Islamic Finance (FN6023) January 2010 Semester Prof. Dr. Murat Cizakca
Topic: Could Emerging Market Economies Lead The Way, when The West seems to be entering another Deflationary or Hyper-inflationary Depression?
Submitted by Muhammed Syedul Hoque (ID: 0800856) Enrolled in Ph.D.
April 17, 2010
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Contents
Abstract ................................................................................................................................................ 3 Introduction ........................................................................................................................................ 4 Economic Growth Build on Mountains of Debt ...................................................................... 7 More Bad News on the Way ....................................................................................................... 18 Efficacy of Recent Bailouts ......................................................................................................... 19 History As Our Guide .................................................................................................................... 29 Could China Provide Economic Leadership? ........................................................................ 37 Could India Lead The Way Forward? ...................................................................................... 43 Growing Debt and Derivatives Problems .............................................................................. 44 First Things First – Reduce Government Debt? .................................................................. 51 Last Resort of Government‘s ..................................................................................................... 56 Prohibition of Riba .......................................................................................................................... 64 Could Islamic Banking Remedy Wealth and Income Inequity? .................................... 65 Conclusion ......................................................................................................................................... 66 Direct References ........................................................................................................................... 69 Indirect References ....................................................................................................................... 72 Appendix A – Economics: The Abysmal Science ................................................................ 74 Appendix B – Three Global Growth Scenarios .................................................................... 76 Appendix C – Trends Journal on US Economy and Politics ............................................ 78 Appendix D – Wealth Concentration amongst 1,011 billionaires ................................ 84 Appendix E – Stages of Deflation and K-Cycle ................................................................... 87 Appendix F – There is an Elite Cabal ...................................................................................... 89 Appendix G – Central Banks Stoking Market Euphoria ................................................... 91 Appendix H – Banking Cabal Gains from Financial Crises and Wars ......................... 99 Appendix I – Syed Hoque‘s Bio............................................................................................... 100
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Abstract
Global economy had a great run-up in growth since the last severe recession in the US in 1980-83, and need not look any farther than the raging equity markets between 1982 and 2000. Subsequently, central banks lowered interest rates in unison to 40-year low to inflate more bubbles rather than allowing debt adjustments to take place. This growth has taken place on the heels of massive credit expansion by consumers, businesses and financial institutions, on the back of which the exporting nations have latched their wagons. Now that this credit bubble has burst governments have begun to expand their balance sheets to save the largest banks, as they have been providing the grease that have been lubricating the global economy. East Asian countries have been the most dependent on exports, and this dependence is coming on the heels of shrinking consumer spending (alternatively, rising savings) in the face of rising interest rates due to sovereign-debt crisis in many countries, and consequently higher debt-servicing burden will be the result of this debt binge for consumers, businesses, financial institutions and governments. In the face of these headwinds, it is questionable whether emerging countries can grow out of this dilemma on their own. It is also questionable whether Islamic Finance can add relief to an already indebted consumer situation considering that over ninety percent of the financing tools used thus far have been credit based. This paper explores these scenarios and attempts to present a realistic scenario about the future of the global economy. The following quote from late Professor Dr. Ludwig von Mises summarises the end result of a boom brought about by credit expansion: "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 system involved." - Ludwig von Mises
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Introduction "The significant problems we face cannot be solved at the same level of thinking we were at when we created them." - Albert Einstein The greatest credit bubble in history has burst, and applying the same old remedies cannot get us out of the economic quagmire faced by the world.
This love
affair with unrestrained money supply, paper money, fractional reserve and ideology of unregulated markets is best told with charts and table from many prominent and contrarian/alternative sources. Large trade and fiscal deficits that have been built up between the US (since 1984) and the Rest of the World (ROW) are beginning to be resolved but not without financial turmoil.
The US has enjoyed the privilege of owning the world‘s reserve
currency, which was pegged to Gold at a rate of $35 per troy ounce (tr. oz.) after President Franklin Delano Roosevelt devalues the US Dollar in 1933 from $20 per tr. oz. to get the US out of the previous economic depression from which the US was not healed until after WW II. IMF was formed in 1944 (soon after the war ended) to stabilise the world economies, and nations gathered in Bretton-Woods (New Hampshire, USA) to agree to peg their currencies to the US Dollar for which they had to deposit certain amount of Gold with the Federal Reserve of New York, which supposedly has custody of the Gold until today.
This policy resulted in stable economic growth until the US entered the
Vietnam War and piled up public debt, in addition to rising trade deficits with other countries. As the US government finances began to deteriorate President Nixon decided to remove the Gold pegging of the dollar in order to be able to inflate their way out of the recession, but people did not realise what that meant until a few years later when US began to put its printing presses on high gear. Several years after this gross violation of IMF terms with other countries, investors realised the trick and began to bid up the gold price initially to US$160 per tr.
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oz. and then finally up to US$850 per tr. oz. on Jan 21, 1980 (refer to Figure 1).
In
order to reign in the speculation in the market Fed Chairman Paul Volcker raised interest rates to 21% which brought the gold price down around US$450-500 within a couple of years. Chairman Volcker‘s interest rate action resulted in severe recession in the US. At that time the US GDP was around US$1 trillion.
Since then interest rates have been
falling and the great market speculation began. The speculative mania did not just erupt in the US Savings and Loans industry, which cost US tax-payers $150 billion.
The
bursting stock market bubble in 1987 as newly appointed Fed Chairman Alan Greenspan got his first test of resilience, and used the same medicine of lowering rates after every panic. This emboldened traders to take bigger and bigger risks/best knowing that the person at the helm was too predictable in his treatment of asset bubbles. Figure 1 – Gold Price from 1970 through November 2009 1
Chairman Greenspan spoke of irrational exuberance in December 1996 referring to the mania taking place in the NASDAQ market which has risen from under 1,000 in 1995 to over 5,132 by March 2000.
Chairman Greenspan belatedly began raising
interest rates in the third quarter of 1999 and kept raising rates till 6.5% mid-200 if a burst bubble would ever re-inflate.
1
www.Kitco.com
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By the summer of 2002 the US economy was in doldrums, and Chairman Greenspan began to aggressive slash interest rates, and lowered it to 1% by May 2004 – a 42-year low.
In the meantime, the Glass-Steagall Act of 1934, which separated
banking, investment banking and insurance to be done under one umbrella, was abolished by 1999 by Former Treasury Secretary Robert Rubin (who later became Group Chairman of CitiGroup), Clinton Economic Advisor Dr. Larry Summers under the tutelage of Fed Chairman Alan Greenspan in the name of freeing the markets from regulations. The lax regulatory stage had already been set for what was to come in the investment banking industry, that is, the debacle with debt, securitisation, derivatives, trade-cycling of dollars that kept a lid on interest rates for a while. Figure 2 – Interest Rate movement in US, UK, EU, Japan and China2
Falling interest rates over the past 20 years (Figure 3) and corporations using capital markets to raise cash, banks began to lose even their retail investment business to investment banking as money-centre banks could not offer attractive rates to their depositors. Also, with every drop in interest rate US consumer began borrow short and invest long looking for higher return to keep up with inflation to maintain their extravagant lifestyle.
Sometimes even the elected and appointed officials proded
consumer to spend, as Fed Chairman Greenspan did in the summer of 2004 by 2
―Worst-case Debt Scenario‖, Client Report, Societe General, November 2009, p. 14
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encouraging consumers to get into adjustable-rate mortgages just before he began to raise rates. Appendix A contains an article that summarises the misplaced faith that monetarists and free-market ideologues had placed on efficient markets theory which has brought the US, and consequently, the global economy to the brink of collapse. The people who got us in this mess cannot be expected to solve the massive economic problem as the quote above summarises so succinctly.
However, their misjudged
solution is to throw more fuel at the fire as if more of the same thing (debt and money) thrown at the problem will resolve an already-aggravated debt situation.
What this
additional debt is doing is incubating the next crisis, that is, the government debt crisis, which has already begun in Greece and Eastern Europe. Figure 2 – 20-year Cycle of Effective US Fed Funds Rate3
Economic Growth Build on Mountains of Debt
Since the removal of the discipline of the gold-standard, US economy began to grow with little attention to the debts it was accumulating in every sector - government, consumers, business and financial institutions.
3
Shedlock, Michael (2005): K Cycle Trends http://globaleconomicanalysis.blogspot.com/2005/07/great-flation-debate-whats-coming-and.html
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Figure 3 depicts slow public debt-growth between 1945 and 1970 due to the restraint of gold-standard on the elected officials, when deficits and debt could not grow out of proportion to a nations stock of gold and money could not be created out of thin air to inflate the economy. With the removal of the gold standard in August 1971 Keynes‘ advise on government to run budget deficit during recessionary times to put money into pockets of people (via unemployment and other welfare benefits) was taken to the extreme.
In 2009 this Keynsian thesis was taken to the extreme by the US government when federal budget deficit shot up to $2 trillion (not reflected in Figure 3 as updated chart could not be located). Instead of putting money into the consumer‘s pocket the government stashed the coffers of bankers, and put US citizens on the hook for future tax payments.
Figure 3 – US Debt Explosion Since 1970 (removal of Dollar-Gold Peg)4
4
US National Debt Clock: www.brillig.com/debt_clock/
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As interest rates fell in the US (Table 1 below), consumers not only used up their own savings to continue their lavish lifestyles but also borrowed to the hilt to maintain that lifestyle with consumer debt growing from a little over $1 trillion in 1982 to over $12.5 trillion debt by 2008 (Figure 4 below). Figure 5 illustrates the US consumer debtto-GDP ratio since 1929. Note that consumer debt-to-GDP ratio in 1929 (in the midst of the Great Depression) was half (60%) of what it was in 2007 (120%).
Even without
having entered another depression the US consumer has accumulated twice that amount (relative to US GDP) reflecting the important role that US consumers have played in shoring up the global economy in the last 15 years. However, since 2007 this ratio has been dropping as consumers retrench and build up their Balance Sheet and shore up savings, but it is a bad omen the global economy when the best consumers in the world are retrenching at a time when they are needed the most.
According to Dr. Stephen Roach 5 98% of global economic growth between 1995 and 2002 was provided by the US consumers. He also mentioned that as late as 2003 70% of US GDP was comprised of consumer spending, even though consumers had run their savings into the ground.
Knut Wicksell‘s6 research indicates that for a healthy
economy consumer spending should be maintained between 62-64% of the GDP, with government spending comprising 18-20% and corporation spending and investment 1618%.
Table 1 – US Interest Rates, Savings, and Household Debt Obligations 7
5 6 7
Year Loans Past Due hit 5%
10-Yr UST Yield (↓)
National Savings Rate (↓)
Homeowner Financial Obligations Ratio (↑)
1980
10.95%
10.57%
13.29%
1991
8.00%
7.06%
15.37%
2001
5.27%
1.40%
16.01%
2007
4.85%
-0.05%
18.07%
http://www.morganstanley.com/views/gef/index.html Swedish Economist (1851-1926) Source: http://www.financialsense.com/Market/wrapup.htm
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Having exhausted their savings by 1998 (Figure 4), consumers resorted to debt to keep up their profligate lifestyle as seen in Figure 5. Figure 6 (consumer debt-toGDP) illustrates the extent debt accumulation as consumer debt began to rise exponentially beginning in 1998. Figure 4 – US Consumer Savings Rates (1957-2009)8
Figure 5 – US Consumer Debt Outstanding (1940-2010)9
8 9
―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 16 http://www.prudentbear.com/index.php/consumer-debt
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Figure 6 – US Household Debt as a % of GDP10
Figure 7 – US Equity Withdrawal by US consumers (1986-2007)11
The additional borrowings came in the form of mortgage equity withdrawals (MEWs), which had not exceeded $300 billion between 1986 and 1997 (shown in Figure 7). From 1998 onward these MEWs took on a greater meaning in the growth of the US economy.
Figure 8 illustrates the contribution of MEWs to the US GDP between the
years 1996 and 2000 was minimal, which means that the economy was growing at a
10 11
―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 16 www.prudentbear.com
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natural pace with savings that had been accumulated in the previous recession in 1990-1994 (Figure 4). Between 2001 and 2005 (Figure 8) MEWs took on a prominent role in the growth of the US GDP to the extent that there would have been no growth without the MEWs.
In 2004 and 2005 MEW provided up to 3.5 – 4.0% of the GDP
growth. This is a significant growth considering that retail construction industry is just one of many industries in the US. Shadow Government Statistics (an independent analyst that uses statistics from various sources to re-construct economic data based on old and honest methods) shows us that even with such large infusion of debt into the US economy, there was not much positive growth in the US economy after adjusted for inflation (Figure 9), which he also computes to be much higher than government figures. In a later section the
author
elaborates
on
the
motivation
of
the
US
government
for
under-
estimating/under-reporting the inflation figures.
Figure 8 – Contribution of Mortgage Equity to US GDP Growth 12
12
Long, Gordon T. (2010): EXTEND & PRETEND:Manufacturing a Minsky Melt-Up!, April 9 http://home.comcast.net/~lcmgroupe/2010/Article-Extend_Pretend-Manufacturing_a_Minsky_Melt-Up.htm
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Figure 9 – Re-constructed US GDP Growth by Shadow Govt. Statistics13
Figure 10 – Financial Sector Borrowings14
On the other hand, the financial sector borrowing does not seem as extreme as consumer segment (Figure 10). That is because the financial sector began to lever-up much earlier, that is, since 1983 as indicated by the debt-to-GDP chart shown in Figure
13 14
Williams, John (2010): www.ShadowStats.com www.PrudentBear.com
13
11, with the only exception of the de-leveraging that took place in the aftermath of the stock market crash in 1987 and dotcom bubble (2000-2003). Unlike the financial and consumer segments, the commercial and industry sector began to lever-up much earlier (1975) as demonstrated by Figure 12. Note that the commercial sector de-leveraging today is happening at a faster pace than the previous three recessions (1975, 1991 and 2001), which could be an indicator of slowing manufacturing investment and inventory depletion which could lead to even higher unemployment than illustrated in a later figure (Figure 29, p. 32).
Figure 11 – US Financial Institution Debt as a % of US GDP
Figure 13 indicates that the existing debt in the entire US system (consumers, businesses, financials and government) is over $50 trillion, and Figure 14 depicts these figures in a normalised manner using the debt-to-GDP ratio. This illustrates the dire situation in the US with debt-to-GDP ratio that is higher that in the midst of the Great Depression
in
1933,
when
the
GDP
had
already
collapsed
by
26-28%
and
unemployment hit a peak of 25%.
14
Figure 12 – Commercial and Industrial Loans15
Figure 13 – US Total Debt (Consumers, Businesses, Government and Financial Institutions)16
A simply calculation will reveal the debt trap that US will be facing in the coming years, not to mention that large budget deficits it is planning in the next decade (see
15
Williams, John (2010): Updated Liquidity and Economic Outlook – Mounting Liquidity Squeeze, April 9, 2010, John Williams‘ Shadow Government Statistics 16 http://www.prudentbear.com/index.php/total-system-debt
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Figure 46, p. 54). At this debt level even a 1.00% (100 basis point) rise in interest rates will wipe out $510 billion from the GDP growth due to rise in debt-servicing burden.
This additional interest payment would amount to 3.6% GDP growth on a
current US GDP of $14 trillion. This is the type of debt-trap analyses IMF economists are familiar with special reference to poor developing countries, but now it seems these IMF economists need to turn their heads in the direction of their hosts. This level of indebtedness in a developed country like the USA without even accounting for future retirement and social security benefits liabilities which is another $73 - $106 trillion in current dollars (mentioned later in the paper) for retirement promises in the coming 70 years. All this money have thus far been accounted for on a cash-basis rather than on an accrual basis (owed liabilities on US Govt. Balance Sheet) to make the US government obligations look small to investors who are investing in government bonds. This improves the US Government‘s chances of issuing debt in the short term, but a day of reckoning is nearing when promises will have to be broken and all hell will break loose in financial markets. This day may only be a few years away as expressed in a survey of readers of Dr. Martin Weiss‘ newsletter. Figure 14 – US Total Debt as a % of GDP17
17
Conrad, Bud and David Galland (2009): Green Shoots or Greater Depression, August 2009, p. 2
16
Figure 15 – Project US Debt-to-GDP Ratio till 201418
Figure 15 is an estimate of debt-to-GDP ratio by Societe Generale in their November 2009 report, which assumes that this ratio will decline to a sustainable level due to de-leveraging by all four segments in the US economy. This does not account for the $1.0 trillion budget deficit that the US Government is planning to run for the next decade. This is not sustainable as this author‘s research indicates that sustainable debt-to-GDP ratio is between 150% and 200%. If this global economy has thus far been fuelled by US consumers (as mentioned ealier), then consumers in other countries better take-up the slack going forward because US consumer is not coming back to the party for a while because they are just beginning to re-build their Balance Sheet and shore-up savings as illustrated in Figure 4, which is absolutely the wrong time to start saving just when the global economy most needs their spending power.
18
―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 12
17
More Bad News on the Way The graph below indicates the mortgage resets for the next grade of mortgages in the US, that is, Alt-A and Prime mortgages. Alt-A is the next level up from subprime and Prime is the best quality mortgage that is the envy of all lenders. These two segments comprise another $1.4 trillion in loan portfolios for the financial institutions.
The rate
resets in these two segments have begun as of mid-2009, and will continue until mid2012 as shown in Figure 16. In a CBS 60 Minutes interview Whitney Tilson19 told the host in 2009 that about 50% of Alt-A mortgages will default in the next two years.
Figure 16 – US Retail Market Mortgage Resets in the Coming years 20
As if this news was not bad enough, $6.5 trillion commercial real-estate (of which around $3.0 trillion has been financed by debt) has also begun to rot as small business (dried by lack of credit) has been closing their doors. This is like adding insult to injury as small, medium businesses (SMEs) are the back-bone of an economy generating up to 80% of employment growth in any economy.
19 20
http://en.wikipedia.org/wiki/Whitney_Tilson Credit Suisse
18
Efficacy of Recent Bailouts
―The success in bailing out the system on the previous occasion led to a super bubble, except that in 2008 we used the same methods….Unless we learn the lessons, that markets are inherently unstable and that stability needs to the objective of public policy, we are facing a yet larger bubble….We have added to the leverage by replacing private credit with sovereign credit and increasing national debt by a significant amount.‖ 21 -
George Soros
Since the collapse of the credit markets consumers and businesses have been shut off from credit. Instead the US government has become the spending of last resort as reflected in Figure 17.
This is not a sustainable situation as the government itself is
dependent on the tax revenues from the two wealth creating sectors - consumers who provide the human capital and businesses that provide the know-how and machinery for this human capital to be tapped. If these two important sectors in the largest economy in the world are retrenching, then the government can only sustain the economy for a limited time. Figure 17 – US Government Doing the Heavy Lifting that Markets are meant for 22
21
Soros, George (2010): We Are Repeating The Mistakes of Our Past, April 15, 2010, http://pragcap.com/soros-we-are-repeating-the-mistakes-of-our-past 22 ―Green Shoots or Greater Depression‖, Bud Conrad and David Galland, Casey Research, August 2009, p.3
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Table 2 below illustrates the $2.0 trillion in stimuli funds that has been spread across the various countries and regions. The stimuli range from 1% of GDP for Russia to 15% for China. This stimulus is like a one-shot deal something akin to a booster shot taken for a flu where one is not sure if it will eventually prevent one from contracting the flu.
The effects of this type of one-shot stimuli are not sustainable in the face of the
bursting of the greatest credit bubble in history, where consumers and businesses face much stiffer cost of credit or no credit at all in the case of SMEs. Table 2 – Over $2.0 trillion in Stimuli Spent by Nations23
Professor Barry Eichengreen (University of California, Berkeley) has been charting various parameters to compare the extent of damage from this crisis with the Great Depression24.
Figures 18 , 19, and 20 track the World Industrial Output, World Stock
Markets, and World Trade Volume, respectively.
The X-axis is in months after the
outbreak of the crisis. These figures have been updated up to June 2009 data. Drop in World Industrial Output (Figure 18) is tracking 1920s curve almost exactly months after the stock market crash/credit crisis.
Drop in the stock indices
(Figure 19) is more remarkable this time around compared to 1930s when the Dow Jones Industrial Average collapsed by 88%, although there has been some improvement
23 24
―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 15 Eichengreen, Barry and Kevin H. O‘Rourke (2010): What do the new data tell us? http://voxeu.org/index.php?q=node/3421, March 8
20
this time around due to the massive one-off stimulus package - not to mention the drastic cuts in interest rates by all governments as shown in Figure 21. What is surprising is that even after implementing these extreme measures the world trading volumes were still dropping, albeit stimulus packages take a while to work through the economy. When Professor Eichengreen updates the figures next time it will be interesting to see if global recovery (greenshoots theory) has indeed taken hold where businesses inventories are building up with an increase in industrial capacity utilisation, which in turn will lead to employment and income growth, which in turn leads to consumer spending.
Figure 18 - World Industrial Output, Now vs Then (updated)25
Figure 19 - World Stock Markets, Now vs Then (updated)26
25
Eichengreen, Barry and Kevin H. O‘Rourke (2010): What do the new data tell us? http://voxeu.org/index.php?q=node/3421, March 8 26 Ibid.
21
Figure 20 - The Volume of World Trade, Now vs Then (updated)
Figure 21 - Central Bank Discount Rates, Now vs Then (7 country average) 27
Figure 22 demonstrates the impact of the slowdown on industrial output in four major European economies. It seems that France and Italy had experienced faster drop in industrial output than in the 1930s, whereas Germany and UK are tracking the previous Great Depression exactly months after the breakout of the crisis.
27
Eichengreen, Barry and Kevin H. O‘Rourke (2010): What do the new data tell us? http://voxeu.org/index.php?q=node/3421, March 8
22
Figure 23 highlights the drop in industrial output in non-European countries (Canada, Chile, Japan and US). Although all these countries had experienced a drop in industrial output, the drop has been far less significant than France and Italy (Figure 22).
Figure 22 - Industrial output, four big Europeans, then and now 28
28
Eichengreen, Barry and Kevin H. O‘Rourke (2010): What do the new data tell us? http://voxeu.org/index.php?q=node/3421, March 8
23
Figure 23 - Industrial output, four Non-Europeans, then and now29
Amongst the small European countries (Belgium, Czechoslovakia, Poland and Sweden) Poland has been least affected by the ‗Great Recession‘ (Figure 24) and experienced somewhat of a recovery. It is too early to conclude that this recovery can be sustained going forward without Poland‘s major trading partners in Europe going into recovery.
29
Eichengreen, Barry and Kevin H. O‘Rourke (2010): What do the new data tell us? http://voxeu.org/index.php?q=node/3421, March 8
24
Figure 24 - Industrial output, four small Europeans, then and now. 30
Professor Eichengreen concludes that: World industrial production continues to track closely the 1930s fall, with no clear signs of ‗green shoots‘. World stock markets have rebounded a bit since March, and world trade has stabilised, but these are still following paths far below the ones they followed in the Great Depression. 30
Eichengreen, Barry and Kevin H. O‘Rourke (2010): What do the new data tell us? http://voxeu.org/index.php?q=node/3421, March 8
25
There are new charts for individual nations‘ industrial output. The big-4 EU nations divide north-south; today‘s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse. The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around. Japan‘s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.
Figure 25 depicts the latest retail sales figures in the US which provides some hope of an economic recovery.
Figure 25 – Inflation-adjusted Retail Sales in the US31
However, John Williams of Shadow Government Statistics has this to say about the latest retail figures:
31
Williams, John (2010): March CPI, Retail Sales, Trade (No. 291), John Williams‘ Shadow Government Statistics, April 14
26
For the last 16 months, monthly real retail sales (CPI-U deflated) have been fluctuating around an average of $161.2 billion (the deflated March number was $166.8). Smoothed for monthly volatility on a six-month moving-average basis, as shown in the accompanying graph, the pattern of activity here has shifted to bottom-bouncing in terms of the level of inflation-adjusted sales. The recent bounce from short-lived factors and warped-seasonals appears likely to turn much lower in the months ahead. There has been no fundamental turnaround in economic activity — no recovery — just general bottom-bouncing, as should be confirmed anew in subsequent reporting32 Figure 26 – Industrial Production in the US through March 2010 33
John Williams comments below on recent bounce in US Industrial Production The June 2009 reading of 95.75 remained the record low for annual production growth since the shutdown of war-time production that followed World War II. For the last 15 months, the production index has averaged 98.87, around which the series has been fluctuating, with March‘s six-month moving average reading at 100.50, versus 101.61 for the single month. The "recovery" in production is shown in the above graph, where month-tomonth volatility is smoothed using a six-month moving average. Production activity has leveled off at a low-level plateau of activity that effectively has wiped out the last eight years of growth in industrial production. Despite the near-term upside bump generated by short-lived stimulus and seasonal distortions, the series generally still is bottom-bouncing and should begin to soften anew, significantly, in the next several months.
32
Williams, John (2010): March CPI, Retail Sales, Trade (Commentary No. 291), John Williams‘ Shadow Government Statistics, April 14 33 Williams, John (2010): March Housing Starts, Industrial Production, (Commentary No. 292, Housing Still Bottom-Bouncing, Production Set to Soften, April 16, 2010
27
Figure 27 – Housing Starts in the US through March 2010 34
Again John Williams of Shadow Government Statistics comments on US Housing Starts: Since December 2008, housing starts have been bottom-bouncing at an historically low level, averaging a seasonally-adjusted annual rate of 565,400. In the past 16 months, all monthly readings have been within the normal range of monthly volatility for the series around that average, including March 2010‘s reading of 626,000. The "recovery" in housing is shown in the above graph. The data are smoothed using a six-month moving average to remove the extreme monthto-month volatility seen in this series. Regardless of any level of smoothing, though, in the current cycle, housing starts remain at least 25% below any levels seen since before the end of World War II. Along with the activity in the broad economy, a renewed downturn in housing appears to be in the offing.
The following is an excerpt from Richard Russell‘s recent newsletter about the recent recovery35:
He wrote after the market closed Friday: "I think this bear-market rally is in the process of breaking up. I'm guessing that the Dow is going to run into some panic action early this year, and I think the Dow will violate first its November low and then its March low." "I believe we're heading into something that nobody, in their wildest dreams, is thinking about. What will it be? It will be a full correction of the entire rise from the 2002 low of 7,286 to the bull market high of 14,164.53 set on Oct. 34
Williams, John (2010): March Housing Starts, Industrial Production, (Commentary No. 292, Housing Still Bottom-Bouncing, Production Set to Soften, April 16, 2010 35 Russell, Richard (2010): Dow Theory Letters. January 31, www.dowtheoryletters.com at http://www.controlledgreed.com/2010/02/richard-russell-moves-into-apocalyptical-mode.html
28
9, 2007. Remember, I warned about the 50% Principle which came into play at the halfway level of the Dow 2002 to 2007 advance? That halfway level was 10,725. ... Having risen to 10,725.43 on Jan. 10, the Dow then turned down. I consider this extremely bearish action." Russell went on: "I see the Dow declining to the low from which the entire rise started. That low was the 2002 low of 7,286. If the Dow does not halt its decline at 7,286, I see it sinking down to its 1980-82 area, which would be around Dow 1,000."
Appendix G contains a recent article by Gary Dorsch (a great analyst in Israel who is best at correlating money supply, market and commodities) how Central Banks are stoking this recovery.
Although a 70% recovery in the Dow Jones Industrial Average
(DJIA) has been achieved thus far, it has to be viewed from the perspective of tremendous amount of money that has been thrown at the financial institutions ($1.75 trillion). Short of lending where else would we expect this money to end-up but financial markets.
History As Our Guide In this section impact of recession, real-estate and equity price drop on the banking system and the number of years it took to resolve the banking crises, and we could perhaps conclude that vice versa would also be true, that is, impact of banking crises on various sectors of the economy, especially, in the absence of consumer savings in the developed world and credit being the grease in contemporary economies. Figures 28 through 34 were adapted from Professors Carmen Reinhart and Kenneth Rogoff‘s work.
They demonstrate in Figure 28 that the duration of banking crisis in
various countries can be correlated to drops in real-estate prices.
On average banking
crises last about 6 years from an average drop in real-estates prices of 35.5%.
The
longest has been 17 years for Japan resulting from a drop of 38% in real-estate prices that began in 1992 and still not out of the danger zone.
29
Figure 28 – Real House Price Cycles and Banking Crisis36
Figure 29 illustrates that banking crisis can also result from equity price declines. Average equity decline for the select group of countries has been 55.9% for which banking crises lasted on average 3.4 years. The longest has been an 85% drop in equity prices in Thailand in the aftermath of the Asian Currency Crises which resulted in banking crisis that lasted for 5 years.
36
Rogoff, Kenneth and Carmen Reihart (2009): The Aftermath of Financial Crises, p. 5
30
Figure 29 – Real Equity Price Cycles and Banking Crises37
Figure 30 illustrates the relationship between a rise in unemployment (due to recessions) and banking crises. On average a rise in unemployment by 7 percent has extended banking crises for 4.8 years on average.
The largest rise in unemployment
(23%) has been in the US during the Great Depression which extended the banking crisis for 4 years. Surprisingly the longest duration (10 years) for banking crisis has been in Japan from a measly 3% rise in unemployment.
37
Rogoff, Kenneth and Carmen Reinhart (2009): The Aftermath of Financial Crises, p. 6
31
Figure 30 – Unemployment Cycles and Banking Crises38
Figure 31 was obtained from Shadow Government Statistics. The figure contains three plots of unemployment data.
Lower two lines (grey and red) are government-
reported unemployment numbers and the upper navy blue line has been re-constructed by John Williams of Shadow Government Statistics, who has re-created the figures using old measures prior to Professor Michael Boskin becoming Economic Advisor to President Clinton. Prof. Boskin not only did not count people who dropped off the unemployment benefit roster, which lasts only for 6 months, but also used computer models to compute business start-ups and closures as proxies of employment growth. John Williams adjusts his numbers by using actual payroll numbers from ADP39 to offset the computer generated number to create a sense of reality in the unemployment figures. Therefore, according to John Williams‘ figure unemployment is currently running around 22% in the US, although there has been some improvement of late. 38 39
Rogoff, Kenneth and Carmen Reinhart (2009): The Aftermath of Financial Crises, p. 7 A leading payroll processing company in the US.
32
Figure 31 – Re-constructed Unemployment Figures using Old/Honest Methods 40
This is just one set of data that John Williams has re-constructed.
There are
other data which has been ‗massaged‘ by the US Government in order to make the economy look rosier than it actually is, in order to get the foreigners to continue funding the gaping trade and budget deficits of the US. The US Government also under-reports Inflation, which puts less burden on government budget that would provide realistic cost of living adjustments to retirees.
That is why one has to parse through all the
mainstream reported official data in order to see what is actually happening in the economy. Figure 32 below illustrates the impact of falling GDP on the duration of banking crisis.
Historically an average GDP decline of 9.3% resulted in 1.9 years of banking
crisis.
In the case of the US the GDP dropped by 26-28% during 1929-1933 which
extended the banking crisis up to 4 years.
40
Williams, John (2010): www.ShadowStats.com
33
Figure 32 – Per Capita GDP cycles and Banking Crises41
Figure 33 – Re-constructed US GDP figures using Re-constructed GDP Deflator42
41 42
Rogoff, Kenneth and Carmen Reinhart (2009): The Aftermath of Financial Crises, p. 9 Williams, John (2010): http://www.shadowstats.com/alternate_data
34
In Figure 33 (above) John Williams has re-constructed the US GDP figures since 1982 using his re-constructed GDP figures (blue line), and demonstrates that US has not had a positive GDP growth since 2000 when adjusted for re-constructed inflation. In fact US has not had sizeable GDP growth since 1990 if one assumes a margin of error of 0.5% which is not uncommon as these figures often get revised within months of first publishing. Therefore, when viewed from alternative perspective it is a far-cry that US has been the haven of productivity growth that Chairman Greenspan so proudly touted during the internet boom years that was attributed to information technology.
Figure 34 – Cumulative Increase in Public Debt following (3-years) Banking Crises43
Figure 34 (above) demonstrates that in the aftermath of a banking crisis the government debt on average increased by 86.3% within 3 years. The largest increase for a developed country (Finland) was nearly 175% in 1991 – the same magnitude as Chile in 1998 which is a developing country. Therefore, banking crisis is not a claim to infamy for just developing countries as it has happened to developed countries as well,
43
Rogoff, Kenneth and Carmen Reinhart (2009): The Aftermath of Financial Crises, p. 10
35
and we are in the midst of a major one. Although the epicentre of this crisis was the US, it has since graduated to sovereign debt crisis (Greece) and slowly we will witnessing more sovereign debt crises as governments overextend themselves into debt in trying to prop-up their banking system while their tax collections dwindle. Initially, Europeans were quick to point the finger at the US without taking stock of toxic assets and overextended governments in their own backyard.
Sooner or later
sovereign debt ratings will be affected due to this over-extension causing the risk premium imputed in interest rates to rise, which will further strain household, business and governments with their existing debts. Rogoff and Reinhart conclude that44: An examination of the aftermath of severe financial crises shows deep and lasting effects on asset prices, output and employment. Unemployment rises and housing price declines extend out for five and six years, respectively. On the encouraging side, output declines last only two years on average. Even recessions sparked by financial crises do eventually end, albeit almost invariably accompanied by massive increases in government debt. How relevant are historical benchmarks for assessing the trajectory of the current global financial crisis? On the one hand, the authorities today have arguably more flexible monetary policy frameworks, thanks particularly to a less rigid global exchange rate regime. Some central banks have already shown an aggressiveness to act that was notably absent in the 1930s, or in the latter-day Japanese experience. On the other hand, one would be wise not to push too far the conceit that we are smarter than our predecessors. A few years back many people would have said that improvements in financial engineering had done much to tame the business cycle and limit the risk of financial contagion. Since the onset of the current crisis, asset prices have tumbled in the United States and elsewhere along the tracks lain down by historical precedent. The analysis of the post-crisis outcomes in this paper for unemployment, output and government debt provide sobering benchmark numbers for how the crisis will continue to unfold. Indeed, the Great Depression in the United States, were individual or regional in nature. The global nature of the crisis will make it far more difficult for many countries to grow their these historical comparisons were based on episodes that, with the notable exception of way out through higher exports, or to smooth the consumption effects through foreign borrowing. In such circumstances, the recent lull in sovereign defaults is likely to come to an end. As Reinhart and Rogoff (2008b) highlight, defaults in emerging market economies tend to rise sharply when many countries are simultaneously experiencing domestic banking crises.
44
Rogoff, Kenneth and Carmen Reinhart (2009): The Aftermath of Financial Crises, p. 11
36
Could China Provide Economic Leadership? The United States began its long trek of becoming the world‘s economic power house during the 19th Century, leading to domination of the 20th Century. The dominant power at the start of the 19th Century was the United Kingdom. Today, they have the 6th highest GDP, just ahead of Italy. In 1970, U.S. GDP was $1 trillion and has risen to $14 trillion today, that is, a 1,300% increase over 40 years.
China‘s GDP in 1970 was $92 billion. Today, it is $4.2 trillion a 4,450% increase in 28 years. China has been growing their GDP at an 8% to 10% pace for over a decade. It now has the 3rd largest economy in the world, and will surpass Japan as the 2nd largest economy on the planet within the next 5 years provided the world economy continues to grow without any major disruptions.
If that is the case then sometime
between 2030 and 2050, China will overtake the United States as the largest economy in the world.45
Figure 35 illustrates the phenomenal growth in private enterprises in China between 1978 and 2003 - from a mere 3,000 enterprises to over 117,000 in a span of 25 years. Figure 36 illustrates the deterioration in US Trade deficit from 1950 to 2007. It is not a coincident that US trade deficit began to grow in 1980 just when the Chinese discovered the power of manufacturing outsourcing.
While the US was exporting its
manufacturing base to China, this outsourced value-addition was showing up on US Balance of Payments which has been offset by Capital inflows from trade-surplus countries like Japan, China and Saudi Arabia in the form of re-cycled US Dollar that were then invested in US Treasuries. Essentially this was the trick that kept-up the demand for US Treasuries which in turn kept US interest rates low for consumer to ‗continue shopping‘ which kept the Chinese manufacturing plants humming until now. This vicious cycle or feedback loop is slowly coming to an end, and all those countries that followed export-led economic growth model will feel it. 45
Quinn, James (2009): CHINA RISING – 21ST CENTURY JUGGARNAUT, June 4, 2009, http://www.financialsense.com/editorials/quinn/2009/0604.html
37
Figure 35 – Growth in Chinese Enterprises (1978-2003)46
Figure 36 – Growth in US Trade Deficit (1950-2007)47
From Table 3 (below) it can be observed that as of 2008 Chinese exports comprised one-third of China‘s GDP. From Table 4 we can see that China‘s growth rate had reached 13% in 2007, and at that rate Chinese GDP would have doubled within 5.7 years. This growth enabled China to re-cycle its vast stash of US Dollar trade surplus into US Treasuries, which kept a lid on interest mortgage rates that enabled US 46
Quinn, James (2009): CHINA RISING – 21ST CENTURY JUGGARNAUT, June 4, 2009, http://www.financialsense.com/editorials/quinn/2009/0604.html 47 www.financialsense.com
38
consumers to ‗house hunting‘ and ‗go shopping‘ using MEWs. This is the level of interdependence between the two countries is something akin to the interdependence between the UK and US when the former was a developed economy and the latter was the manufacturing hub in the first-half of the 20th century. Therefore, having observed the drop in world trade (Figure 18, p.21) it is questionable whether China can remain unscathed by unfolding crisis and the drop in consumer spending in the US.
Table 3 – China‘s Dependence on Exports as a % of GDP48 Exports-to-GDP ratio: Imports-to-GDP ratio: Trade-to-GDP ratio * :
32.7
% (2008)
25.0
% (2008)
57.7
% (2008)
% OF THE WORLD (excluding Intra-EU Trade)
2006
2007
2008
Imports
8.0%
8.3%
8.8%
Exports
11.3%
12.3%
12.3%
Table 4 – China GDP and Growth, Inflation and Current Account Balance (2005-2008)49 Current GDP: GDP per capita:
2,992.7
Billions of euros - 2008 (estimates after 2008)
2,254.1
Euros - 2008 (estimates after 2008) 2005
2006
2007
2008
Real GDP growth (%, estimates after 2008)
10.4
11.6
13.0
Inflation rate (%, estimates after 2008)
1.8
1.5
4.8
9.0 5.9
Current account balance (% of GDP, estimates after 2008)
7.2
9.5
11.0
10.0
No matter how much Western Economists rant-and-rave about China increasing its consumption, China‘s continued growth depends on whether ordinary Chinese citizens have the purchasing power to consumer the products they manufacture.
This is
especially true if the wealth is found to be concentrated amongst the Politburo members, State-owned Enterprises (SOEs) and their consorts in the private sectors (tycoons).
48 49
European Trade Stastistics, http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113366.pdf European Trade Stastistics, http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113366.pdf
39
For now China is growing with $586 billion in stimulus package passed in 2009 where a sizeable chunk has gone into building the infrastructure as elaborated below50:
-
38% in Public infrastructure
-
25% in post-quake reconstruction
-
10% in social welfare
-
9% in technology
-
9% in rural development
-
5% in sustainable development, and
-
4% in education/cultural projects
Perhaps China can afford to spend its vast pool of foreign reserves in internal project, but that will not only hurt the US as interest rates will have to rise but also hurt China in deflation in the reserve assets. Therefore, it is questionable as to how many of these stimuli can China afford, and even if China could afford it cannot substitute private investment and consumption forever.
Some researchers have alluded to the fact that
China is building empty cities (which people cannot afford to move into because of lack of purchasing power) to keep up the GDP and employment growth in order to avoid social unrest by 100-150 million farmers who are leaving farms for better paying manufacturing jobs. Therefore, China also faces real problems which are in some ways bigger than what Greece or Spain may be facing in the midst of this crisis.
Nonetheless Societe Generale (SocGen) has provided their estimate of China‘s growth that will comprise a bigger portion of world GDP by 2014 (Figure 37 below). SocGen estimates that China, which comprised 9% of world GDP in 2009 (same as Japan) will command 12% of the global GDP by 2014.
The transfer of wealth from
advanced economies, such as the US and Japan, to emerging economies such as China can be denied.
According to the IMF, the contribution of emerging markets to global
GDP will increase from 24% to 50% by 2014. If we assume that emerging market GDP
50
―Investing in China‟s Infrastructure”, April 2010, EuroPacific Capital, www.Europac.net
40
per capita increases to 25% of that of developed countries then global GDP, with the shift shown above in emerging markets‘ weight, would increase by 50%!51
Figure 37 – Projected Relative Sizes of Economies in 201452
On one hand it is not surprising that this wealth is taking place, as China has become the manufacturer of the world, and even in the midst of the ‗great recession‘ it still has the know-how and the capital in the form of machinery to plough forward. Other countries like the US and UK have been hollowed-out of their manufacturing capability and capital base, leaving them nothing other than their ‗great efficient capital‘ markets and their reputation (past glory) to continue issuing debt and paper until that confidence is shattered. Below is poignant quote pointed at the UK and the US governments‘ creditworthiness going forward, as Standard & Poor‘s (leading credit-rating agency in the world) has dropped hints in 2009 of possible downgrading of their ratings: ―If you once forfeit the confidence of your fellow citizens, you can never regain their respect and esteem. It is true that you may fool all of the people some of the time; you can even fool some of the people all of the time; but you can't fool all of the people all of the time.‖ - Abraham Lincoln, 16th US President (in office 1861-1865)
51 52
―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 23 ―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 23
41
And even if China is able to grow through internal consumption it is the resourcesupplying countries like Saudi Arabia, Malaysia, Brazil, Australia and Russia that would most likely reap the benefits of Chinese growth, since these countries run a positive trade balance with China (Table 5). However, this is unlikely as China is dependent on US and European markets to absorb its outputs.
Table 5 – China‘s Top Ten Trading Partner (2008)
53
CHINA'S TRADE WITH MAIN PARTNERS (2008) The Major Imports Partners Rk 1 2 3 4 5 6 7 8 9 10
Partners
Mio euro
The Major Export Partners %
World
746,760.2
100.0%
Japan EU27 South Korea United States Hong Kong Australia Malaysia Saudi Arabia Brazil Russia
100,914.5 88,442.1 82,693.8 54,883.5 40,443.2 23,567.8 23,554.3 21,249.3 20,059.6 17,258.4
13.5% 11.8% 11.1% 7.3% 5.4% 3.2% 3.2% 2.8% 2.7% 2.3%
Rk
Partners World
1 2 3 4 5 6 7 8 9 10
EU27 United States Hong Kong Japan South Korea Russia India Singapore Canada Australia
%
Mio euro 979,215.0
100.0%
205,526.6 185,701.0 127,078.5 81,959.5 51,136.6 22,181.1 22,003.3 21,178.3 17,732.3 16,314.8
21.0% 19.0% 13.0% 8.4% 5.2% 2.3% 2.2% 2.2% 1.8% 1.7%
Table 6 – China/US Trade Statistics (in billions, US$) (2001-2009) 54
US exports % change US imports % change Total % change US balance
2000 16.3 24.4 100.0 22.3 116.3 22.6 -83.7
2001 19.2 18.3 102.3 2.2 121.5 21.4 -83.0
2002 2003 2004 2005 2006 2007 2008 22.1 28.4 34.7 41.8 55.2 65.2 71.5 15.1 28.5 22.2 20.6 32.1 18.1 9.5 125.2 152.4 196.7 243.5 287.8 321.5 337.8 22.4 21.7 29.1 23.8 18.2 11.7 5.1 147.3 180.8 231.4 285.3 343 386.7 409.2 21.2 22.8 28 23.3 20.2 12.7 5.8 -103.1 -124.0 -162.0 -201.6 -232.5 -256.3 -266.3
2009 69.6 -2.6 296.4 -12.3 366.0 -10.6 -226.8
Table 6 illustrates the deteriorating US trade imbalance, which can be correlated to the manufacturing job lost in the US. In 2008 US trade deficit had reached an all-time
53
European Trade Stastistics, http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113366.pdf
54
http://www.uschina.org/statistics/tradetable.html; Notes: US exports reported on FOB basis; imports on a general customs value, CIF basis Source: US International Trade Commission
42
high of $800 billion of which $266 was with China alone – this is clearly 33% of the trade deficit.
Could India Lead The Way Forward? As of the first quarter 2009, the leading economic indicator for India (Figure 38) stopped declining and flattened, but has not turned up yet. Hopefully, future data will be more rosy, and indicates an upturn. According to CIA Factbook55 India faced an industrial slowdown early in 2008 due to the global financial crisis, but nonetheless led annual GDP growth to slow to 6.1% in 2009 – the second highest growth in the world among major economies. India escaped the brunt of the global financial crisis because of cautious banking policies and a relatively low dependence on exports for growth. Domestic demand, driven by purchases of consumer durables and automobiles, has re-emerged as a key driver of growth, as exports have fallen since the global crisis started. India's fiscal deficit increased substantially in 2008 due to fuel and fertilizer subsidies, a debt waiver program for farmers, a job guarantee program for rural workers, and stimulus expenditures. The government abandoned its deficit target and allowed the deficit to reach 6.8% of GDP in FY10. Figure 39 below forecasts India‘s agricultural output drop of 4-5% in the coming year (2009-2010), which comprises 16% of India‘s GDP (Table 7). Considering the scale of the drought this estimate is very rosy. However, estimates of Industrial production growth (Table 7) is still optimistic perhaps due to the fact that India does not export much in the way of manufactured goods compared to China. Figure 38 – Leading Economic Indicators for India are not Up Yet 56
55 56
CIA Factbook: https://www.cia.gov/library/publications/the-world-factbook/geos/in.html Joseph, Mathew et. Al. (2009), The State of the Indian Economy 2009-2010, October 2009, p. 25
43
Figure 39 – Agricultural Output and Projections57
Table 7 - Indian GDP Forecast58 - Perhaps India has room for growth without Exports
Growing Debt and Derivatives Problems As if slowing economies was not a big enough blow to the global economy, and now the developed world is faced with a rising pool of retirees in the next decade which needs to be financed through debt. countries.
Table 8 illustrates this rising debt levels in G-20
Projections of rising debt levels in developed countries is also a cause for
concern at a time when interest rates are creeping up, which implies that rising debt will shift national income from investment to debt-servicing. This debt burden for developed economies in the worse-case scenario provided by SocGen (below) is even more alarming than IMF figures in Table 8.
57 58
Joseph, Mathew et. Al. (2009), The State of the Indian Economy 2009-2010, October 2009, p. 24 Joseph, Mathew et. Al. (2009), The State of the Indian Economy 2009-2010, October 2009, p. 26
44
Figure 40 – Total Public Debt in the World59
Figure 41 – Debt-to-GDP ratios of Developed versus Developing Countries 60
59 60
―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, Front-page ―Worst-Case Debt Scenario‖, Client Report, Societe Generale, November 2009, p.21
45
Table 8 – Projected Rise in Government Debt-to-GDP Ratio in G-20 Countries
Some countries like Japan, US, Italy and India (Table 8) have already reached the point of no return in their public debts, and they do not have a choice but to inflate in order to avoid deflation in this ‗great recession‘, and others like UK, France and Germany are not far behind. The IMF says that debt-to-GDP ratio of advanced countries is expected to rise by 20 percentage points in 2009 - the most pronounced upturn in the last few decades. The one-year increase in government debt is three times as large as that experienced during the 1993 recession.61 The IMF says fiscal balances will be severely affected by the crisis in the short run. For G-20 advanced economies, fiscal balances are projected to worsen, on average, by 8 percentage points of GDP in 2009 relative to 2007, reaching 93⁄94 percent of GDP in 2009.
The fiscal balances of G-20 emerging economies deteriorate
less—given the lower impact on growth, automatic stabilisers and fiscal stimulus—but 61
IMF says G-20 Advanced Nations‘ Debt-to-GDP ratio to increase by 20% in 2009, June 11, 2009, http://www.finfacts.ie/irishfinancenews/International_4/article_1016894_printer.shtml
46
still significantly (reversing the improvement achieved since 2003). For the advanced countries, half of the deterioration is due to fiscal stimulus and financial sector support, while for emerging economies, a relatively large component is due to declining commodity and asset prices.62 Figure 42 – Debt as a percent of GDP in Select Major Developed Countries 63
Comparatively the developing countries are better off in terms of their debt levels (Figure 41, Table 8), however, developing countries do not have to account for retirement welfare benefit payments as these programs are non-existent in those countries.
This is the twin-edged sword of economic growth as consumer spending
comprises 60-70% of GDP in most countries. Therefore, if consumers are not given reassurance about their retirement then they are bound to save at higher rates than their counterparts in developed countries. Therefore, it is an exercise in futility to expect the consumers in developing countries to take a lead rejuvenating the global economy and thus increasing their spending and abandon their saving habits in the absence of such public retirement guarantees. With the global GDP at $60 trillion (2009), and globally government debt is about to grow to $45 trillion by 2011 (without counting the debt of other sectors – consumers,
62 63
IMF Staff Team, “Fiscal Implications of the Global Economic and Financial Crisis”, June 2009 ―Worst-Case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 6
47
business and financial institutions), then a small rise in interest rates (4 to 5%) would take away 0.75% from global GDP growth. Does this mean that the global economy has reached debt saturation and counterproductive, where any growth in global income is offset by interest payments? And all this is happening at a time when there is a great deal of uncertainty over interest rates and $604.6 trillion exchange-traded derivatives market64 of which 72.3% was related to interest rate derivatives.
Most likely there is
another $600 trillion in over-the-counter derivatives (customised derivative contracts between two parties) which are not exchange traded that would account for the total derivatives outstanding as of March 2009 at $1.28 quadrillion (that is, 10 to the power 15)65. Congressional Budget Office (CBO) has provided the worst- and best-case scenarios of US Government Debt-to-GDP ratios based on trillion$ budget deficit the US government is embarking on in the coming years shown on Figure 43.
On the other
hand Figure 44 illustrates the transfer payments due to retirees in the next 70 years, which have thus far been accounted in CBO budgets on a cash basis which amounts to additional $73 trillion in future US Government liabilities. Figure 43 – US CBO Estimates US Govt. Debt-to-GDP Ratio Under Two Scenarios66
64
www.BIS.org; http://www.bis.org/statistics/otcder/dt1920a.pdf http://thecomingdepression.blogspot.com/2009/03/outstanding-derivatives-128-quadrillion.html 66 Conrad, Bud and David Galland (2009):“Green Shoots or Greater Depression”, Casey Research, August 2009 65
48
Figure 44 – Concord Coalition (NGO) Rendition of Future Liabilities of US Govt. To Retirees67
Money and Markets68 is a US research and investment advisory firm that provides insights into what is happening in the US financial markets.
They recently surveyed
2,000 of their readers with three question, and below are their responses:
67
http://www.concordcoalition.org/
49
Question 1. Will Washington stop its spending, borrowing and printing spree before it‘s too late to save the U.S. economy? Yes: 8.2% No: 91.8% Question 2. If your answer is ―No,‖ how much longer do you believe America can continue before the Treasury bond market collapses and the recovery is sabotaged? One year or less: 28.6% One to two years: 58.5% More than two years: 12.9% Question 3 — ―What events do you believe could force Washington to reverse course?‖ The optimists among our readers feel that the November elections could offer a ray of hope — but many others point out that BOTH parties are equally guilty of piling up huge deficits. The vast majority say it‘s simply too late to avoid a major bond market crash and interest rate explosion. They‘re predicting that foreigners will soon stop buying U.S. debt ... that America‘s credit rating will be slashed ... that investors will dump Treasuries en masse ... and even that China, India and OPEC could refuse to accept U.S. dollars in payment for trade. These debts levels will have dire consequences for the global economy. Below is a quote from Societe Generale on countries defaulting on their bonds, and green highlight specifically mentions about common nature of default in European countries in the middle ages. Therefore, it is not unlikely that it can happen in modern days as the game of paper promises, be it debt or currencies, and defaults are as old as empires themselves. ―Although it is the last survival option in the bag, sovereign borrowers may have to default; and could do so with limited strings attached as they are not subject to bankruptcy courts in their own jurisdiction, and would hence avoid legal consequences. One example is North Korea, which in 1987 defaulted on some of its government bonds and loans. In such cases, the defaulting country and the creditor are more likely to renegotiate the interest rate, length of the loan, or the principal payments. During the 1998 Russian financial crisis, Russia defaulted on its internal debt, but did not default on its external Eurobonds. Further back in history, European countries frequently defaulted Spain did so 13 times in the Middle Ages. The damage to the country‘s economy can be harsh as it will suffer from higher interest rates and capital constraints in the future. But remember that all major economies apart from the US have a long history of sovereign defaults.‖69
68 69
http://www.moneyandmarkets.com/ ―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 22
50
Dr. Jim Willie of The Hattrick Letter drew a flow chart to depict what are the chain of events that will lead up to this eventuality (Figure 45).
Dr. Willie provided this
scenario in December 2009, and so far it has come half-circle with Greek financial turmoil, and if we are lucky enough we will witness the remaining half of the diagram play out in the next two years, if Dr. Willie is to maintain his public credibility. Figure 45 – Chain of Events Leading up to US Treasury Bond Default 70
First Things First – Reduce Government Debt?
Societe Generale analysts71 have provided four options to lower government debt. One option is to raise tax which is not viable in the face of rising unemployment, rising debt-servicing burdens and rising cost of living (Figure 46). The other two options are to reduce government expenditures and privatise government enterprises. The option that US Government has chosen is to explode its debt, since there is not much cash to be released from State Enterprises which were sold off during President Reagan‘s time, unlike for communist or socialist governments that own state enterprises.
70 71
Willie, Jim (2009): The Hatrick letter, December 15 ―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 21
51
The last option suggested by SocGen is to devalue the currency thus repaying debts with deflated currency.
This goes smack against Islamic Law of debt deflation,
that is, paying debt with reduced value of the currency. This is the reason why debts are discouraged in Islam and if incurred for any reason it is mandated to be paid in „ayn (commodities) and not dayn (promises in paper), otherwise, the creditor gets cheated. Therefore, usage of paper money leads to uncertainty as one side (debtor) always wins by paying amounts that is less than due, as actual inflation is always larger than reported inflation as demonstrated in Figure 53. Elected officials promise the world to get elected and run up deficits which have to be paid with freshly minted paper, but what is more surprising is that private investors keep falling into this charade of debt devaluation through paper money even though history is strewn with stories of government debt defaults. Figure 46 – Four Options Provided Below to Lower Government Debt
Many developed country governments, such as US, UK. Japan and a few European countries, are in a bind now as large proportion of their populations are about to retire, who did not have enough children to support them or the system in their
52
retirement years (not to mention their secular individualistic value system).
Thus the
dependence on foreign workers and immigrants most of whom are Muslims migrating from war-torn countries, which in turn has become a dilemma for the developed nations trying to sort the ‗good Muslims‘ from the terrorists. These developed nations face dire choices between social unrest if retirement withers away in deflationary economic collapse, or revolt from younger generation if their future is destroyed in government finance collapse due to irresponsible issuance of debt and collapsing economy and currency. This is even more urgent for the US which owes foreigners $6 trillion in US asset discussed in a later section. Figure 47 depicts the funding gap (tax collections – expense) for the US Government. Since 2007 this funding gap has been widening which is directly correlated to the dire unemployment figures discussed earlier (Figure 29, p.32). This is the reason why the US Government is running a budget deficit of $1.875 trillion in 2009-2010 fiscal year (Sep‘09-Sep‗10).
Figure 48 illustrates the projected US Government budget
deficits for the next 10 years. This is colossal amount of debt that needs to be raised just by the US Government alone, without counting the EU, UK, Japan and other emerging countries that will also need to tap the capital markets. Figure 47 – $1.0 trillion Funding Gap in 2009 for the US Government72
72
“Worst-case Debt Scenario”, Societe Generale, November 2009, Client Report
53
Figure 49 shows the amount of debt that governments were planning to issue in 2009. Not sure how much of this was eventually raised but this state of affairs cannot go on forever and something has to give. Most likely it will be rise in interest rates that will signal the end of global economic recovery. Also, the world does not have enough savings or appetite for government debt, unless governments can cajole fund managers or sequester pension funds by government decree to mandatorily invest in government bonds. Figure 48 – Projected US Government Budget Deficit (2009 – 2019)73
73
Conrad, Bud and David Galland (2009): “Green Shoots or Greater Depression”, Casey Research, August 2009, p.5
54
Figure 49 – Projected Sovereign Debt Issuance in 200974
Rogoff and Reinhart conclude that:75 Our analysis has documented some of the links between public and private debt cycles and the recurrent pattern of banking and sovereign debt crises over the past two centuries. Banking crisis are importantly preceded by rapidly rising private indebtedness. But banking crises (even those of a purely private origin) directly increase the likelihood of a sovereign default in their own right (according to our findings) and indirectly as public debts surge. There is little to suggest in this analysis that these debt cycles and their connections with economic crises have changed appreciably over time.
74
Allison, Tony (2009): Unlimited Debt: When the glass overflows, we all get wet, July 20, 2009, www.financialsense.com 75 Rogoff, Kenneth and Carmen Reinhart (2010): From Financial Crisis to Debt Crisis, p. 41
55
Last Resort of Government’s When all else fails governments resort to the printing press. This game can go on for a little while until people, especially, foreign investors wake up and begin to smell this rotten game and dump a batch of currencies en-masse for asset that cannot be created out of thin air.
This is exactly what happened to the Reichsmark in Weimar Republic
Germany between 1919 and1923, soon after signing the Treaty of Versailles when Germany was loaded by the Allied Powers for paying war reparation payments.
So
Weimar Republic agreed to pay and started printing money so fast that by mid-1923 the Reichsmark lost its value (Figure 50), so much so that a wheel-barrow of Reichsmark fetched only a loaf of bread. Figure 50 – Gold and Silver maintained purchasing power during German Hyperinflation76
Figure 50 demonstrates that hard currencies like gold and silver maintain people‘s purchasing power when unscrupulous governments try to destroy their currencies. While the price of gold rose 10 fold in the first year (1923), the increase from 1,000 Marks to 100 trillion marks in the following four years was almost incomprehensible. When Federal Reserve President Thomas Koenig was appointed to his position as the President in Kansas City Office in 1991, he said the following:
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The Bullion Buzz eNewsletter - April 13, 2010, http://www.bmgbullion.com/document/691
56
―When I was named president of the Federal Reserve Bank of Kansas City in 1991, my 85-year old neighbor gave me a 500,000 mark German note. He had been in Germany during its hyperinflation, and told me that in 1921, the note would have bought a house. In 1923, it would not even buy a loaf of bread. He said, ‗I want you to have this note as a reminder. Your duty is to protect the value of the currency.‘ That note is framed and hanging in my office.‖ Yet this is exactly what is happening to the US Money Supply as illustrated by John Williams of Shadow Government Statistics in Figure 51. First, the Fed stopped reporting M3 Money Supply data in March 2006 (reconstructed in navy-blue by Shadow Stats) as The Fed was ready to ramp up M3 for the following two years, using the excuse that M2 already contained information about M3. This is an insult to economists who understand the difference between pure credit money (M3) and long-term deposits and savings (M2). Then when credit began to collapse in 2008, the Fed opened its money spigot (M1) shown in Figure 51 and 52, as well as increasing its high powered money (money with which banks can expand credit) by purchasing toxic assets at nearly par value from the banks without which all major US banks would have been insolvent. Figure 51 – Money Supply Data from Shadow Government Statistics (re-constructed US M3 Money Supply since Federal Reserve Abandonment this Measure in March 2006)77
The following quote was adopted from John Williams recent commentary on US economic conditions:
77
Williams, John (2010): http://www.shadowstats.com/alternate_data
57
Real Money Supply M3. The signal of pending intensification of the economic downturn, based on the annual contraction in the inflation-adjusted broad money supply (M3), was discussed in the prior Commentary No. 290. The annual real contraction in March M3 (SGS-Ongoing) estimated for that Commentary was 5.8%. Based on today’s CPI-U report, that annual contraction was 6.0%. Figure 52 illustrates how The Fed has been expanding its Balance Sheet since September 2008 through printing money out of thin air, and purchasing junk/toxic assets to re-liquefy the banking system. The Europeans, Japanese and Malaysians have been at it as well.
The Monetary Base determines the ―potential‖ of the banking system to
extend credit into the economy. The following chart illustrates the geometric growth in the narrow monetary base: Figure 52 – Quantitative Easing Gives Way to Flood of Money 78
Dr. Christian Martenson explained succinctly in Figure 53 the life-cycle of fiat money. Initially people have faith in the currency especially if it is backed by gold, which is often the practice by IMF shortly after a currency crisis. As soon as confidence in the new currency takes hold then debt build-up and deteriorating economic conditions warrant de-pegging of the currency from gold backing as explained in the introduction.
78
http://www.stlouisfed.org/
58
It has been 38 years since the US Dollar was de-pegged from gold (August 15, 1971), and at the rate the Federal Reserve is expanding its Balance Sheet and printing money out of thin air, the day of reckoning is nearing for the US Dollar, if Dr. Christian Martenson‘s analysis holds water.
Exponential growth in money creation [supply]
creates problems in a finite world because this leads to exponential growth in demand for finite resources. Figure 53 – The Life-cycle of Fiat Currency79
Figure 54 (below) illustrates how closely Gold Price has been tracking the increase in US M2 Money Supply since 2005.
It is as if the investment community does not
believe in the words of Fed Chairman Bernanke but instead watches his actions. There is a lot of effort by the banking cabal to suppress the price of gold in order to lure leary investors who are on the sidelines back into the paper markets of bond and stocks. That is a different topic about which information can be found on www.GATA.org.
79
http://www.chrismartenson.com/
59
Figure 54 – Dual-axes Chart Showing US M2 Money Supply (LHS) and Gold Price (RHS) 80
Figures 55 (normal scale) and 56 (log scale) illustrates that inflation had been around 10% in the US colonies since 1665, but had become especially serious since the creation of the Federal Reserve in 1913. Figure 55 – Consumer Inflation in American Colonies (1665-2009)81
80 81
Dorsch, Gary (2009): G-20 Inflates the Global Economy to Prosperity, September 11; www.sirchartsalot.com Hyperinflation Special Report, www.ShadowStats.com, John Williams, Dec 2, 2009
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Figure 56 – Consumer Inflation in American Colonies (1665-2009)82
Figure 57 illustrates the under-reporting of inflation figures by government statisticians who have fudged the data to make GDP deflator small to put a rosy picture on recent GDP growth (since 1995) just when real US GDP stopped growing according to John Williams (Figure 9, p. 13). Figure 57 – Re-constructed Inflation by Shadow Government Statistics (1980-2010)83
Dr. Marc Faber84 was recently interviewed on www.Bloomberg.com and reports: 82 83
Hyperinflation Special Report, www.ShadowStats.com, John Williams, Dec 2, 2009 Williams‘, John: http://www.shadowstats.com/alternate_data
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Prices may increase at rates ―close to‖ Zimbabwe‘s gains, Faber said in an interview with Bloomberg Television in Hong Kong. Zimbabwe‘s inflation rate reached 231 million percent in July, the last annual rate published by the statistics office. He had this to say about US monetary policy: “I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.” Looking at the size of US assets (‗debt‘) owed to the rest of the world (Figure 58) it is obvious that the world had become hooked US consumer spending and economic growth. While world worked hard to earn their living the US on the other hand just had to crank-up the printing press to pay for the sweat of the labourers in the sweat shops around the world. This game will only go on as long as people and countries (central banks) allow themselves and their citizens to be robbed of their labour through a depreciating currency and inflation. Nonetheless this situation is untenable and a day of reckoning is approaching for the US and the World.
Figure 58 – Net US Accumulated Investment Position with the Rest of the World 85
Now
that
private investors‘ appetite for
further
US
debt
is
waning
as
demonstrated by Figure 59, how much longer will foreign central banks tolerate 84 85
Faber, Marc: Editor of “Gloom, Boom, Doom Report”, www.gloomboomdoom.com Conrad, Bud and David Galland (2009): “Green Shoots or Greater Depression”, Casey Research, August 2009, p.5
62
diminution in their investments through devaluation of the US dollar via massive debt monetization even though Dallas Fed Chief Richard Fisher (Appendix H, p. 95) said the Fed will not resort to monetization. Question is can the rest of the world come up with an alternative, or would WTO, World Bank, BIS and IMF use this crisis as a justification to create bigger economic block that will be sustained by bigger currencies, when the last biggest currency and their custodians proved unworthy of our trust that they can manage the value of our savings in good faith. Or, through the creation of a bigger currency do we need a bigger crisis in 10 or 20 years to learn some lessons.
Figure 59 – Changes in Capital Flows in-and-out of the US86
"The U.S. has one huge advantage, the U.S. alone can print the paper which its debts are denominated in. This is why the reserve status of the dollar is so critical to the survival of the U.S. Should the U.S. lose its reserve status, the result would be an economic collapse."87
86
Conrad, Bud and David Galland (2009): “Green Shoots or Greater Depression”, Casey Research, August 2009, p.5 87 Russell, Richard: The Dow Theory Letter, www.dowtheoryletters.com
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Prohibition of Riba
―It is illegal for anyone to corrupt (ifsad) people‘s money or currency or to cause changes or fluctuations in its value. Similarly, it is illegal to treat money as commodity of trade, otherwise, serious problem will be faced by the people in the scale only Allah will know its magnitude. What is required is that money should be treated as capital for business and not commodity for trade, and when the government prohibits the use of any currency, such must be accordingly withdraw from circulation‖88 -
Ibn Qayyum al-Jawziyyah (1292-1350CE / 691 AH - 751 AH); a Hanbali Jurist wrote in his famous book al-Turuq al-Hukmiyyah89
As we have observed markets and asset prices can get distorted for a long time due to artificially-engineered low interest rates, and very few ordinary people are able to determine the true value of assets and trade honestly with their hard-earned savings. These ordinary people get caught up in the financial storms, and no option but to swallow the bitter pills and new solutions provided by the ‗Master of Money‘.
On the
other hand, the rich can afford expensive advisors to advise them when to exit inflated financial markets before melt-downs or melt-ups happen, and move onto the next asset class that is screaming and flailing to be inflated. In a way prohibition of riba applied on the entire society is a blessing in disguise from Allah SWT that protects common people so that they do not fall prey to manipulation of the elite. Unfortunately, Muslims have become blind to this wisdom and falling headlong into the traps that is impoverishing their societies over and ver again – first through colonisation and now through dollarization.
Why should we be surprised
since it was prophesied a long time ago. Abu Sa'id Al-Khudri (r.a.a.) narrated that the Messenger (saw) of Allah SWT said, "You will surely follow the ways of those nations before you, span by span and cubit by cubit (i.e. inch by inch) so much so that even if they entered the hole of the lizard, you will follow them." We said, O Messenger (saw) of Allah SWT! Do you mean the Jews and the Christians?" He (saw) replied, "Whom Else?" 88 89
Bukhari 3456, Sahih Muslim,The Book of Trials 67, Volume 2, page 1058
See economic review of this book in Rifat al-Iwadhi, 1985, Min Al-Turath al-Iqtisad li al-Muslimin, p. 245 Azam Ibn Abdul-Rahman, Prof. Dr. Zainal Azam (2001):"Currency Fluctuation and its Effects on Debts and Obligations in Islamic Law", Jul 2001, IKIM Law Journal, Vol. 5, No. 2, pp.21-38
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Could Islamic Banking Remedy Wealth and Income Inequity?
Unfortunately, Islamic Banks have also been operating under the same principles of credit financing using the BBA and Murabaha, rather than practicing wealth accumulative modes such as Mudaraba and Musharakah where the Raab Al-Maal and the Mudarib risk their respective capital and labour and accept the risg that is due to them from Allah Almighty. Instead, current Islamic banking practices are ensuring the growth of capital for their shareholders and fat compensation for the bankers, and in return for their money the depositors get a measly 3 or 5% for their deposits which barely beats inflation. Besides what can Islamic Banks do when they follow standard set by Basel II that are meant for conventional banks where Musharakah is so heavily weighted for riskiness, that it requires larger bank reserves, and thus reduces the banks‘ ability to create credit to maximise profits for their shareholders. Wealth concentration has most likely reached its zenith when one hears of news such as the following90. Surely we do not need Allah Almighty‘s wrath on us before this situation is corrected.
―The number of billionaires around the world has nearly recovered in 2010 after dropping by a third last year during the global financial crisis. There are now 1,011 billionaires, compared with 793 last year and 1,125 in 2008.... ―The net wealth of those billionaires grew to $3.6 trillion from $2.4 trillion last year, but is still down from 2008's $4.4 trillion, according to the 24th annual Forbes list, which took a snapshot of wealth on Feb. 12 to compile its ranking.‖ According to Wilfred Hahn91 74.9% of world oil reserves are in Muslim countries and yet their Income per Capital is less than $2,500 92 (second lowest only to Hindu‘s at $1,000 per capital), when per Capita income for Christians and Jews are $20,000 and $23,000, respectively.
Some might raise the argument that because of our large
numbers this statistic favours smaller communities.
Nonetheless (politics aside) this
number is very lopsided considering that world‘s most precious resource (black gold) is 90
World's mega-rich adding wealth, Carlos Slim No. 1, Reuters - Thursday, March 11, http://sg.news.yahoo.com/rtrs/20100311/tbs-billionaires-7318940.html?printer=1 91 Hahn, Wilfred (2009): Global Financial Apocalypse Prophecied, 2009, p.252 92 Ibid, p. 302
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in Muslim lands, and Allah Almighty promises that His SWT Deen will be most dominant way of life.
―It is He who sent his messenger with the Truth and Guidance so that it may prevail over all the ways of life even if the mushrikoon detest it.‖ (Surah At Tawbah 9:33 & As-Saff 61:9) ―It is He who sent his messenger with the Truth and Guidance so that it may prevail over all the ways of life and all sufficient is Allah for a Witness.‖ (Surah Al-Fath 48:28) ―[For] Allah has thus ordained: ‗I shall most certainly prevail, I and My Messengers!‘ Verily, Allah is Qaweeun, A‘zeez!‖ (Surah Al-Mujaadilah 58:21) The question is how have we worked to implement His SWT system, or has this wealth become a curse on the Muslims and divided us into many nations and tribes rather than being one united Ummah? Furthermore, it is questionable whether current practices of Islamic banking and Muslim politics will deliver a just system of wealth accumulation and distribution, or is there a need for other forms of representation that will be more just in giving the rights of the poor?
Conclusion ―I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.‖ -
President Thomas Jefferson, 3rd US President (in office 1801-1809)
My conclusion is that we are experiencing the very best recovery that several trillion in freshly minted money and credit can buy. The recovery mainly seems to exist on Wall Street, financial markets and in government statistics more than it does on Main Street and in people's real lives. There is no doubt that a bounce has been engineered, but the main question is whether it is the enduring kind or a flash in the pan. No money has gone to household or small businesses as bailouts have been thrown at ‗too big to fail‖ banks. Therefore,
66
without the participation of small businesses, and with states and municipalities that are in retreat and retrench, this recovery is quite questionable. My assessment is that this manufactured bounce will wear off this summer and that we may be another round of stimulus and Fed liquidity programs before November elections in the US. Given the political dimensions involved, it is almost certainly a slamdunk to predict more money being dumped into the situation prior to the elections. This is how low American politics has sunk, that is, give other people‘s money (tax-payers) to people who only care about greasing their own pockets, i.e. bankers. Bernard Lietaer, a respected financial figure, and his criticism of today‘s monetary system should not be taken lightly.
Lietaer‘s criticisms, however, are far more
fundamental than those of either Peter Warburton (author of Debt and Delusion, 1999) or Austrian economists.
Lietaer directly targets the system of money itself and
specifically the US dollar, warning among other things that93:
―..Unless precautions are taken, there is at least a 50-50 chance that the next five to ten years will see a dollar crisis that would amount to a global meltdown.‖ Bernard Laetaer is referring to the US Dollar crisis. This will be a major crisis of the century because the ‗crack-up‘ or ‗melt-up‘ boom being engineered by our elected (politicians) and nominated (central bankers) officials will tip the global economy into hyperinflation and people will chase hard commodities as they will maintain their value in US Dollars term (the currency that is being inflated). The other option is to let deflation take its course (letting asset prices take their natural course downward where existing savings can afford those assets).
Given that politicians do not like to disappoint their
electorate most likely the former option will be chosen. Gerald Celente concludes that: As the economic crisis escalates and the debt-based central banking system shows it can no longer re-inflate the bubble by creating assets out of thin air, an economic and political rationale for war is easy to come by; for if the Keynesian doctrine that government spending is the only way to lift us out of an economic depression is true, then surely military expenditures are the 93
Laetaer, Bernard (2001): The Future of Money, Bernard, Century/Random House 2001
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quickest way to inject ―life‖ into a failing system. This doesn‘t work, economically, since the crisis is only masked by the wartime atmosphere of emergency and ―temporary‖ privation. Politically, however, it is a lifesaver for our ruling elite, which is at pains to deflect blame away from itself and on to some ―foreign‖ target. 94 The western central banking cabal (banking families that own the Federal Reserve) have no interest in doing good for the ordinary people as has become apparent in the bailouts that have gone to them rather than the ordinary people, who really stimulate the economy via their spending.
How do people become free from the
shackles of debt when their elected officials have no qualms about putting their citizens into more debt. So the oppression of the elite will continue until oppressed people find ways to send a message about these injustices to change their condition. Having been hooked on the US consumer, the rest of the world built-up manufacturing capacity that is increasingly being underutilised and they are desperately in need of new customers. Unfortunately new customers, as good as the US consumers are not abound, especially, now when everyone is re-building their balance sheets and savings for rainier days ahead without even referring to retirement.
Government
spending and further debt accumulation cannot sustain a recovery without the participation of consumers and businesses, and it is a vicious cycle that puts taxpayers into further debt. This is the cycle of deflation and Kondratieff cycle that everyone needs to re-learn if they are to avoid the same mistakes in the future. This mess will take a long time to resolve, and perhaps never get resolved until the introduction of new economic blocks and currencies that will be managed by more incompetent regulators and supra-national global institutions, which will further erode the financial freedom of individual nations to manage their own destiny. This will lead to more inflation and oppression by the elite. If history is any guide, last Great Depression in the US did not get resolved until after WWII, and hopefully, it will not come to that this time around. 94
http://socioecohistory.wordpress.com/2009/08/12/celente-thesis-war-as-the-solution-to-economicdepression/
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2.
―Worst-case Debt Scenario‖, Client Report, Societe General, November 2009
3.
Shedlock, Michael (2005): K Cycle Trends http://globaleconomicanalysis.blogspot.com/2005/07/great-flation-debate-whatscoming-and.html
4.
US National Debt Clock: www.brillig.com/debt_clock/
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http://home.comcast.net/~lcmgroupe/2010/Article-Extend_PretendManufacturing_a_Minsky_Melt-Up.htm
10. Williams, John (2010): www.ShadowStats.com 11. Conrad, Bud and David Galland (2009): Green Shoots or Greater Depression, August 2009 12. http://en.wikipedia.org/wiki/Whitney_Tilson 13. Credit Suisse 14. Soros, George (2010): We Are Repeating The Mistakes of Our Past, April 15, 2010, http://pragcap.com/soros-we-are-repeating-the-mistakes-of-our-past 15. Eichengreen, Barry and Kevin H. O‘Rourke (2010): What do the new data tell us? http://voxeu.org/index.php?q=node/3421, 16. Russell, Richard (2010): Dow Theory Letters. January 31, www.dowtheoryletters.com at http://www.controlledgreed.com/2010/02/richardrussell-moves-into-apocalyptical-mode.html 17. Rogoff, Kenneth and Carmen Reihart (2009): The Aftermath of Financial Crises, p. 5 18. Quinn, James (2009): CHINA RISING – 21ST CENTURY JUGGARNAUT, June 4, 2009, http://www.financialsense.com/editorials/quinn/2009/0604.html 19. European Trade Statistics, http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113366.pdf
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20. Investing in China‟s Infrastructure”, April 2010, EuroPacific Capital, www.Europac.net 21. http://www.uschina.org/statistics/tradetable.html; Notes: US exports reported on FOB basis; imports on a general customs value, CIF basis Source: US International Trade Commission 22. CIA Factbook: https://www.cia.gov/library/publications/the-worldfactbook/geos/in.html 23. Joseph, Mathew et. Al. (2009), The State of the Indian Economy 2009-2010, October, p. 24 24. IMF says G-20 Advanced Nations‘ Debt-to-GDP ratio to increase by 20% in 2009, June 11, 2009, http://www.finfacts.ie/irishfinancenews/International_4/article_1016894_printer.sht ml 25. IMF Staff Team, “Fiscal Implications of the Global Economic and Financial Crisis”, June 2009 26. Statistics on Derivatives, www.BIS.org, http://www.bis.org/statistics/otcder/dt1920a.pdf 27. http://thecomingdepression.blogspot.com/2009/03/outstanding-derivatives-128quadrillion.html 28. Conrad, Bud and David Galland (2009):“Green Shoots or Greater Depression”, Casey Research, August 2009 29. http://www.concordcoalition.org/ 30. http://www.moneyandmarkets.com/ 31. Willie, Jim (2009): The Hatrick letter, December 15 32. Allison, Tony (2009): Unlimited Debt: When the glass overflows, we all get wet, July 20, 2009, www.financialsense.com 33. The Bullion Buzz eNewsletter - April 13, 2010, http://www.bmgbullion.com/document/691 34. Williams, John (2010): http://www.shadowstats.com/alternate_data 35. St. Louis Federal Reserve, http://www.stlouisfed.org/ 36. Martenson, Christmas: http://www.chrismartenson.com/ 37. Dorsch, Gary (2009): G-20 Inflates the Global Economy to Prosperity, September 11; www.sirchartsalot.com
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38. Hyperinflation Special Report, www.ShadowStats.com, John Williams, Dec 2, 2009 39. Williams, John: http://www.shadowstats.com/alternate_data 40. Faber, Marc: Editor of “Gloom, Boom, Doom Report”, www.gloomboomdoom.com 41. Russell, Richard: The Dow Theory Letter, www.dowtheoryletters.com 42. See economic review of this book in Rifat al-Iwadhi, 1985, Min Al-Turath al-Iqtisad li al-Muslimin, p. 245 43. Azam Ibn Abdul-Rahman, Prof. Dr. Zainal Azam (2001):"Currency Fluctuation and its Effects on Debts and Obligations in Islamic Law", Jul 2001, IKIM Law Journal, Vol. 5, No. 2, pp.21-38 44. World's mega-rich adding wealth, Carlos Slim No. 1, Reuters - Thursday, March 11, http://sg.news.yahoo.com/rtrs/20100311/tbs-billionaires-7318940.html?printer=1 45. Hahn, Wilfred (2009): Global Financial Apocalypse Prophecied, 2009, p.252 46. Laetaer, Bernard (2001): The Future of Money, Bernard, Century/Random House 2001 47. http://socioecohistory.wordpress.com/2009/08/12/celente-thesis-war-as-thesolution-to-economic-depression/ 48. Thomas H. Naylor, Professor Emeritus of Economics, Duke University http://vermontrepublic.org/economics-the-abysmal-science 49. Quarterly Trends Journal, June 2009, www.trendsjournal.com 50. Quigley, Caroll (1975): Tragedy and Hope: A History of the World in Our Time 51. Thomson, Ahmed: “Dajjal the Anti-Christ”, revised edition, 2004, Ta-Ha Publishers, UK, p.56 52. Perkins, John: “Confessions of an Economic Hitman”, 2004, Plume Publishers, Preface, p. IX
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Indirect References 1. “The Future of Capitalism – Credit, Lending and Leverage”, McKinsey & Company, March 2010 2.
“Debt and De-Leveraging – The Great Credit Bubble and Its Consequences”, McKinsey & Company, January 2010
3.
As-Sufi, Shaykh Abdulqader As-Sufi: ―Technique of the Coup De Banque”, Madinah Press, 2005
4.
Vadillo, Umar:“The Return of the Islamic Gold Dinar”, Madinah Press, 2004
5.
El Diwany, Tarek:”The Problem with Interest”, Kreatoc, London, 2003
6.
Tarpley, Webster: “Surviving the Cataclysm”, Progressive Press, 2009
7.
Minsky, Hyman: ―Stabilising an Unstable Economy”, 2008, McGraw Hill
8.
Das, Satyajit: “Traders, Guns and Money”, FT Prentice Hall, 2006
9.
El-Erian, Mohammed: “When Markets Collide”, McGraw Hill, 2008
10. De Soto, Jesus Huerta: “Money, Bank Credit and Economic Cycles”, Mises, 2006 11. Kindleburger, Charles and Aliber, Robert: “Manias, Panics and Crash – A History of Financial Crises”, John Wiley, 2005 12. Batra, Ravi: “Greenspan‟s Fraud – How Twp Decades of His Policies Have Undermined The Global Economy”, Palgrave McMillan, 2005 13. Duncan, Richard: “The Dollar Crisis – Causes, Consequences and Cures”, John Wiley, 2003 14. Lewis, Hunter: “Where Keynes Went Wrong – And Why World Governments Keep Creating Inflation, Bubbles and Busts”, Axios, 2009 15. Barton, Dominic, Robert Newell and Gregory Wilson: “Dangerous Markets – Managing in Financial Crises”, John Wiley, 2003 16. Panzner, Michael: “Financial Armageddon”, Kaplan, 2007 17. Bonner, William: “Financial Reckoning Day”, John Wiley, 2003 18. Prechter, Robert, Jr.: “Conquer The Crash”, John Wiley, 2003 19. Fischer, David Hackett: “The Great Wave – Price Revolutions and the Rhythm of History”, Oxford, 1996
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20. Graham, Frank D.: “Exchange Prices, and Production in Hyper-Inflation: Germany 1920-1923”, 1930, re-Print by Mises, 2009 21. Ruppert, Michael: “Confronting The Collapse – The Crisis of Energy and Money in a Post Peak Oil World”, Chelsea Green Publishing, Vermont (USA), 2009 22. Eggelletian, Andre Michael: “Thieves in the Temple – America Under The Federal Reserve System”, Milligan Books, LA, 2004 23. Engdahl, F. William: “Full Spectrum Dominance – Totalitarian Democracy in the New World Order”, Engdahl, 2009 24. Hertz, Noreena: “The Debt Threat – How Debt is Destroying The Developing World...and Threatening Us All”, Harper Business, 2004 25. Turk, James and John Rubino:‖The Coming Collapse of the Dollar and How to Profit From It”, Doubleday, Randomhouse, 2004 26. Schiff, Peter, Jr. And John Downes: “Crash Proof – How to Profit from the Coming Economic Collapse”, 2007 27. McMurtry, John: “The Cancer Stage of Capitalism”, Pluto Press, 1999 28. Chossudovsky, Michel: “The Globalisation of Poverty and the New World Order”, Global Research (www.globalresearch.ca), 2003 29. Vadillo, Umar:”Esoteric Deviation in Islam”, Madinah Press, 2003 30. Hosein, Imran:”Jerusalem in the Qur‟an”, Masjid Dar Al-Qur‘an, Bay Shore, NY, 2002 31. Kennedy, Margrit:”Interest and Inflation-Free Money – Creating an Exchange Medium that Works for Everybody and Protects the Environment”, New Society Publishers, 2005
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Appendix A – Economics: The Abysmal Science ECONOMICS: The Abysmal Science95 No academic discipline has ever been so thoroughly discredited in such a short period of time as has economics over the past year. Virtually no business, government, or academic economists foresaw what may prove to be the greatest economic meltdown in history. Even though all of the evidence points to a major recession, many economists are still in denial as to the downside risk. Those employed by the Federal Reserve Bank, the U.S. Treasury, the White House, the World Bank, and the International Monetary Fund are among the most inept. They appear to be clueless as to how to deal with the crisis. Then there are the economists who are reporting for The Wall Street Journal, Business Week, Fox News, and CNBC who are little more than Wall Street prostitutes. Ironically, enrollments in college economics courses have soared over the past two decades. An economics degree often provided a ticket to Wall Street. How was it possible for the economics profession to experience such a cataclysmic failure of insight? The answer is really quite simple. Economics is not a science but rather a pseudoscience pretending to be a science. British economist Joan Robinson got right to the heart of the problem in her 1962 book Economic Philosophy when she said, ―Any economic system requires a set of rules, an ideology to justify them, and a conscience in the individual which makes him strive to carry them out.‖ In other words, underlying every sophisticated economic theory and mathematical model lies a political ideology. Since the 1980s the prevailing ideology in economics has been the free market, globalization ideology of University of Chicago economist Milton Friedman. Although Ronald Reagan popularized this ideology in the 80s, it was Bill Clinton and his Secretary of the Treasury Robert Rubin along with Fed Chairman Alan Greenspan who presided over its implementation in the 1990s. They created a regulatory environment which enabled globalization to thrive. George W. Bush was little more than a naïve cheerleader for globalization, who failed to notice when it started to unravel. The problem of economics according to the high priests of the free market can be summarized as follows: Given the distribution of income and wealth, how do we achieve global economic growth in such a manner that we simultaneously allocate resources worldwide in a socially optimal fashion with a minimum of interference by government and organized labor? The underlying premise of this paradigm is that, if consumers, managers, employees, and stockholders do their own hedonistic thing, their interests will converge in the long run and society will evolve toward some form of socially optimal equilibrium. ―This is an ideology to end ideologies,‖ said Joan Robinson. Tinkering with the distribution of income or wealth is strictly taboo. So too is questioning the sustainability of never ending economic growth. The free market, global growth paradigm represents an ideology based on having – owning, possessing, manipulating, and controlling money, people, 95
Thomas H. Naylor, Professor Emeritus of Economics, Duke University http://vermontrepublic.org/economics-the-abysmal-science
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things, places, and even nations. There is absolutely nothing new about economists providing the economic underpinnings to support the prevailing ideology. Since the days of Adam Smith, economists have supplied the rich and powerful with the kinds of answers they wanted to hear. As John Maynard Keynes once said, ―Practical men are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.‖ Today it is hardly surprising that few economists feel any discomfort whatsoever in justifying hedonism. Most of the funding for economic research comes from large corporations and the federal government, both of whom have a strong vested interest in promoting greed so that the economy does not collapse. While posing as objective social scientists, all too many economists are willing to sell their souls to the highest bidder. During the 1990s Wall Street economists and financial analysts created the ultimate, free market, global, money-making machine. Designed to minimize public scrutiny, government regulation, and the possibility of prosecution, this Frankenstein-like monster consisted of a complex international network of hedge funds, derivative contracts, credit default swaps, and exchange-traded funds all based on sophisticated mathematical models. The greed driven maze was supported by a network of interconnected financial institutions linking every country to every other country and everyone to everyone else. It was so complex that literally no one understood how the separate components fit together. Now that the system is broken, neither Wall Street, the Fed, nor the Treasury knows how to fix it. It was simply too big, too unwieldy, too inflexible, and too conducive to mismanagement and fraud to survive. Many believe that the meltdown of the U.S. economy was caused by too much credit and too much easy money. Yet the government‘s strategy for dealing with the problem seems to be more of the same. Thus far none of the government‘s bail-out strategies or stimulus packages seem to be working. Printing money like it was going out of style will not fix the U.S. economy. If China or Japan pulls the plug on their investments in U.S. Treasury bonds, the U.S. government could become insolvent. Economics has long been known as the ―dismal science.‖ We believe this is a complete misnomer. Economics as practiced in the United States today is no science at all, but rather a political ideology disguised as a science. Economics is the ―abysmal science,‖ and that‘s a problem for all of us. As if to prove the abysmality of it all, ―More than 90 percent of economists predict the recession will end this year. That assessment came from leading forecasters in a survey by the National Association for Business Economics,‖ reported USA Today, 27 May 2009. These very same ―leading forecasters‖ who struck out in 2007, predicting that America would escape recession, were at bat again in 2009, predicting an end to what they didn‘t see coming.
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Appendix B – Three Global Growth Scenarios Three economic scenarios, one constraint: debt!96 Past crises, including the explosion of the dotcom bubble, have had greater repercussions on developing economies. In this the first global recession, with, as mentioned, significant transfer of wealth towards emerging markets, it is evident that the advanced economies economic model is flawed – and fundamental problems stemming from the lack of income parity and population demographics are preventing a consumption-led recovery. Given the debt problems the Western world is facing, we have focused our research on the different economic scenarios for the next two years and their implications for asset class allocation. Three scenarios – Decline, recovery or growth?
Bear scenario Our bear scenario suggests we would enter a deflationary spiral as high unemployment and low consumption drive prices ever lower. A second round of home foreclosures in the US would lead to further write-downs on bank balance sheets, and even more government public deficits as the debt transfers from financial institutions to the state through more rescue packages. Under this scenario, the central banks would adopt a method such as that used by the Japanese in 1990, reducing interest rates to 0% to battle with deflation, and they would continue using unorthodox monetary policy such as quantitative easing to replace capital destruction. Avoiding depression is the focus here, though a long and arduous recession can be expected under the bear scenario. But keep in mind that more public debt will reduce room for manoeuvre, as well as being a source of future problems. In other words, the consequence, as with the other two scenarios, is high government deficits.
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―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 27
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Central scenario Our central scenario sees a stabilisation in 2009, with several corrections in financial markets as economic ‗green shoots‘ exaggerate the good news factor from beating expectations. The current deleveraging of financials looks set to have strong and long lasting implications on macroeconomic indicators as GDP growth will likely be limited due to continued balance sheet tightening and restrictions on lending. High levels of unemployment are continuing to take a toll on consumer finances and investment sentiment. But we may see a stabilisation in unemployment figures, and further improvements could confirm that the worst is behind us. However, even as we come out of the recession, governments will be carrying excess debt rescued from financials. Bull scenario Under our bull scenario, we would see a rapid recovery following the rapid descent, combined with inflation as we come out of the recession. The US and emerging markets would return to growth in 2010, leaving Europe to recover shortly thereafter. The combination of growth and inflation would help reduce debt by between 5% and 10% per year. Even under our bullish scenario, debt would be hard to handle, with interest rates dictating how much debt to erase, but also the cost of servicing the debt. This is why we believe there is no easy road to recovery.
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Appendix C – Trends Journal on US Economy and Politics Here is what Trends Journal had to say about the state of the US Economy and politics97: Publisher’s Note: A function of the Trends Journal® and the motto of The Trends Research Institute is ―Think for Yourself.‖ It sounds easy, but it takes will, knowledge and courage. The will to seek, the knowledge to support convictions, and the courage to challenge conventional wisdom, popular opinion and authority. Parents, education and peer pressure have all combined to condition us. In order to think for ourselves, we must first recognize the extent to which we have been, and continue to be, conditioned. We‘ve been taught to think that esteemed economists with intimidating titles from prestigious universities know more about the world of business than anyone else. But, as Thomas Naylor has so ably argued, their abject failure to forecast the worst economic crisis since the Great Depression and its ongoing implications should make anyone an economic agnostic, if not an atheist. The crisis that began with the ―Panic of ‗08‖ was unlike anything that anyone alive had ever experienced. In 2012, it should now be self evident that the broad range of academic, government and media experts did not have the foresight to see what was coming, and therefore should not have been trusted to predict either what would come, or what remedies to prescribe. The economic future being shaped had little to do with economic formulas, principles, algorithms or theories. It had to do with connections; who knew whom. As we had written in our Trend Alert® months before Election Day (see page 6), ―The Wall Street Gang was running the White House.‖ Financiers and politicians controlled the nation‘s purse strings, and every move they made was designed to enrich and empower themselves under the pretext of helping Mr. and Ms. Average American. NEW YORK FED CHAIRMAN’S TIES TO GOLDMAN RAISE QUESTIONS The Federal Reserve Bank of New York shaped Washington‘s response to the financial crisis late last year, which buoyed Goldman Sachs Group Inc. and other Wall Street firms. Goldman received speedy approval to become a bank holding company in September and a $10 billion capital injection soon after. During that time, the New Goldman‘s board and had a Goldman‘s new status as a Reserve policy. (Wall Street
York Fed‘s chairman, Stephen Friedman, sat on large holding in Goldman stock, which because of bank holding company was a violation of Federal Journal, 4 May 2009.)
―Raise questions,‖ reads the WSJ headline. What questions? It couldn‘t be more blatant. Just follow the money. During the Bush years it was the military industrial complex. Billions in no-bid contracts went to firms with inside connections. During the Obama regime it would be the Financial Mafia. Billions would be directly deposited into banks and brokerages of white-shoe Wall Street insiders.
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Quarterly Trends Journal, June 2009, www.trendsjournal.com
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Either way, Halliburton, Kellogg Brown & Root, Lockheed Martin — Citigroup, Bank of America or Goldman Sachs — the bottom line was the same: American taxpayers would have to foot the bill. From Bubble to Bubble to Bubble The printing presses never stopped. Trillions of dollars backed by nothing were magically manufactured. The US government assumed nearly a trillion dollars of debt by mid-fiscal year 2009. It issued $3.25 trillion worth of Treasuries (nearly four times more than floated in 2008), and would chalk up a fiscal deficit equal to 12.9 percent of its GDP. Over the next decade, US interest payments on debt would more than quadruple. How this would be paid was a question cursorily addressed and more often postponed. It was a new variation of the familiar ―bubble‖ scheme, but it was the same old song. The melody line went like this: back in March of 2000 the dot-com bubble burst, wiping out $5 trillion in market value. Recession followed. Rather than let speculators pay for their gambling excesses and swallow their hi-tech losses, the Boys at The Bank, headed by Federal Reserve Chairman Alan Greenspan, created another bubble. This time it was the real estate, leveraged-buyout and merger-and-acquisition bubble. Beginning in 2001, the Fed began flooding the markets with cheap money. With easy access to low interest loans, developers, speculators and consumers went on a borrowing, building and spending spree. If you were tracking trends, looking at facts for what they were and not what you wanted them to be, you would have known the outcome in advance. Like all bubbles, it was doomed to burst. As the real estate market sizzled, we went on record to forecast fizzle. Low interest rates would devalue the dollar. In order to prop it up, the Fed would have to raise rates. High interest rates was the pin that would pop the bubble: ―The real recession antidote was the 46-year low interest rates that set the real estate market on fire and sparked the easy money re-financing boom that led homeowners to tap the equity in their homes, lower monthly payments and go on a spending spree. Pure and simple, it was an interest rate recovery brought on by 13 rate cuts. (―Real Estate Fizz,‖ Trends Journal®, December 2004.) Most who played the game knew the rules. The bubble was not sustainable. But with big money being made, properties being flipped like flapjacks, and real estate prices booming, the players would not face the consequences. As we wrote: ―Similar to the 1929 stock market crash story of Joseph Kennedy knowing it was time to sell when the shoeshine boy gave him stock tips, now legions of job-seeking unemployed have become real estate agents and mortgage brokers, while novice speculators flip properties … all hoping to turn a quick buck.‖ (―Real Estate Fizz,‖ Trends Journal®, December 2004.) At the onset of the ―Panic of ‗08,‖ the Boys at The Bank did it again. With credit lines blocked and equity markets diving, rather than let the biggest speculators eat their losses, the Fed flooded the marketplace with cheap money. But even all-time low interest rates would not staunch the cascade of failing market sectors. Washington stepped into what had formerly been the
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sacrosanct realm of private enterprise. Trillions of taxpayer dollars were pumped into businesses deemed ―too big to fail.‖ A new, unthinkable, unimaginable, unfathomable, unprecedented chapter in American history was written. A new bubble was created; a bubble bigger than all the bubbles ever blown. And when it blew… The ―Bailout Bubble‖ —The Bubble to End All Bubbles KINGSTON, NY, 13 May 2009 — The biggest financial bubble in history is being inflated in plain sight, said Gerald Celente, Director of The Trends Research Institute. ―This is the Mother of All Bubbles, and when it explodes,‖ Celente warns, ―it will signal the end to the boom/bust cycle that has characterized economic activity throughout the developed world.‖ Either unwilling or unable to call the bubble by its proper name, the media, Washington and Wall Street describe the stupendous government expenditures on rescue packages, stimulus plans, buyouts and takeovers as emergency measures needed to salvage the severely damaged economy. ―All of this terminology is econo-babble,‖ said Celente. ―It‘s like calling torture ‗enhanced interrogation.‘ Washington is inflating the biggest bubble ever: the ‗Bailout Bubble.‘ ―This is much bigger than the Dot-com and Real Estate bubbles which hit speculators, investors and financiers the hardest. However destructive the effects of these busts on employment, savings and productivity, the Free Market Capitalist framework was left intact. But when the ‗Bailout Bubble‘ explodes, the system goes with it.‖ The economic framework of the United States has been restructured. Federal interventionist policies have given the government equity stakes, executive powers and management control of what was once private enterprise. To finance these buyouts, rescue and stimulus packages — instead of letting failed businesses fail and bankrupt banks and bandit brokerages go bankrupt — trillions of dollars are being injected into the stricken economy. Phantom dollars, printed out of thin air, backed by nothing ... and producing next to nothing ... defines the ―Bailout Bubble.‖ Just as with the other bubbles, so too will this one burst. But unlike Dot com and Real Estate, when the ―Bailout Bubble‖ pops, neither the President nor the Federal Reserve will have the fiscal fixes or monetary policies available to inflate another. With no more massive economic bubbles available to blow up, they‘ll set their sights on bigger targets. ―Given the pattern of governments to parlay egregious failures into mega-failures, the classic trend they follow, when all else fails, is to take their nation to war,‖ observed Celente. Since the ―Bailout Bubble‖ is neither called nor recognized as a bubble, its sudden and spectacular explosion will create chaos. A panicked public will readily accept any Washington/Wall Street/mainstream media alibi that shifts the blame for the catastrophe away from the policy makers and onto some scapegoat.
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―At this time we are not forecasting a war. However, the trends in play are ominous,‖ Celente concluded. ―While we cannot pinpoint precisely when the ‗Bailout Bubble‘ will burst, we are certain it will. When it does, it should be understood that a major war could follow.‖ But the future would be postponed, as money pumped over the arid financial fields forestalled the inevitable. Financial botanists bedazzled investors and charmed the general public with authoritative ―green shoot‖ descriptions and analyses: -
The frozen credit markets had thawed Shares of financial companies climbed sharply Mortgage refinancing had soared in the US Absent were explanations of how and why these developments would lead to long-term growth and productivity.
The credit market thaw was a result of trillions of bailout dollars, taken from taxpayers, allocated to keep troubled banks afloat. The shares of financial companies spiked because they were showered with free taxpayer money to cover their losses … or to gamble with. With interest rates at historic lows, millions of people were refinancing mortgages to decrease monthly payments rather than use the equity to buy second homes, make improvements, buy cars, go on vacations or retail spending sprees … as they had done in the past. These and other indicators of recovery were, without exception, both shortterm and illusory. ―Green shoots‖ had replaced ―Change we can believe in‖ as the new selfhypnotizing slogan protecting Americans from any contact with reality. And it worked. With strong public approval ratings 100 days into his presidency, Obama radiated confidence. Preaching faith in economic revival, the President proclaimed that his $787 billion stimulus plan, $700 billion bank recapitalization, $70 billion to rescue and take over auto companies, and billions more to other failing industries, ―were starting to generate signs of economic progress.‖ Justifying the record deficits his plans generated, Mr. Obama asserted, ―The last thing a government should do in the middle of a recession is to cut back on spending.‖ Really? Why wasn‘t it ―the first thing a government should do‖? Cutting back was precisely what America, for decades, had been forcing on other countries that had over-borrowed and over-spent themselves into analogous economic crises. In a stroke of magisterial hypocrisy, the crippling austerity measures America had demanded of others did not apply at home. Regardless of who was President, opposition came with the office. Polls have shown that a solid third of voters will oppose whoever is President no matter how well he performs, while another third will support him no matter how badly he performs.
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Therefore, it was conveniently taken for granted by a media majority that the driving force behind the tax protests and tea parties came from the predictable opposition third, characterized as a consortium of paranoid rightwing nuts, Republican diehards, and assorted fringe elements. Rather than acknowledge the movement as a valid indicator of much broader public sentiment, it was written off with a smirk and a shrug, as a blip, a fad, a Fox News production. Delighting in double entendres on ―tea bagging,‖ broadcast personalities and pundits reduced the protests to prankery. It was no such thing. It was a voice that cut across party lines, and ignoring it would prove to be a big mistake. According to the White House, ―The President was unaware of the tea parties.‖ Later, made aware in a ―Let them eat cake‖ moment, President Obama would dismiss the protests as ―unhealthy.‖ The movement was not to be ridiculed or ignored out of existence. History was being made. No living American had ever witnessed such widespread tax protests. However underreported, the 500 protests and tea parties held throughout the nation on April 15th, 2009 can now, in 2012, be recognized as the opening salvo of ―The Second American Revolution.‖ That groundswell of disenchantment was not confined between party lines or locked in rigid ideology. Intelligent citizens everywhere were outraged at being forced to foot the bill for the trillions in government rescue packages, while property, school, and a wide variety of sales, license fee and hassle taxes were dramatically raised or newly levied. Predictably, the media was missing the trend, as was the White House. A year and a half before the first tea party, The Trends Research Institute had forecast ―Tax Revolts‖ would be a major trend. (See ―Tax Revolts,‖ Top Trends 2008, Trends Journal®, December 2007). The protests had been long in the making and had next to nothing to do with President Obama. They were not a right wing GOP movement. We had forecast a tax revolt movement when George W. Bush was President. As we wrote, the protests were a reaction by the ―Coalition of the Cash Strapped‖ being taxed to death. It was clear and straightforward. People were taking to the streets because they couldn‘t make ends meet. The vast majority was not prompted by political agenda or ideology. Saddled with $14 trillion in debt, out of work, under-employed, wages declining, homes being foreclosed at record rates and down on their luck, growing legions couldn‘t pay existing bills, let alone pay more taxes. Others, who had thought their financial futures were secure, saw household wealth fall $8.5 trillion and real estate values fall by $2.5 trillion between 2008 and 2009. What would it take to get these facts and their indisputable implications into the media‘s head? Yes, federal taxes played a role in the tax revolts. There was widespread outrage at taxpayer financed bailouts, buyouts and rescue packages that fell on taxpayer shoulders. There was disgust with paying exorbitant salaries to executives responsible for the failures. Even so, the tea party spark was not lit by Washington. While these grievances were real and did, to some extent, act as galvanizing forces, they were, in a sense, abstract. Those immense Beltway/Wall Street bills would only come due in the future.
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But in 2009, what most infuriated the populace were the state and local tax increases at a time when the great majority were least capable of supporting them. And despite all the talk about ―green shoots‖ sprouting across the US landscape, the economy would continue to wither, and so too would tax revenues. It was a vicious cycle. As tax revenues declined, new tax schemes to squeeze the ―little people‖ were invented, and old ones expanded. Empire America Fading Fast Back in 2002, we forecast that, based on a confluence of emerging trends, not only was the consumer-based US economy unsustainable, Empire America itself would dissolve. (See ―Empire America Fading Fast,‖ Trends Journal®, Fall 2002.) In 2009, this was no longer a forecast, it was fact. You only had to do the math. Federal obligations were at an astounding and irreconcilable $546,000 per household. Not only was it impossible to pay off the debt given the direction the government was going — printing phantom money, out of thin air, based on nothing and producing practically nothing — the debt was foreordained to increase. 2008 tax revenues had plunged 34 percent, and they would plummet further as ―The Greatest Depression‖ set in. Added to the debt load were the unavoidable trillions committed to cover Medicare/Social Security/retirement programs for 78 million aging baby boomers. Those were the inescapable, undeniable numbers. They didn‘t lie. But not only were they not being added up, they were invisible: ―US hopes of ‗green shoots‘ lift confidence,‖ read the 26 May 2009 Financial Times headline.
The following is a quote from foremost Trends Forecaster (Gerald Celente) in the World who has been very accurate about his forecasts since 1980 from stock market crash of 1987, dotcom bubble and first terrorist attack: “Given the pattern of governments to parlay egregious failures into megafailures, the classic trend they follow, when all else fails, is to take their nation to war.”98
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Gerald Celente, Director, Trends Journal Institute, www.TrendsResearch.com
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Appendix D – Wealth Concentration amongst 1,011 billionaires
World's mega-rich adding wealth, Carlos Slim No. 199
Reuters - Thursday, March 11 * Billionaires worth $3.6 trillion, up from $2.4 trillion * Numbers up from 2009, but still short of 2008 * Only second time in 16 years Bill Gates out of top spot By Michelle Nichols NEW YORK, March 10 - Mexican tycoon Carlos Slim is the world's richest person, knocking Microsoft
founder Bill Gates into second spot, as the wealth of the world's billionaires grew by 50 percent over the last year, Forbes magazine said on Wednesday. It is only the second time magazine said, estimating compared to Gates's $53 came in at No. 3
since 1995 that Gates has lost the crown, the Slim's net worth at $53.5 billion, billion fortune, while investor Warren Buffett with $47 billion.
The trio regained $41.5 billion of the $68 billion they had lost the previous year, Forbes said. The number of billionaires around the world has nearly recovered in 2010 after dropping by a third last year during the global financial crisis. There are now 1,011 billionaires, compared with 793 last year and 1,125 in 2008. The net wealth of those billionaires grew to $3.6 trillion from $2.4 trillion last year, but is still down from 2008's $4.4 trillion, according to the 24th annual Forbes list, which took a snapshot of wealth on Feb. 12 to compile its ranking. The average billionaire is now worth $3.5 billion, up $500 million from last year. And the number of women on the list rose to 89 from 72 last year. "The global economy is recovering and it's reflected in what you see in the list this year," Steve Forbes, chief executive of Forbes, told a news conference. "Financial markets have also made an even more impressive comeback from the lows of just about a year ago, particularly in emerging markets." "Asia is leading the comeback," Forbes said. The number of billionaires in the Asia-Pacific region grew by 80 percent to 234 and their net worth almost doubled to $729 billion, which the Forbes ranking
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http://sg.news.yahoo.com/rtrs/20100311/tbs-billionaires-7318940.html?printer=1
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attributed to the area's "swelling stock markets and several large public offerings during the past year." Two Indians round out the top five richest people in the world -- Mukesh Ambani, with a petrochemicals, oil and gas fortune of $29 billion, and steel magnate Lakshmi Mittal, who is valued at $28.7 billion. The biggest gainer on the list was Brazilian mining magnate Eike Batista, 53, with $27 billion, up from $7.5 billion. He made his riches through the initial public offerings of several companies. He is planning to take his shipbuilding and oil services firm OSX public next week in an expected $5.6 billion offering, which would be Brazil's second biggest ever IPO. UNITED STATES, EUROPE LAGGING Of the 97 billionaires making their debut on the Forbes list, 62 are from Asia, while for the first time China is now home to the most billionaires outside of the United States. "The United States still dominates, but the United States is lagging," Forbes said. "It is not doing as well as the rest of the world in coming back." "The global boom that we experienced from the early 80s ... which was temporarily derailed in 2007, now looks like it is beginning to get back on track. But Asia and a handful of others are surging, relatively the United States and Western Europe are lagging." The top homes to billionaires are New York with 60 and Moscow with 50, followed by London with 32. There are 55 countries represented on the Forbes list with billionaires from Pakistan -- clothing exporter Mian Muhammad Mansha -- and Finland -manufacturing mogul Antti Herlin -- making an appearance for the first time, while Turkey, Russia and India regained billionaire numbers lost last year. There were 164 billionaires returning to the list in 2010, including Facebook founder Mark Zuckerberg, who is also the world's youngest with a $4 billion fortune at the age of 25. The second-youngest self-made billionaire is Japan's Yoshikazu Tanaka, 33, who made $1.4 billion from social networking firm Gree <3632.T>. The oldest is 99-year-old Walter Haefner from Switzerland who has $3.3 billion. The sixth-richest man is Oracle Corp Chief Executive Larry Ellison with $28 billion. At No. 7 is the richest man in Europe, Bernard Arnault, CEO of luxury goods group LVMH , who has a fortune of $27.5 billion. "The bling is back," said Forbes Senior Editor Luisa Kroll of Arnault's wealth. Rounding out the top 10 is Spanish clothing retailer Inditex founder Amancio Ortega with $25 billion and German supermarket king Karl Albrecht, who is valued at $23.5 billion.
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While Gates's and Buffett's fortunes far exceed most others in the top 10, Forbes Senior Editor Matthew Miller said their fortunes would be far greater if they hadn't given away a lot of their money. "They would be far richer today if it wasn't for their tremendous philanthropy," he said. "Buffett would be worth at least $55 billion ... and Gates' net worth would exceed $80 billion had it not been for his philanthropy." The Forbes ranking of the world's billionaires can be seen at www.forbes.com/billionaires. (Additional reporting by Elzio Barreto; Editing by Mark Egan and Eric Walsh) (For a list of the top 20 click [ID:nN10142112] (For a newsmaker story on Carlos Slim click [ID:nN10147269] and for a factbox on Slim [ID:nN10139746] Copyright © 2010 Yahoo! Southeast Asia Pte. Ltd. (Co. Reg. No. 199700735D). All Rights Reserved.
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Appendix E – Stages of Deflation and K-Cycle
Surely Winter (Kondratieff Winter or K-Winter) Follows Autumn Below are the stages of deflation:100
Rising productivity and rampant credit expansion led to massive overcapacity
Global wage arbitrage is putting downward pressure on wages and benefits
An enormous bubble in credit lending developed, causing malinvestments and speculation
Speculative credit lending fueled bubble prices in houses and other assets, including the stock market
At some point, housing prices will fall as the pool of stupid buyers exhausts itself. The housing sector will stall
A stalled housing sector will cause rising unemployment and lower demand for goods and services, appliances, eating out, etc., etc., etc
Bankruptcies will rise
Banks will not be willing to extend further credit on assets declining in value, especially to those out of work or nearly underwater on their homes. In fact, appraisals will get tighter at long last
Credit lending will plunge. We have already seen the second consecutive month of declining consumer credit. This is the first time since 1992. There is every reason to believe a reversal is under way. If not now, then soon
Bankruptcies, falling asset prices, and people walking away from mortgage loans is a destruction of credit
If credit counted as inflation on the way up, a destruction in credit MUST be counted as deflationary on the way down
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Shedlock, Michael (2005): K Cycle Trends http://globaleconomicanalysis.blogspot.com/2005/07/great-flation-debate-whats-coming-and.html
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Appendix F – There is an Elite Cabal In Tragedy and Hope, Prof. Carroll Quigley exposed the role of International Banking cabal behind-the-scenes in world affairs. Prof. Quigley had this to say about the banking cabal: ―Ladies and gentlemen, the institution of Central Banking as it is known today has but one commodity it ‗peddles‘ to the world – namely, IRREDEEMABLE, UNBACKED FIAT MONEY. The very nature of irredeemable fiat money regimes – where money is ‗lent‘ into existence with compound interest – is that they are inherently unstable. Fiat money regimes owe their instability to the fact that their growth curves are, by definition, exponential.‖ ―The powers of financial capitalism had another far reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements, arrived at in frequent private meetings and conferences. The apex of the system was the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the worlds‘ central banks which were themselves private corporations. The growth of financial capitalism made possible a centralization of world economic control and use of this power for the direct benefit of financiers and the indirect injury of all other economic groups.‖ 101
The following excerpt is from a letter from the London branch of the banking firm of Rothschild Brothers, dated 25 June 1863 and addressed to the New York bank of Ickleheimer, Morton and Van der Gould – which was quoted by Ezra Pound in his writings, and which gives some indication of both the nature and identity of iceberg of the institutionalised usury which has so deeply affected the characteristics and quality of life in the twentieth century. ―The few who understand the system...will either be so interested in its profits, or so dependent on its favours, that there will be no opposition from that class, while, on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantages that Capital derives from the system, will bear its burden without complaint, and perhaps without even suspecting that the system is inimical to their interests...‖102 It can be concluded from the above quote that from the inception of the ribabased
101 102
system
there
were
people
who
knew
the
benefits
of
this
form
of
Quigley, Caroll (1975): Tragedy and Hope: A History of the World in Our Time Thomson, Ahmed, “Dajjal the Anti-Christ”, revised edition, 2004, Ta-Ha Publishers, UK, p.56
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economic/financial system.
Thus these elite have pushed these agenda through their
institutions of injustice such as central banks, credit-creating money-centre banks, and their global institutions such as BIS, IMF and World Bank. As if that was not enough the people in developing countries have been impoverished further by currency debasement, debt crises and international intrigue as proven by the following quote from the book titled, ―Confessions of an Economic Hitman‖103: ―Economic hit men (EHM) are highly paid professionals who cheat countries around the globe out of trillions of dollars. They funnel money from the World Bank, The US Agency for International Development (USAID), and other foreign ―aid‖ organisations into the coffers of huge corporations and the pockets of a few wealthy families who control the planet‘s natural resources. Their tools include, fraudulent financial reports, rigged elections, payoffs, extortions, sex, and murder. They play a game as old as empire, but one that has taken on new and terrifying dimensions during this time of globalisation. I should know; I was an EHM.‖
103
Perkins, John, “Confessions of an Economic Hitman”, 2004, Plume Publishers, Preface, p. IX
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Appendix G – Central Banks Stoking Market Euphoria Gary Dorsch, SirChartsAlot, Inc. | April 15, 2010 http://financialsense.com/fsu/editorials/dorsch/2010/0415.html With only the slightest degree of hesitation, the Dow Jones Industrials penetrated the psychological 11,000-level this week, extending its historic gains to +70% above its March 2009 lows, and melting away deep-seeded skepticism over whether equities have gone ―too-far, too-fast,‖ in what is the least-loved bull market in history. Yet the bearish skeptics might want tojudge the outlook for the US-economy through the lens of the stock market, rather than vice versa. Just as the decimation of global stock markets in late 2008, erasing $30trillion in market capitalization from the peak in October 2007 was an accurate predictor of just how severe the economic recession would be, conversely, the V-shaped recovery rally since March 2009, recouping more than $15-trillion of market value, is signaling a robust rebound in the global economy. China is the locomotive that‘s pulling the global economy, leading the way at a blistering +12% clip in Q‘1, 2010. While a tsunami of money injections by the G-20 central banks initially fueled the stock markets‘ historic advance, further gains must be earned the oldfashioned way, - through a solid recovery in revenues and earnings. On Wall Street, S&P-500 profits are expected to rebound +37% from a year ago, and so far, that‘s looking like a conservative estimate. There‘s been better-thanexpected numbers by cyclical bellwethers such as CSX Railroad, Intel, UPS, and JP-Morgan, and Fed chief Ben ―Bubbles‖ Bernanke and his band of superdoves, have reiterated that they‘ll keep short-term rates locked at zero percent for an ―extended period‖ of time.
The Fed has its foot pressed firmly on the monetary accelerator, and driving recklessly over the speed limit, favoring faster growth over fighting inflation,
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in order to insure a sustainable recovery that can lead to a noticeable decline in the 9.7% jobless rate. The Fed believes it can help the economy to create new jobs, by simply printing money and stoking euphoria and speculation in the stock market. News that US-employers added 162,000-jobs in March was one of the most encouraging signs that the Fed‘s radical ―quantitative easing‖ (QE) scheme is bearing fruit. With job creation strengthening, US-businesses have restarted to rebuild inventories from record low levels, and according to the Purchasing Manager‘s Index, orders for US-exports soared to its highest level in 21years. Retailers reported growth in sales across a broad spectrum of categories. Behind the scenes, the Fed has kept the stock market rally intact, by funneling $1.75-trillion into the coffers of the Wall Street Oligarchs, and locking down short-term interest rates at zero-percent. Banks have funneled the Fed‘s high-powered money into high-grade corporate (LQD), and junk bonds (JNK, HYG), making the stock market look more attractive. In turn, ultra-low bond yields have prevented any meaningful decline in the stock market, and fueled a parabolic V-shaped recovery. In the next phase of the rally, otherwise cautious investors typically capitulate, by returning to the equity markets, and buying stocks at marked-up prices.
Alongside the booming stock markets, - industrial commodities are also responding to stronger economic growth in China, India, Brazil, and other emerging nations. Speculators are re-engaging the ―yen carry‖ trade, and funding their purchases of industrial commodities at ultra-low interest rates of 0.1%, financed by Japanese brokers. China‘s voracious demand for crude oil, aluminum, iron-ore, copper, and rubber, showed no let-up in March, with imports rising rapidly despite higher prices paid by factories returning to work after the long Lunar New Year holidays. Chinese crude oil imports jumped to 5-million barrels per day in March, their second-highest monthly level on record, and 29% higher than a year ago. Imports of copper surged to 456,000-tons, up 22% from a year ago. Traders
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estimate that the amount of copper in Shanghai warehouses is bulging at 200,000-tons, twice February‘s level. China even recorded a trade deficit of $7.2-billion in March, the first gap since April 2004, with imports surging +66% higher from a year ago. Global crude steel production rose to 108-million tons in February, up 24% from a year earlier, with nearly half the world‘s steel output emanating from China. Capacity utilization for steelmakers worldwide rose to 79.8%, a 15month high and 12% higher than a year ago. Iron-ore, used in making steel, skyrocketed on the Chinese spot market to $167 /ton last week, nearly tripling above last year‘s low. The price of DRAM computer chips in Taiwan have also tripled from a year ago. The explosive rallies in key raw materials, utilized by factories, poses a major inflationary threat to big importers such as China and India, where food and energy account for more than half of the average household budget. So far, the central banks of China and India are still favoring faster growth, over combating inflationary pressures. India‘s wholesale price index is 10% higher than a year ago, and the Bank of India is expected to hike its cash rate a quarter-point to 6% next week.
Despite growing signs of a rebounding US-economy, and healthy profit growth for S&P-500 companies, the propaganda artists hired by the Federal Reserve, continue to paint a gloomy picture of the economy in the media. Fed officials are aiming their gloomy rhetoric at the bond market however, as part of a brainwashing operation, working to keep bond yields locked at artificially low interest rates. ―There are a lot of people who are unemployed. There are a lot of factories that are not producing at full steam, so we have excess slack. There is little inflationary pressure in the economy that is operating well below its potential,‖ said Dallas Fed chief Richard Fisher, on April 13th. ―The pain is still with many of us to be sure, and we are a long way from a full recovery,‖ added Richmond Federal Reserve Bank Jeffrey Lacker. But there is no pain on
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Wall Street. In fact, the hallucinogenic side effects of QE have made any attempt at short-selling the stock market, as futile as trying to submerge a helium filled balloon under water. In the United States, the Dow Jones Commodity Index is hovering +20% higher than a year ago, an early warning signal that inflation will accelerate in the months ahead, regardless of what government apparatchiks say. In theory, signs of a rebounding economy, accompanied by higher commodity prices, should lead to higher Treasury bond yields. But in reality, that hasn‘t been the case. Instead, the Fed has demonstrated its mastery over the Treasury bond market, by locking longer-term bond yields within narrow trading ranges, thru jawboning and stealth QE.
As the Dow Jones Industrials blasts thru the psychological 11,000-barrier, and the S&P-500 Index climbs through the 1,200-level, Fed officials are aware that the stock market rally could short-circuit, and fizzle-out, if Treasury yields are allowed to climb above key resistance levels. Another threat to the stock market, is a possible ―Oil Shock,‖ as crude oil prices surged to $86/barrel this week. Last week, when the US Treasury‘s 10-year yield briefly climbed to 4-percent, a key resistance level, the Fed covertly intervened at the weekly T-note auction, disguised as an indirect bidder, to knock yields lower. Keeping a lid on the pressure cooker is essential, to keeping the euphoria on Wall Street intact. A record 4-to-1 cover at the 10-year auction, convinced short sellers in Treasury notes to scramble for cover, out of fear of the magical powers of the ―Plunge Protection Team,‖ (PPT). Former Fed chief ―Easy‖ Al Greenspan warned on March 27th, that if the Fed and the Treasury want to avoid trouble in the stock market, the 10-year Tnote yield should be capped at 4-percent. ―If the 10-year yield begins to move aggressively above 4%, it‘s a signal that we are in difficulty. There is basically this huge overhang of federal debt, - never seen before. It‘s going to have a marked impact eventually unless it is contained, on long-term rates. That will
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make a housing recovery very difficult to implement and dampen capital investment,‖ he warned. Just hours before the ten-year and thirty-year Treasury auctions, Fed chief Ben ―Bubbles‖ Bernanke, tried to reassure skeptical foreign central banks that the US-budget deficit would not lead to higher inflation. ―Inflation is not really the issue here, because the Federal Reserve is not going to monetize the government debt,‖ Bernanke said. China was a net seller of $61-billion of US Treasury notes over the past four-months, but cash rich buyers from the United Kingdom, picked-up the slack, purchasing nearly $125-billion during the same time period. At the same time however, ―Bubbles‖ Bernanke is playing a shell game, by jigging-up the stock market to sharply higher levels, with ultra-low interest rates. ―The Fed has stated clearly that it anticipates that extremely low rates will be needed for an extended period,‖ Bernanke told the Joint Economic Committee, touching-off a wild buying frenzy on Wall Street. At the same time, primary bond dealers are loathe to lift the Treasury‘s 10-year yield above 4%, without the Fed‘s permission, reckoning the central bank would intervene again, to put a lid on yields.
―If huge amounts of government borrowing push-up bond yields would the Fed then step in and buy a bundle of Treasuries just to hold rates down? I think not,‖ declared Dallas Fed chief Richard Fisher on March 27th. ―Monetizing the debt via Fed purchases of government bonds, inevitably leads to hyperinflation and economic destruction, and the central bank will not be complicit in that action, if it were pressured to do so,‖ Fisher said. ―The markets, fearing the consequences of runaway deficit financing, have bid-up longer-term nominal rates, resulting in a yield curve that is now historically steep. Some of this might reflect an improvement in economic growth, but we cannot turn a blind eye to the effect that growing government indebtedness has on confidence and Treasury yields,‖ he added.
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Traders have bid-up the price of gold, to as high as $1,155 /oz this week, seeing thru the haze of the Fed‘s smoke and mirrors. The fact is, the Fed has already monetized trillions of dollars of new supply, through its QE scheme, and many investors have lost all faith in the anti-inflation resolve of the G-20 central banks, and ultimately, the value of paper money. In fact, the ballooning size of the US Treasury‘s debt, which hit a record $12.8-trillion last month, has been a steady linchpin supporting the historic rally in the gold market over the past decade. As a general rule of thumb, every $1-trillion of fresh debt issued by the Treasury equates with a $125 /ounce increase in the price of gold, regardless of how the Fed is manipulating the federal funds rate or bond yields. As long as the Fed and G-20 central banks continue to peg ultra-low interest rates, and G-20 governments continue to flood the debt markets with huge quantities of IOU‘s, - it translates into monetization, and the trajectory for the gold market would stay bullish.
Situated in a sweet spot, alongside booming global stock markets, and soaring prices for base metals, are the mining companies listed on the Australian Stock Exchange. Carry traders are borrowing Japanese yen, and gaining exposure to the higher yielding Australian dollar, by speculating in Australian mining and natural resources shares. Also fueling the Aussie dollar‘s gains from 77-yen in early February to 87-yen this week are high and rising Australian interest rates, and a surge in the spot price for iron ore, which hit $167 /ton, led by frantic Chinese steelmakers. Recently, Vale, the Brazilian mining giant, said it negotiated a whopping 90% increase in the contract price for iron-ore, with one of its key Asian customers, Sumitomo Metal, Japan‘s third-biggest steelmaker. Australian miners BHP Billiton and Rio Tinto quickly re-negotiated the terms of their iron ore sales, and moved future sales to quarterly contracts, adding to volatility on the spot market. Global demand for iron-ore is expected to reach a record 1-billion tons this year, boosting Australia‘s terms of trade, which is expected to rebound 15%
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this year as higher iron ore and coal spot prices are built into new export contract prices.Iron ore and coal account for nearly 40% of Australia’s exports by value, and price increases for these two commodity exports alone could add $21-billion to the local economy. If Beijing allows the yuan to appreciate against the US-dollar, as expected, it would cut the cost of China‘s imports of commodities, which totaled $244billion in 2009. Last year, China spent 607-billion yuan ($89-billion) on importing crude oil, 343-billion yuan ($50-billion) on iron ore and 206-billion yuan ($30.2-billion) on copper. However, the Chinese ruling elite are fearful, that any revaluation would backfire, by touching off a global stampede of speculators into commodities. Copyright © 2010 Gary Dorsch, SirChartsAlot, Inc. Disclaimer, Bio, Subscription Information, & Editorial Archive contact information Gary Dorsch | Editor, Global Money Trends Magazine | Email | Website
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Appendix H – Banking Cabal Gains from Financial Crises and Wars
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Appendix I – Syed Hoque’s Bio
From the age of 17 Syed has been interested in economic development, engineering and history.
Since 1995 he has developed a keen interest in Islamic
prophecies (sayings of the Prophet (pbuh)) about the times and signs of the appearance of Mehdi, Imposter Christ (Dajjal) and Jesus (alahis salaam), and finding connections in them to global events that are unfolding in politics and finance. By the Grace of Allah Almighty Syed was able to see this crisis coming since the summer of 2003 and has been advising his family and friends to prepare for this eventuality. Even being a US citizen, he took steps to remove himself and his children from that debt-laden country, and immigrated to New Zealand in 2005 to avoid the social unrest that will unfold in the US due to the economic disintegration arising from the coming hyperinflation. This is no less a crisis than the German hyperinflation in the early 1920s which gave rise to fascism and Hitler. Syed holds a B.S. degree in Mechanical Engineering from Columbia University (US), a Master‘s degree in Mechanical Engineering from Texas A&M University (US), an MBA in Finance from Columbia Business School (Columbia University, New York), and pursuing a Ph.D. in Islamic Finance to understand the root causes of crises, and provide remedies for these systemic crises from an Islam perspective. Syed‘s professional career ranges from working as an Associate Consulting Engineer on experimental helicopters at NASA‘s largest wind tunnel facilities in Mountain View (California), to serving as a Sr. Financial Analyst at Hewlett-Packard Company Headquartered in Palo Alto (California), to Sr. Consultant at KPMG Consulting at the same location.
Lately, Syed has been engaged in Islamic Finance Training in
Foundations of Islamic Finance and MicroFinance with SHAPETM Financial Corporation under the sponsorship of The RedMoney Group in Kuala Lumpur.
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