at a record highs, and these dismal predictions implicitly assume a stable or growing money supply.

A tsunami of eventual mortgage defaults seems to be building and loan modifications have been a failure thus far. There have been only a small number of permanent loan modifications (295,348) under the Home Affordable Modification Program (HAMP) in 2009, out of 3.3 million eligible (60 days delinquent) loans and more than half of modified loans default.

Mortgage Delinquencies and Foreclosures
Chart courtesy of Calculated Risk
Although it has been reported that American consumers are saving at a rate of 3.4%, the contraction of the broad money supply suggests savings liquidation. Given a contracting money supply, ongoing debt defaults and declining consumer spending, the increase in non-mortgage consumer loans indicates that consumers are borrowing where possible to consolidate debts, cover debt service, or borrowing to continue operating financially as their total debt grows, thus as they approach insolvency.
CONSUMER
Chart courtesy of the Federal Reserve Bank of St. Louis
The increase in non-mortgage consumer loans has not prevented an overall decline in total household debt attributed to ongoing deleveraging by consumers. While deleveraging (paying down debt) has been interpreted as caution on the part of consumers, or as low consumer confidence, the decline in outstanding credit reflects a reduced ability to borrow, i.e., to service additional debt. This suggests that the recovery of the US economy may be illusory and that the economy is likely to contract further in coming months.
CMDEBT
Chart courtesy of the Federal Reserve Bank of St. Louis
Commercial borrowing has declined more sharply than household debt suggesting that the nominal return to growth estimated at 3% has not been matched by debt financed expansion in the private sector.
BUSLOANS
Chart courtesy of the Federal Reserve Bank of St. Louis
The broad US money supply is no longer being maintained or expanded by normal lending activity. If federal government deficit spending ($1.5 trillion annually), debt monetization and emergency actions by the Federal Reserve (totaling an estimated $1.5 trillion since 2008) to recapitalize banks are considered separately, there remains a net drain effect on the broad money supply. The scarcity of money hampers economic activity, i.e., money is less available for investment, and directly exacerbates debt defaults as consumers and businesses experience cash shortfalls, while at the same time being less able to borrow. Since unemployment is a key indicator of recession, then if the US economy were contracting, it would be evident in unemployment statistics.

Structural Unemployment

Unemployment and labor force data suggest that the US labor market is in a structural decline, i.e., millions of jobs have been and are being permanently eliminated, perhaps as a long term consequence of off-shoring, outsourcing to other countries and the ongoing de-industrialization of the United States. However, the immediate meaning of the term “structural” has to with the fact that jobs created or sustained during the unprecedented expansion of debt leading to the financial crisis that began in 2008, e.g., a substantial portion of service sector jobs created in the past two decades now appear not to be viable outside of a credit expansion.

Officially, the US unemployment rate rose to 9.9% in April 2010, which represents the percentage of workers claiming unemployment benefits. However, the total number of unemployed or underemployed persons, including so-called “discouraged workers” (Bureau of Labor Statistics U-6), rose to 17.1%. Using the same methods that the BLS had used prior to the Clinton administration, U-6 would be approximately 22%, rather than the official 17.1% statistic.

U-6 Unemployment
Chart courtesy of Shadow Government Statistics
With official U-6 unemployment of 17.1% and a workforce of 154.1 million there are roughly 26,197,000 people officially out of work. Using the pre-Clinton U-6 unemployment calculation of approximately 22%, there would be 33.9 million unemployed. If the average US household consists of 2.6 persons and if 33% of the unemployed are sole wage earners, then 55.5 million US citizens currently have no means of financial support (17.9% of the population).
Unemployment by Duration
Chart courtesy of Calculated Risk
While it has been reported that the labor force is shrinking, the characterization of workers permanently exiting the workforce by choice may be inaccurate. While a shrinking workforce could reflect demographic changes, the rate of change suggests that tens of millions of Americans are simply unemployed.
EMRATIO
Chart courtesy of the Federal Reserve Bank of St. Louis
Setting aside the question of whether or not those “not in the workforce” are, in fact, permanently unemployed, the workforce, as a percentage of the total US population, is currently at 1970s levels. Since many more households today depend on two incomes to meet their obligations, compared to the 1970s, a marked drop in the percentage of the population in the workforce points to a decline in the labor market more significant than official unemployment statistics suggest. What is more important, however, is that structural unemployment suggests structural government deficits, e.g., unemployment benefits, welfare, food stamps, etc. Since more than 2/3 of US GDP (roughly 70%) consists of consumer spending, a sustainable recovery from recession seems improbable if unemployment is worsening or if the labor force is in a structural decline, since that would imply unsustainable government deficits, whether or not they are masked by nominal GDP gains thanks to economic stimulus measures.

Government and GDP Growth

The US federal government is a growing portion of GDP, thus reported GDP growth is largely a byproduct of government deficit spending and stimulus measures, i.e., reported GDP growth is unsustainable. Total government spending at the local, state and federal levels accounts for as much as 45% of GDP, thus nominal gains would be expected when government deficit spending increases. According to some measures, reported gains in GDP are a byproduct of relatively new statistical methods and, using earlier methods of calculation, GDP remains negative.
GDP
Chart courtesy of Shadow Government Statistics
Government borrowing and spending may have offset declines in the private sector but only to a degree and only temporarily. The resulting growth in US public debt has an eventual mathematical limit: insolvency. Of course, the actual limit to US borrowing remains unknown. The continuing solvency of the US depends on the ability and willingness of governments, banks and investors around the world to lend to the US, which in turn depends on the tolerance of lenders for the US government’s profligacy and money printing by the Federal Reserve, e.g., quantitative easing and exchanging new cash for worthless bank assets. US Treasury bond auctions will fail if lenders conclude that a sufficiently large portion of their investment will be diluted into oblivion by proverbial money printing. In that event, the US dollar will surely plummet, despite deflationary pressures within the domestic US economy, and the cost of foreign goods, e.g., oil, will rise causing high inflation or triggering hyperinflation.
GFDEBTN
Chart courtesy of the Federal Reserve Bank of St. Louis
According to the Bank for International Settlements (BIS), the federal budget deficit increased from 3.1% of GDP in 2007 to 9.2% in 2010.  Rather than being the result of one-time expenses, such as temporary stimulus measures, much of the deficit represents permanent increases in government spending, e.g., due to the growing number of federal employees. If increased government spending is removed, GDP appears to be declining significantly.
GDP Minus Government Deficit Spending
Chart courtesy of Karl Denninger
Of course, sustainability has more to do with total debt than with deficit spending because a deficit assumes that there is an underlying capacity to service additional debt.

Unsustainable Debt

While asset prices have declined, e.g., real estate and equities, debt levels have remained high due to the federal government’s policy of preserving bank balance sheets, which had ballooned prior to the financial crisis to the point that overall debt in the US economy reached unsustainable levels.
Total Debt to GDP
Chart courtesy of Karl Denninger
The absolute debt to GDP ratio of the US economy peaked in 2007 when debt levels exceeded the ability of the economy to service debt from income based on production, even at low interest rates. Although US GDP began to decline prior to the advent of the global financial crisis, debt coverage had been in decline approximately since the 1970s, coincidentally, around the time that the US dollar was decoupled from gold.
Declining Debt Coverage from 1971 on
Chart courtesy of Karl Denninger
Government deficit spending cannot correct the situation because, for every dollar of new borrowing, the gain in GDP is negligible and some have argued that the US economy has passed the point of “debt saturation.”
Debt Saturation
Chart courtesy of Nathan A. Martin
In a growing economy, additional debt can result in a net gain in GDP because the money supply grows and economic activity is stimulated by transactions that flow through the economy as a result. The debt saturation hypothesis is that, as debt levels rise, additional debt has less impact on GDP until a point is reached where new debt causes GDP to decline, i.e., the capacity of the economy to service debt has been exceeded and, not only is it impossible for the economy to grow at a rate sufficient to service existing debt (since interest compounds), but economic activity actually declines further as a function of additional debt.

A Downward Spiral

The process of debt deflation is straightforward. New lending at levels that would maintain or expand the broad money supply is impossible for two reasons: (1) asset values and incomes have fallen and millions remain unemployed; and (2) debt levels remain excessive compared to GDP, i.e., real economic activity (outside of the government and financial services industry) cannot service additional debt. The inability to lend, actually the result of prior excess lending, results in a net drain of money from the economy. The drain effect, in turn, leads to further defaults as cash strapped consumers and businesses fail to service existing debt, and as debt defaults impact bank balance sheets, putting a damper on new lending and completing the cycle of debt deflation.

Keynesian economic policies, i.e., government deficit spending, are irrelevant vis-à-vis excessive debt levels in the economy and bailing out banks is not a solution since it cannot stop the deterioration of their balance sheets. The process is self-perpetuating and cannot be stopped by any government or monetary policy because it is not a matter of policy, but rather one of mathematics.

Since the presence of excess debt (beyond what can be supported by a stable GDP, or by sustainable GDP growth) impacts the broad money supply, efforts to preserve bank balance sheets, i.e., to keep otherwise bad loans on the books of banks at full value, will ultimately cause bank balance sheets to deteriorate more than they would have otherwise. The fact that US banks issued trillions in bad loans cannot be corrected by changing accounting rules, nor can the consequences be avoided by government deficit spending or by unlimited bailouts, and the problem cannot be papered over by dropping freshly printed money from helicopters flying over Wall Street. The major problems facing the US economy today—a tsunami or debt defaults, structural unemployment, massive government budget deficits, a contraction of the broad money supply outside of the federal government and the financial system, and a lack of sustainable growth—cannot be addressed as long as excess debt levels are maintained. As von Mises clearly understood, sound economic conditions cannot be restored unless and until the excess debt, which resulted from a boom brought about by credit expansion, is purged from the system. The alternative, and the current policy of the United States, is a downward spiral into a bottomless economic abyss.

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