Though prior to the 2008
financial crisis our largest banks had become casino like speculators
with public money lacking in fiduciary responsibility, our elected
officials bailed them out. Our leadership placed America and the world
unknowingly (knowingly?) on a preordained destructive path because it
was politically expedient and the easiest way out of a difficult
predicament. By kicking the can down the road our political leadership,
like the banks, avoided their fiduciary responsibility. Similar to
a parent wanting to be liked and a friend to their children they avoided
the difficult discipline that is required at certain critical moments in
life. The discipline to make America swallow a needed pill. The
discipline to ask Americans to accept a period of intense adjustment. A
period that by now would be starting to show signs of success versus the
abyss we now find ourselves staring into. A future that is now
significantly worse and with potentially fatal pain still to come.
Unemployed Americans, the casualties of the financial crisis wrought by
the banks, witness the same banks declaring record earnings while these
banks refuse to lend. When the banks once more are caught with
their fingers in the cookie jar with falsified robo-signing mortgage
title fraud, they again look for the compliant parent to look the other
way. Meanwhile the US debt levels and spending associated with
protecting these failed (and still insolvent institutions) are so out of
touch with US de-industrialized productive capability that the US dollar
is falling and forcing countries around the world to devalue their
currencies in a desperate attempt to maintain competitive advantage. So
much for the “strong dollar” mantra we heard endlessly for years from
every US Secretary of the Treasury that needed foreign investment to
fund our deficits. Like second rate powers, our word is no longer our
bond.
The
fork in the road which we chose has resulted in:
1)
massive public debt levels that can never realistically be expected to
be paid back,
2)
Financial markets that are disconnected from fundamental historical
values,
3) A
global banking industry that can best be described as fragile and is
realistically insolvent if the
accounting games were to be removed.
I think most would agree
that massive public, private and consumer debt levels are a central
problem to the current global predicament. We also however need to
appreciate that these massive debt build ups have also allowed the
over-building of production capacity. We have global supply that is now
outstripping demand. The output gap in the US
alone would require a theoretical -7% Fed Funds Rate according to the
Taylor Rule (6)
EXCESS CAPACITY
The currency wars are
being fought because global players are being forced to fight for a
piece of the global demand pie that is growing at a slower rate (a first
derivative problem) versus the capacity presently available and coming
online. The Asian buildup of production capacity is nothing short of
startling but it is premised on a free spending and 70% consuming US
economy. A slowdown in the US and a weakening US dollar are major
threats to political and social stability in the Asian export economies.
Everything in the mercantile, export led Asian economies must be done to
avoid this. The facts however are that there are no longer sufficient
jobs in America to support past and present levels of consumptions. The
middle class in America is quickly becoming extinct and with it the
ability to famously ‘shop till they drop’.
What are the US
politicos to do? The well recognized Michael Hudson asserts in
Why the U.S. Has Launched a New Financial World World War:
“Finance is the new form of warfare – without the expense of a military
overhead and an occupation against unwilling hosts. It is a competition
in credit creation to buy foreign resources, real estate, public and
privatized infrastructure, bonds and corporate stock ownership. Who
needs an army when you can obtain the usual objective (monetary wealth
and asset appropriation) simply by financial means? All that is required
is for central banks to accept dollar credit of depreciating
international value in payment for local assets. Victory promises to go
to whatever economy’s banking system can create the most credit, using
an army of computer keyboards to appropriate the world’s resources. The
key is to persuade foreign central banks to accept this electronic
credit.
U.S.
officials demonize foreign countries as aggressive “currency
manipulators” keeping their currencies weak. But they simply are trying
to protect their currencies from being pushed up against the dollar by
arbitrageurs and speculators flooding their financial markets with
dollars. Foreign central banks find them obliged to choose between
passively letting dollar inflows push up their exchange rates – thereby
pricing their exports out of global markets – or recycling these dollar
inflows into U.S. Treasury bills yielding only 1% and whose exchange
value is declining. (Longer-term bonds risk a domestic dollar-price
decline if U.S interest rates should rise.)
What
is to stop U.S. banks and their customers from creating $1 trillion, $10
trillion or even $50 trillion on their computer keyboards to buy up all
the bonds and stocks in the world, along with all the land and other
assets for sale in the hope of making capital gains and pocketing the
arbitrage spreads by debt leveraging at less than 1 per cent interest
cost? This is the game that is being played today.”
The chart to the right
was published in
early spring of this year specifically spelling
out that a ‘Beggar-thy-Neighbor’ roadmap lay ahead.
WINNERS & LOSERS IN
A CURRENCY WAR
How could I have been so
sure when I put this chart together? The realistic fact about wars are
that there are winners and losers. These however are not the people on
the battlefield. Since Caesar, wars are about money. The winners are
those who finance them and the losers are those that pay for them. Rich
banking families are well documented to have financed both sides. It
matters not much who wins but rather that a war is fought so money is
made.
So who actually wins in
a currency war? The answer is found by forensically following the
money.
EVERY WAR COMES WITH NEW TECHNOLOGY
The most effective way
of following the money is to consider the major new innovations in the
financial world. Like all wars the winner is the one who innovates the
‘combat technology’ the fastest.
We need to remember that
the financial innovations discovered during and after the financial
crisis such as: Collateralized Debt Obligations (CDOs), Credit
Default Swaps (CDSs), Structured Investment Vehicles (SIVs), Special
Purpose Entities (SPE’s) and a raft of securitization products were the
foundations upon which were built the “Toxic Assets” and the reason for
the global financial crisis. The toxic assets were the catalyst which we
continuously heard referred to during the crisis which forced the
government into massive public debt government spending in an apparent
attempt to avoid a financial collapse.
If we examine the latest
raft of new weaponry, we can easily see where this is headed, how the
money will flow, who wins and unfortunately who loses.
1-
FIAT PAPER BOMBERS -
Quantitative Easing
Quantitative Easing is an euphemism for printing money. The US has
embarked on a massive untested trial in recklessly printing money.
2-
CURRENCY MISSILES - US$ Carry Trade
Like
the hydrogen bomb was to the early atomic bomb, the US$ Carry Trade is
to the original pilot Japanese Carry Trade. IF QE are the bombs, then
the US dollar carry trade are the missiles that deliver the bombs.
With borrowing costs in the US approaching zero, a weakening carry
currency and unlimited money creation, we have the perfect carry trade
missile that can and will hit any economy in the world.
3-
REGULATORY ARBITRAGE -
Guarantees and Contingent Liabilities
I have written
extensively
how the financial crisis has served as a vehicle to shift debt
obligations from the banking and private sector to the public sector.
This has been achieved through government guarantees, the use of
balance sheet contingent liabilities and interest rate / currency
swaps. It is the battlefield strategy of Regulatory Arbitrage.
ARTICLES:
SULTANS OF SWAP: Smoking Guns!
,
SULTANS OF SWAP: The Sting!
,
SULTANS OF SWAP: The Get Away!
4-
PUBLIC PRIVATE PARTNERSHIPS / PRIVATE FINANCE INITIATIVES – PPP/PFI
The
extensive hidden use of Public Private Partnerships & Private Finance
Initiatives (PPP/PFI) recently came to light during the European
Sovereign debt crisis. This tool has become the guidance system for
missile delivery since it allows the conversion of freshly printed
fiat paper into real, unencumbered, revenue producing assets.
ARTICLES:
SULTANS OF SWAP: Explaining $605 Trillion in Derivatives!
,
SULTANS OF SWAP: Smoking Guns!
5-
AN UNREGULATED $615
TRILLION – Derivative Swaps
The
unregulated, off balance sheet, offshore, non exchange traded, private
SWAP vehicle is the ideal vehicle with which to control global
financial markets. The Sultans of Swaps now operate much as the Bond
Vigilantes did at one time but with different control and much
different motives. The growth of the SWAP market in interest rate and
currency swaps effectively muzzled and obsoleted the Bond Vigilantes
of yesteryear.
ARTICLES:
SULTANS OF SWAP: Explaining $605 Trillion in Derivatives!
HOW THE MONEY WILL BE MADE
– Paper Assets Exchanged for Real Assets
1-
TAKE OVER PUBLIC SECTOR ASSETS – buildings, land, treasuries.
2-
TAKE OVER PRIVATE SECTOR
ASSETS - land and resources.
3-
TAKE OVER OF SOVEREIGN
TREASURY – transfer of sovereign treasury gold holdings
4-
MAJOR CORPORATE
CONSOLIDATIONS - reduced competition, reduced monopoly laws and
emergence of cartels
5-
NATIONALIZATION OF
PRIVATE & PUBLIC PENSIONS - government grab of financial assets
REAL WEALTH
The financiers of the
currency wars understand that real wealth in its most simplistic essence
can only be created by:
1-
GROWING IT
2-
MINING IT
3-
BUILDING IT
Paper money is simply a tool for the trading of wealth. When money is
backed by a hard asset then it also becomes a store of that wealth.
However that is not the case with fiat currencies. Though Gold is real
wealth it does not grow wealth, but rather stores it or protects it from
the debasement of paper ‘trading’ instruments. Ideal real wealth is
wealth that continues to grow and yet maintains its inherent value. Over
the longer term it is usually better to own well managed, unencumbered
agricultural producing land, producing mines and production facilities
than just the wealth product they output. The Rothschild banking family
learned this hundreds of years ago and is the reason why they moved from
solely owning gold to energy, mining, agriculture and selective base
materials process production.
FLAWED
PUBLIC POLICY DECISIONS ASSURE THE OUTCOME
One mistake after
another has been made in an attempt to ‘kick the can down the road’ and
avoid the inevitable necessity to restructure the debt. Unfortunately
when it is restructured it will be at the expense of the public and not
the original parties. The cost to the tax payer will be insurmountable
debt and the forced surrender of pubic assets. Public assets that in the
future will be charged for by ’Private Banking’ and Special Purpose
Entity (SPE) owners.
=>
BAILOUTs: Banks, AIG, GM, Fannie Mae / Freddie Mac
=> ZIRP
=> TARP & ARRA
=> HAMP, Cash for Clunkers etc.
=> Extend & Pretend Accounting
=> QE I (Buying $1.7B in
(Mortgage & Treasury Products)
=> QE II
TIMING
Like a well oiled
machine the sequence of events continue to unfold as laid out in my
Extend & Preserve article series. The
implementation of Quantitative Easing (QE I) and change in GAAP
Mark-to-Market accounting treatment ignited the initial rally leg. With
further refinements (see
EXTEND &
PRETEND - Manufacturing a Minsky Melt-Up) it continued until it
became evident that the US employment and GDP were not improving in any
meaningful manner despite $13T of Spend, Lend and Guarantee initiatives.
Then as the polarization of the EU wanting ‘austerity’ policies versus
the US wanting ‘stimulus’ measures, the US dollar began weakening and
stocks stopped their retracement in June. When Bernanke signaled QE II
in August the financial markets were once again ignited and the US
dollar weakened further. The financial markets are now propelled by both
euphoria and fear of more liquidity being made readily available. It
will not end well as we naively get caught in the spider’s carefully
laid out trap.
CONCLUSION
An interesting fact is
that the US has positioned itself for this war as a result of the
spending on previous wars. According to Michael Hudson (5):
“What
destabilized the system was war spending. War-related transactions
spanning World Wars I and II enabled the United States to accumulate
some 80 per cent of the world’s monetary gold by 1950. This made the
dollar a virtual proxy for gold. But after the Korean War broke out,
U.S. overseas military spending accounted for the entire payments
deficit during the 1950s and ‘60s and early ‘70s. Private-sector trade
and investment was exactly in balance.
By
August 1971, war spending in Vietnam and other foreign countries forced
the United States to suspend gold convertibility of the dollar through
sales via the London Gold Pool. But largely by inertia, central banks
continued to settle their payments balances in U.S. Treasury securities.
After all, there was no other asset in sufficient supply to form the
basis for central bank monetary reserves. But replacing gold – a pure
asset – with dollar-denominated U.S. Treasury debt transformed the
global financial system. It became debt-based, not asset-based. And
geopolitically, the Treasury-bill standard made the United States immune
from the traditional balance-of-payments and financial constraints,
enabling its capital markets to become more highly debt-leveraged and
“innovative.” It also enabled the U.S. Government to wage foreign policy
and military campaigns without much regard for the balance of payments.”
We don’t need to go into
the additional costs of the wars in Iraq and Afghanistan, Homeland
Security (War on Terror) and military base expansion into 130 countries
which have exploded the US fiscal deficits. Suffice it to say that these
and all wars since Vietnam are wars that have been conducted without
increasing taxes – a historical first which draws little attention or
concern.
The present fiat
currency system will end based on the strategy of Debase, Default and
Deny! It is my opinion that it will be replaced by a system structured
on the IMF and BIS’s Strategic Drawing Rights (SDRs) partially backed by
precious metals. The question to be asked however is not what will be
the replacement for fiat currency, but who will have ownership of the
assets after this war ends? Who will pay the requisite ‘tribute’ that
goes to the victors?
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In
September 2008 the US came to a fork in the road. The Public Policy
decision to not seize the banks, to not place them in bankruptcy court
with the government acting as the Debtor-in-Possession (DIP), to not
split them up by selling off the assets to successful and solvent
entities, set the world on the path to global currency wars.
