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-GOLD The Canary in the Coal Mine
Before modern ventilation systems, coal miners would often take a caged canary underground with them. In the presence of deadly
gases, the canary would first stop singing and soon die. That was all the evacuation warning early miners needed.
The price of gold is a referendum on the quantity and quality of paper money and, like the canary in the coal mine, it is
signaling a warning: there’s trouble with the dollar reserve standard. Around the world the alert are looking for ways
to abandon it.
Americans have had a pretty good, if undeserved, deal since the end of World War ll.
First the dollar exchange standard buttressed the value of the US dollar as other nations began to hold their reserves in
dollars and issue their own currencies against them – as they once had issued their currencies as a claim check for
The idea was that they could hold these dollars without fear because the dollar would forever be exchangeable for gold held
in the depositories of the United States.
That didn’t last.
The United States issued more dollars than it could possibly redeem at the fixed rates.
In fact, on a single day in March, 1968, private buyers took 400 tons of gold from the London gold pool. With the demand to
exchange dollars for gold beyond containment, in 1971 Nixon closed the gold window and abandoned any pretense of dollar convertibility.
So what has acted as a restraint on the issuance of more dollars since then?
And we know the dollar is slumping. But, did
you know that year-to-date, while the S&P 500 is up 18 percent—a great showing no doubt—gold is up even more.
The precious metal
is up 21 percent. In other words, measured in true, gold-backed purchasing power, stocks have really done nothing this year.
Zip. It is most disappointing.
I try to be optimistic about better earnings, a stock market rally and economic recovery.
And I’m sticking to my guns. But what we’re seeing right now is pretty darn close to what we witnessed in the
1970s—the rise in gold and inflation really cuts into the stock market.
So what’s the way out?
Well for starters, we need a stable dollar to
stop inflationary pressures. And we also need lower tax rates to spur the economy, help it grow, and reduce unemployment.
I’ve been calling this the Mundell-Laffer supply-side solution, after Nobel Prize winning economist Robert Mundell and
my mentor, former Reagan advisor Arthur Laffer. It was put to work with great success nearly thirty years ago to stop stagflation.
It also launched a twenty year bull market recovery.
Put simply, the Mundell-Laffer model exercises monetary restraint to
save the dollar—and low marginal tax rates for economic growth incentives that benefit investors, risk takers, small
businesses and workers. Right now, for therapy, the Fed should begin moving excess cash from the economy and they should raise
their target rate. Take a page from the Reserve Bank of Australia’s playbook and move rates higher.
In addition, the
Treasury ought to get out there and buy these unwanted dollars in the marketplace. Just go out there and bid for them. And
they need to stop printing so much debt from Congress. All this massive spending and borrowing is killing us. We need to be
slashing tax rates on large and small businesses. There’s just no better place to begin job creation. And leave the
Bush tax cuts in place for heaven’s sake.
This supply-side shock therapy would save the dollar. And it would put
real long-term torque into the recovery.
Worldwide trade imbalances have declined by almost half since the recession's
as Asia and the United States emerge from the global economic crisis, Europe appears likely to be the world’s laggard,
threatening a return to the dark days of “Eurosclerosis.” Leaders who once spoke optimistically of fundamental
changes aimed at enhancing productivity have turned to the more prosaic tasks of protecting jobs and avoiding painful political
worse than being back to Square 1,” said Gilles Moëc, a senior economist in London for Deutsche Bank.
And just when it is needed most, the political will
to address Europe’s bigger economic problems seems absent, according to many experts across the region and around the
La crisis complicará equidad social en Latinoamérica
La actual crisis financiera internacional hará más difícil la aplicación
de políticas de equidad social para la integración de los pobres a la economía, advirtieron hoy aquí 17 ex presidentes latinoamericanos.
El documento "Hacia una agenda social para la democracia en América
Latina para los próximos 20 años", que debatieron en Lima 17 ex gobernantes de la región, reconoció que Latinoamérica enfrenta
aún serios problemas económicos y sociales.
países del área tienen instituciones "políticamente débiles" para resolver esos problemas, añadió el informe emanado de la
reunión del Centro Global para el Desarrollo y la Democracia (CGDD), presidida este viernes por el ex mandatario peruano Alejandro
Según los ex gobernantes, algunos líderes
proponen continuar con la promoción del crecimiento y las políticas del Consenso de Washington, que han dejado a las economías
de América Latina mal estructuradas para competir en los mercados mundiales.
Otros gobiernos están tentados a escoger el camino de la confrontación y la demagogia, en la
que el líder, en vez de un proyecto de reforma, se pronuncia a favor del Estado central, afirmaron los ex presidentes latinoamericanos
en el documento.
De acuerdo con los 17 ex mandatarios,
ni el fundamentalismo del mercado ni el populismo autoritario ayudarán a lograr un desarrollo sostenido, equitativo y de largo
plazo y tampoco es probable que profundicen la democracia en Latinoamérica.
When our leaders have no awareness of the disastrous consequences of their actions, they can claim ignorance
and take no action.
Or when our leaders have no hard evidence as to what might happen in the future, they can at least claim
But when they have full
knowledge of an impending disaster … they have proof of its inevitability in ANY scenario … and they so declarein their official reports … but STILL don’t lift a finger to change
course … then they have only one remaining claim:
And, unfortunately, that’s precisely the situation we’re in today: Three recently released
government reports now point to fiscal doomsday for America; and one of the reports, issued by the Congressional Budget Office
(CBO), says so explicitly:
The CBO paints two future scenarios for the U.S. budget deficit and the
national debt. But it plainly declares that fiscal disaster will strike in EITHER scenario. Furthermore …
The CBO states that its fiscal disaster scenarios could cause severe
economic declines for decades to come, including hyperinflation and destruction of retirement savings.
The CBO then proceeds to admit that even its worse-case scenario could
beunderstated by a wide margin due
to panic in the financial markets or vicious cycles that are beyond control.
Separately, in its Flow of Funds Report for the second quarter, the Federal Reserve provides irrefutable
data that we are already beginning
to witness the first of these consequences in the United States: an unprecedented cut-off of credit to businesses and consumers.
Meanwhile, the Treasury Department shows that America’s fate remains,
as before, in the hands of foreigners, with the U.S. still owing them $7.9 trillion!
And despite all this, neither Congress nor the Obama Administration have
proposed a plan or a timetable for averting these doomsday scenarios. Their sole solution is to issue more bonds, borrow more,
and print more without restraint.
That is the epitome of insanity.
Yes, the great government bailouts of 2008 and 2009 have bought us some time … but they have promptly
proceeded to sell us into bondage.
Yes, they have given us safe passage over tough seas … but only to throw our assets onto the global
auction block for the highest bidders.
The one bright spot: Unlike some governments, ours does not conceal the evidence of its folly. Quite the
contrary, the proof pours forth from these three government reports in relatively blunt language and unmistakably blatant
After the job losses in August, things are starting to look bad for the U.S. economy and also
for the banking sector, according to Christopher Whalen, managing director at Institutional Risk Analytics.
Whalen says most observers are drawing
the wrong economic conclusions from the stock market’s robust rally.
“Why is liquidity going into the financial sector? It’s
because the real economy is dying [and] everyone is fleeing into the stocks and bonds because they’re liquid at the
moment,” Whalen says. “That’s not a good sign.”
The banking sector’s assets shrunk by about $300 billion per quarter in the first half
of 2009, a sign of banks hoarding cash in anticipation of additional future losses, according to Whalen. “The real economy
is shrinking because of a lack of credit.”
Whalen also predicts that the shrinkage will continue into 2010, suggesting the banking sector
hasn’t yet seen the peak in loan losses.
Institutional Risk Analytics forecasts the FDIC will ultimately need $300 billion to $400 billion
to recoup losses from its bank insurance fund. (In other words, the $45 billion the FDIC sought to raise last week by
asking banks to prepay fees is just a drop in the bucket.)
“Investors should think about this because the fourth quarter in the banking industry is
going to be a bloodbath,” says Whalen.
He also believes smaller and regional banks like Hudson City Bancorp may come into favor versus
larger peers, which have dramatically outperformed since the March lows.
“When you see the markets rallying when the real economy is shrinking that tells you this
[recovery] is not going to be very enduring,” Whalen says.
In this regard, Whalen finds himself in philosophical agreement with Nouriel Roubini, George
Soros, and Meredith Whitney, among other “prophets of the apocalypse” who’ve once again been raising red
flags in recent days.
Federal Reserve Bank
Whalen´s opinion comes just at the
time that New York Fed President Bill Dudley also expressed concerns about several areas of the U.S. economy, including commercial
real estate. Financial markets are performing better, but on the negative side, and unemployment is way too high.
Dudley, who spoke earlier this week
at Fordham University, said that the recovery will turn out to be “moderate by historical standards,” an outcome
he calls “disappointing” and which will not bring the unemployment rate (currently 9.8 percent) down quickly.
Dudley also said that three restraining
factors are at play: “The shock to household net worth seems likely to have several important implications for
household behavior; the fiscal outlook, as the stimulus is a temporary fix – ‘it’s no fix at all, actually,’-
and banks’ ’still-in-the-dumps’ balance sheets, which makes them capital constrained and hesitant to expand
in the United States is expected to rise well into next year and probably pass the psychological mark of 10 percent.
budget deficit tripled to a record $1.4 trillion for the 2009 fiscal year that ended last week, congressional
The Congressional Budget
Office estimate, while expected, is bad news for the White House and its allies in Congress as they press ahead
with health care overhaul legislation that could cost $900 billion over the next decade.
The unprecedented flood of red ink flows from several factors, including a big drop in tax revenues due to the
recession, $245 billion in emergency spending on the Wall Street bailout and the takeover of mortgage giants Fannie Mae and
Freddie Mac. Then there is almost $200 billion in costs from President
Barack Obama's economic stimulus bill, as well as increases
in programs such as unemployment benefits and food stamps.
The previous record deficit was $459 billion and was set just last year.
Gold prices continued to surge on Wednesday, hitting a fresh record close to $1,050
a troy ounce as investors bet that trading momentum would push the precious metal still higher.
Barclays Capital said gold prices, which have risen 10.3 per cent since the
end of August, could run to as high as $1,500 an ounce if previous technical trading patterns were extrapolated.
“We believe gold has a significant upside potential into 2010,”
the bank said, adding current prices “were off the charts”. In spite of a 40 per cent rally in gold prices since
Lehman Brothers collapsed a year ago, few traders appeared to be taking profits or betting on a price fall.
Reaction against Barack Obama’s “Bail-out Nation” is provoking
the emergence of a coalition of conservatives, libertarians and independents increasingly alarmed over the growth of US national
debt and budget deficits, according to Michele Bachmann, a rising rightwing star of the Republican party.
EVERY TWELVE SECONDS s in America, there is another
foreclosure filing. That's the rhythm of a crisis that threatens to choke off hopes for a recovery in the U.S. housing market
as it destroys hundreds of billions of dollars in property values a year.
There are more than 6,600 home foreclosure filings per day, according to
the Center for Responsible Lending, a nonpartisan watchdog group based in Durham, North Carolina. With nearly two million
already this year, the flood of foreclosures shows no sign of abating any time soon.
If anything, the
country's worst housing downturn since record-keeping began in the late 19th century may only get worse since foreclosures,
which started with subprime borrowers, have now moved on to the much bigger prime loan market on the back of mounting unemployment.
BEIJING — The auto-parts maker Delphi Corp. is headquartered in Troy, Mich., in the heart
of the region that made the United States the car capital of the world. It's a place where the phrase "buy American" is right
Now the 3,000 employees of Delphi's
brake and suspension unit are getting a new boss. Battered by weak sales, Delphi is selling the unit to investors led by a
company named Shougang Corp.
Shougang is a steel
maker owned by the government of China — a government that calls itself communist but espouses a "socialist market economy"
as it marches down globalization's road toward a capitalistic future.
"Everyone's so desperate for cash that the Chinese show up with a checkbook and people say, `Yes, please'," says
Arthur Kroeber, managing director of Dragonomics, a Beijing research firm.
Explosive growth in China and India, coupled with Japan's clout as the world's No. 2 economy,
has long been expected to shift economic power from the United States to Asia as this century progresses. The financial crisis
and resulting Great Recession are accelerating that process.
"China certainly comes out of the crisis stronger rather than weaker, and it's the opposite for the United States,"
says Stephen Roach, chairman of Morgan Stanley Asia.
some Americans have begun declaring this the "Chinese century" since it began nearly a decade ago. But while they and others
fear the rise of China in international relations and the global economy, the reality is less dramatic: Beijing is still getting
its own sprawling, chaotic house in order and is in no position to supplant the United States as global leader in the near
At the same time, Beijing's power
remains undefined: On an unfamiliar global stage, it is unsure what role it wants to play.
There was a hearing
this morning held by the House Financial Services Committee titled, "Reform of the Over-the-Counter Derivative Market: Limiting Risk and Ensuring Fairness." Much of the discussion centered on Committee Chairman Barney Frank's (D-MA) proposal to regulate the derivatives
market, which differs in significant ways from that offered by the Obama administration. I worry that proposed derivatives
regulation misses the mark on a few levels.
Bloomberg has a nice article on that committee hearing, if you want specific details. I'd rather think about the bigger picture and where
derivatives regulation really fits in.
Congress has an awful lot on its plate these days, but fixing the financial system should be
its chief priority, as it's clearly the timeliest. Yet, finance is big and broad. There are lots of different aspects that
politicians might seek to write new rules for. So where should it begin? I think the rather uncontroversial answer is with
whatever causes led to the financial crisis that prompted one of the worst recessions in U.S. history.
far, Congress has done a pretty poor job of adhering to this seemingly obvious strategy: the only financial regulation imposed
so far this year was for the credit card industry. It played absolutely no part in the crisis.
great corporate and financial crises are usually accompanied by spectacular corporate scandals that provide a simple, roughly
accurate storyline for the crisis as a whole. Early in the Great Depression, Franklin D. Rooseveltrailed against the “Ishmael or Insull
whose hand is against every man’s” — a reference to Samuel Insull, whose utilities empire had imploded in
scandal. The Insull story, along with several other scandals, inspired the securities laws of 1933 and 1934 and other important
corporate reforms. Sixty years earlier, the Philadelphia banker and railroad magnate, Jay Cooke, had been the face of the
Panic of 1873.
The current crisis
has been deficient in these terms. In the absence of obvious, hissable villains and a simple story line, the conventional
wisdom seems to focus more on the crisis itself than on its causes, with the Lehman Brothers bankruptcy now viewed as its pivotal
moment. The Lehman story line is worrisome for at least two reasons: it threatens to distract attention from the causes of
the crisis and the story line itself is deeply mistaken.
'World Bank, IMF
Ill Prepared for Financial Crisis'
The World Bank and the International
Monetary Fund (IMF) were ill prepared to tackle the current global economic crisis, a group of Latin American countries said
yesterday. The group comprising Brazil, Colombia, Dominican Republic, Ecuador, Guyana, Haiti, Panama, Suriname, and Trinidad
and Tobago said the institutions lagged behind in their lending capacities.
Represented by the Brazilian Minister of Finance Guido Mantega at the ongoing
Bank/IMF Annual World conference in Istanbul, Turkey, the group said there is a need to reform IMF.
Mantega said: "The
global crisis has shown that the Bretton Woods institutions were ill prepared to face the challenges that arose in 2008 and
2009. Reforms of the IMF, as well as of the World
Bank, were long overdue.
"These institutions were lagging well behind in terms of lending capacity, surveillance, lending instruments and governance.
The need to reform the IMF became unmistakably clear."
a book that seeks to predict
the future for more than a year
In the prelude to his classic
Yesterday, historian Fredrick Allen asked, “Do you remember
what you were doing September 3, 1929?”1 On
a similar note, I ask, do
you remember what you were doing on October 9, 2007? On that day, the Dow would
make its record high of 14,164, and then, echoing 1929, promptly crashed.
Regarding September 3rd, Allen said, “If there was any single day when the wave
of prosperity—and of speculation—which characterized the nineteen-twenties may
be said to have attained its utmost height before it curled over and crashed,
September 3, 1929 was that day.”2
Just as September
marked the end of a long and prosperous era in American history, October 9, 2007
marked the end of another era. While 1929 is associated with the end of the
post-world war economic boom, it brought more than that. Ending the era of
American growth and prosperity as a humble inwardly focused free-market economic
power that began after the end of the Civil War, the transition America embarked
upon following 1929 brought it into a new period of global supremacy as its
economic might ran the world and its suddenly dominant military used the threat
of overwhelming force to keep any and all potential enemies at bay. In the ashes
of the economic depression following 1929, the great American leviathan state
For decades, the federal
government grew steadily larger, consuming more and more of its citizens' time
and resources; Americans weren't solely effected, America became a huge drain on
the world's economy, endangering the quality of life of many of the world's
people. As the saying goes, a trend that can't continue—won't. Though there have
been tremors—the crash of 1987, the Asian contagion of 1997, the tech wreck of
2000, the stock market crash of 2008 is the first direct shockwave we've seen
originating from the giant earthquake that is about to
Just as the fall of
British economy directly led to the worldwide Great Depression of the 1930s, the
conclusive cessation of American economic supremacy is directly responsible for
the coming period of global economic collapse. Just as the decline of both the
value of and the trust in the British Pound led to the Great Depression, the
fall of the American dollar will be the focal point that leads to the
realignment of the international economy and political scene. While figuring out
the precise timing of the oncoming economic depression is nearly impossible, it
is imperative that the dollar be observed, as its further declines are the most
obvious harbinger that the great change is occurring.
October 9, 2007 represented
more than a mere apex for America's economic power, it also marked the end of
the era of big government. From the 1980s onward, America's economic policies
have largely been crafted with a focus on kicking the can as far down the road
as possible when it comes to dealing with policy-maker's untouchable 1000-pound
gorilla: the debt. America's governments have collectively done what they've
could to keep the illusion of a strong economy by artificially increasing the
monetary supply, lowering interest rates to absurdly low levels and by allowing
the outsourcing of key American jobs through a badly misguided “free” trade
policy that has sold off the core of American economic vitality in return for
better relations with our trade partners and guarantees of more funding of our
While it's never smart
against the federal government's ability to find crafty non-solutions that put
off the day of reckoning until after the next election, it appears that America
is just about out of time. With utterly unfundable entitlement time bombs
ticking, America had no margin for error. Then the Iraq War happened, the
banking system was backstopped with trillions of dollars of borrowed money and
stimulus packages were passed without a prayer of funding. We've passed the
Rubicon, the federal government is inarguably bankrupt, and with it, the era of
American supremacy has ended. The world has entered a new era, an era of change
and transformation in which we'll continue to see America rapidly lose its
economic and political power. This book examines how this transformation will
play out, and how we can prepare for its numerous effects.
-- Ian Bezek, October
Chapter 1: America's Decline:
More Like Britain Than Rome
2: So Long, Big
Government: The Imminent Collapse of Global Socialism
3: America: The
World's Greatest Sub-prime Borrower
4: Europe: ...And You
Thought America Was Out Of Luck?
5: China, The Great
Chapter 6: Globalzation
Reversed: The World Isn't Flat After All
Chapter 7: Other Factors:
Oil, Demographics and Global Scarcity
Chapter 8: The Next Five
9: 2035: The World
Through Your Children's Eyes
10: What We Can (And
Krugman: In Trade, ‘It’s Not
the Great Depression — It’s Worse’
Princeton University economist, author and New York Times columnist Paul Krugman won the Nobel Prize in economics last year for
his work on international trade — so the guy knows what he’s talking about when it comes to this subject. And
Paul Krugman. (Getty
First, he offered a few comments about the U.S. economy:
1 - Based on
GDP, “the recession is over, we’re back to a world of growth”
2 - But, “the jobs picture is continuing to deteriorate. The recession may be over, but the bad times are
nowhere near over.”
3 - “This could be bad. Financial crises tend to produce prolonged
hits to growth…and this is the mother of all synchronized financial crises so we almost certainly have a long, long
slog before we’re fully recovered.”
Then, he turned to the topic of world trade. And the picture he painted was not a pretty one.
“When it comes to international trade, actually
it’s not the Great Depression, it’s worse,” he said, presenting charts showing the decline in global trade
activity falling much more steeply in the current downturn than during the Depression.
“The scale of the collapse of world trade has been so large that
it has produced a degree of international linkage that surpasses what even the pessimists imagined,” he said. “World
trade acted as a transmission mechanism,” spreading economic distress “even to those countries that had relatively
healthy financial systems,” such as Germany.
“We really are one world economy in a way that has never been true before,” he said.
Krugman alerta de una caída del
comercio internacional peor que en la Gran Depresión
El premio Nobel de
Economía Paul Krugman advirtió de que, con motivo de la crisis, el comercio internacional ha sufrido su mayor caída, peor
incluso que la de la Gran Depresión, y expresó sus dudas sobre su pronta recuperación.
"En materia de comercio
internacional, esto no es como en la Gran Depresión, es peor", dijo el columnista de 'The New York Times' durante su intervención
en la última jornada del World Business Forum celebrado en Nueva York.
El también economista de la Universidad
de Princeton, que ganó el Nobel precisamente por sus trabajos en esta materia, argumentó que la crisis económica ha ido acompañada
de una fuerte caída del comercio internacional, más aguda que la registrada en la recesión de la década de los treinta y que
además ha contribuido a endurecer los efectos de la recesión.
"El comercio mundial ha actuado como un
mecanismo de transmisión de la recesión, incluso hasta los países con sistemas financieros relativamente saludables", explicó
Krugman, para el que este fenómeno era un claro ejemplo del grado de globalización de la economía.
Reconoció que la
Administración estadounidense se ha comportado como un "estabilizador" y ha evitado un "apocalipsis" desencadenado por una
excesiva ingeniería financiera, que llenó los mercados de un tipo de deuda que es "como la carne picada: Uno no puede saber
realmente lo que se está comiendo en la hamburguesa".
"Basándonos en los datos del PIB (estadounidense),
la recesión ya ha terminado, puesto que hemos vuelto al crecimiento. El riesgo de depresión ya ha pasado, y todos los indicadores
apuntan a la recuperación, pero el mercado laboral sigue deteriorándose, así que la recesión puede haber acabado, pero los
malos tiempos en absoluto", apuntó Krugman.
En ese sentido explicó que normalmente las crisis financieras van acompañadas
de "largos periodos malos" para el crecimiento económico, por lo que "con ésta, que es la madre de todas las crisis financieras
sincronizadas", es previsible que la plena recuperación se haga esperar varios años. Para superar los efectos de la crisis
en el empleo y en el comercio internacional, Krugman rechazó la conveniencia de acudir al proteccionismo de los mercados,
una medida que a menudo se ha dicho que contribuyó a empeorar la situación durante la Gran Depresión.
Jeffrey Sachs, un economista prolífico, que es además autor y profesor
de la Universidad de Columbia, usó palabras inusualmente duras en un discurso el martes para referirse al ex presidente de
la Reserva Federal Alan Greenspan, a quien atribuyó una gran parte de la culpa por la crisis financiera actual.
"La esencia de la caída actual son las finanzas", dijo
Sachs en un discurso en el World Business Forum en Nueva York. "Es una crisis de Wall Street. Una crisis hecha calle abajo",
señaló, y agregó que "si uno observa bajo los escombros uno puede darse cuenta de lo que ocurrió y por qué".
En primer lugar, "un largo brote de crédito fácil defendido
por Alan Greenspan y la Fed fuera de los límites normales de política monetaria", que estuvo acompañado por "una desregulación
casi completa del sector financiero contraria a casi todo lo que sabemos sobre los riesgos de un sistema financiero altamente
"Esto es irresponsabilidad
flagrante", señaló. "Esta no es una cuestión de la filosofía del mercado de uno, simplemente profunda irresponsabilidad".
Sin embargo, agregó posteriormente que la ideología de Greenspan posiblemente era responsable dada su filosofía "Ayn Rand"
de que los mercados se cuidan a sí mismos "hasta que descubrió posteriormente la falla de su teoría".
Sachs también criticó duramente a los gobiernos de los
ex presidentes Bill Clinton y George W. Bush. "Arribamos a este acantilado mediante la agresiva irresponsabilidad de dos Gobiernos
estadounidenses consecutivos", dijo, a los que acusó de ceder ante la presión del mayor grupo cabildero del país: el sector
AIE dice que la crisis financiera bajó hasta un 3% las emisiones de gases
impacto de la crisis financiera y económica internacional en la energía supondrá una reducción de hasta un 3,0 por ciento
de las emisiones de gases causantes del efecto invernadero este año, dijo hoy la Agencia Internacional de Energía (AIE) en
La AIE precisó que se trata del
recorte "más pronunciado en los últimos 40 años" y conseguirá que el volumen de emisiones en 2020 sea un 5 por ciento más
bajo de lo que la agencia multilateral calculó hace doce meses.
...where are the
fingers of instability today? Where are the fault lines that could trigger another crisis? Are there any early warning signs?
I see two possibilities, one positive and one negative.
Chad Starliper sent me the following
graph. It shows the debt-to-GDP ratio for the US, adding in various levels of debt. For instance, the ratio of debt to GDP
for all levels of government debt is 87%. But if you add household and business debt along with the GSE (government-sponsored
enterprises) like Fannie and Freddie, the ratio rises to 331%. If you add in future benefits of Social Security and Medicare,
the number becomes more like 1,000%.
The Obama administration tells us that the government deficit is going to be well over $1 trillion a year for
at least ten years. And that does not take into account the outlier years in the 2020s when the really heavy lifting of Social
Security and Medicare kicks in.
There is a truism that goes a little like, "If something can't happen, then it
won't." Let me make a prediction. We won't have a trillion-dollar deficit in ten years. Why? Because it can't happen. The
market will simply not allow it.
As I have written, we can run large deficits almost forever, as long as the
deficits are less than nominal GDP. While it may not be the wise thing to do, it does not bring down the system.
when you start adding to the deficit in amounts significantly larger than nominal GDP, there is a limit. Each dollar, like
the grains of sand, adds to the potential instability of the system. Is it $2 trillion more? $3 trillion? No one can know,
but the longer it goes, the worse the ensuing financial earthquake will be.
The current political class and their
intentions are dangerously close to killing the golden goose. It is one thing to steal the eggs; it is an altogether different
thing to kill the goose through ignorance of the consequences. And the size of the deficit, for as long as they plan to have
it, will most assuredly kill the goose.
The U.S. faces the
possibility of deflation for the first time since the Eisenhower administration, a threat that may prompt the Federal Reserve
to keep interest rates near zero through next year. Executives at Kroger Co., the largest U.S. supermarket chain, blamed deflation
for a 7 percent drop in earnings in the second quarter, while falling prices for food, gasoline, and electronics left August
sales unchanged at Costco Wholesale Corp. A sustained price drop might set off a chain reaction in which lower profits force
employers to pare wages and payrolls. That would erode consumer demand, exacerbating wage cuts and firings. Such a spiral
led to Japan’s “lost decade” of slow economic growth in the 1990s. A more vicious version in the U.S. helped
create the Great Depression six decades earlier. Bond investors are forecasting retreating consumer prices, as shown by the
yield they demand to hold a one-year bond versus a similar inflation-protected bond.
e la crisis global El premio Nobel de Economía
Joseph Stiglitz salió a golpear a los responsables de la crisis financiera internacional que ha llevado al mundo a la recesión
Como modo de remediar los males
que ha generado el sistema financiero en la economía real, Stiglitz recomendó imponer un impuesto a las transacciones financieras
para evitar el comportamiento disfuncional de los mercados y ayudar a pagar el daño que la crisis ha generado sobre los pobres.
el marco de la Asamblea anual del Fondo Monetario Internacional (FMI) y el Banco Mundial en Estambul, Stiglitz decía: “El
sector financiero contaminó la economía global con activos tóxicos y ahora deben limpiarla”.
Para Stiglitz, dicho
impuesto debería cubrir todo tipo de activos y su recaudación podría destinarse a ayudar a los países pobres que fueron las
víctimas inocentes de la crisis.
En referencia a la decisión del gobierno estadounidense de aprobar un paquete de estímulo
por US$ 700.000 de principios de año, el economista consideró que ello invalida el argumento de que no hay dinero para el
Los principales responsables de la crisis financiera internacional, están claramente identificados. ¿Se
animarán los gobiernos a hacerles pagar por sus culpas?
The current financial
crisis and worldwide recession have abruptly halted a nearly three-decade-long expansion of global capital markets. After
nearly quadrupling in size since 1980, world financial assets—including equities, private and public debt, and bank
deposits—fell by $16 trillion last year to $178 trillion in 2008, the largest setback on record.
research suggests that the forces fueling growth in financial markets have changed. For the past 30 years, most of the overall
increase in financial depth—the ratio of assets to GDP—was driven by rapid growth of equities and private debt
in mature markets. By 2007, the total value of global financial assets reached a peak of $194 trillion, equal to 343 percent
of GDP. But the upheaval in financial markets in late 2008 marked a break in this trend. e lens of global financial assets
and capital flows.
Although the full ramifications of the financial crisis will take years to play out, it is already
clear that the financial landscape has shifted in several ways. Most notably, MGI finds that:
equities accounted for virtually all of the drop in global financial assets. The world's equities lost almost half their value
in 2008, declining by $28 trillion. Markets have regained some ground in recent months, replacing $4.6 trillion in value between
December 2008 and the end of July 2009. Global residential real estate values fell by $3.4 trillion in 2008 and nearly $2
trillion more in the first quarter of 2009. Combining these figures, we see that declines in equity and real estate wiped
out $28.8 trillion of global wealth in 2008 and the first half of 2009.
Credit bubbles grew
both in the United States and Europe before the crisis. Contrary to popular perceptions, credit in Europe grew larger as a
percent of GDP than in the United States. Total US credit outstanding rose from 221 percent of GDP in 2000 to 291 percent
in 2008, reaching $42 trillion. Eurozone indebtedness rose higher, to 304 percent of GDP by the end of 2008, while UK borrowing
climbed even higher, to 320 percent.
Financial globalization has reversed, with cross-border
capital flows falling by more than 80 percent. It is unclear how quickly capital flows will revive or whether financial markets
will become less globally integrated.
Some global imbalances may be receding. The U.S. current
account deficit—and the surpluses in China, Germany, and Japan that helped fund it—has narrowed. However, this
may be a temporary effect of the crisis rather than a long-term structural shift.
Mature financial markets
may be headed for slower growth in the years to come. Private debt and equity are likely to grow more slowly as households
and businesses reduce their debt burdens and as corporate earnings fall back to long-term trends. In contrast, large fiscal
deficits will cause government debt to soar.
For emerging markets, the current crisis is likely to
be no more than a temporary interruption in their financial market development, because the underlying sources of growth remain
strong. For investors and financial intermediaries alike, emerging markets will become more important as their share of global
capital markets continues to expand.
Iran announced late last month that its foreign currency reserves would henceforth be held in
euros rather than dollars
In the most profound financial change in recent Middle East history, Gulf Arabs are planning
– along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies
including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation
Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.
Secret meetings have already been held by finance ministers
and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer
be priced in dollars.
The plans, confirmed to The Independent
by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also
augurs an extraordinary transition from dollar markets within nine years.
"These plans will change the face of international financial
transactions," one Chinese banker said. "America and Britain must be very worried. You will know how worried by the thunder
of denials this news will generate."
The end of the dollar
spells the rise of a new order
It is not hard to see the motivation for oil exporters to move away from the dollar. The value of
the US currency has fallen sharply since last year's meltdown. And fears are growing, in the light of a spiralling US government
deficit, that a further depreciation is likely. They do not want to sell their wares in return for a currency with an uncertain
...the significance of this development goes much further. Since the end of the Second World War the dollar has been the
bedrock of world trade. The pre-eminence of the American currency flowed naturally from the economic dominance of the US.
Virtually everyone traded with America so it made sense to use their currency.
But the US is not the dominant power that it once was. The financial crisis has left it hobbled with
significant government and household debts and sharply reduced prospects for growth. Developing nations such as China, Brazil
and India, on the other hand, have weathered the economic storm significantly better. So while this latest proposal is born
of financial calculation, it is also a reflection of a new economic world order.
We should not be sentimental for the dollar. It makes economic sense for world trade to be conducted
in a variety of currencies. Relying on one only has the advantage of clarity, but it also creates instability if the economy
that underpins it faces uncertain prospects.
Roubini Says Stocks
Have Risen ‘Too Soon, Too Fast’
Nouriel Roubini, who predicted the financial crisis, said stock
and commodity markets may drop in coming months as the gradual pace of the economic recovery disappoints investors.
have gone up too much, too soon, too fast,” Roubini said in an interview in Istanbul on Oct. 3. “I see the risk
of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U- shaped.
That might be in the fourth quarter or the first quarter of next year.”
Stocks have surged around the world in
the past six months as evidence mounts that the economy is emerging from its deepest recession since the 1930s. TheStandard & Poor’s 500 Index has soared 51 percent from a 12-year low
in March while Europe’s Dow Jones Stoxx 600 is up 48 percent. The euphoria contrasts
with warnings from policy makers and investors like billionaire George Soros, who said today that the U.S. economic recovery
will be “very slow.”
U.S. consumers are “overdebted” and the banking system has been “basically
bankrupt,” Soros said in Istanbul. “The United States has a long way to go.”
Group of Seven policy
makers, who met in the Turkish city over the weekend, said prospects for global growth “remain fragile.”
“The real economy is barely recovering while markets are going this way,” Roubini
said. If growth doesn’t rebound rapidly, “eventually markets are going to flatten out and correct to valuations
that are justified. I see a growing gap between what markets are doing and the weaker real economic activities.”
Christina Romer, the head of President Obama's Council
ofAdvisers, already has an answer: pretty darn close
Comparing 1929 with
2007-09, Romer finds the initial blow to confidence far greater now than then. True, stock prices fell a third from September
to December of 1929; but fewer Americans then owned stocks, and prices had risen early in the year. Moreover, home prices
barely dropember 2008 was 17 percent -- more than five times as
large. Both stocks sion mainly reflects,
as Romer argues, countervailing government actions. Private markets for goods, services, labor and securities do mostly self-correct;
but panic, driven by the acute fear of the unknown, feeds on itself and disarms thped. From December 1928 to December 1929, total household wealth declined only
3 percent. By contrast, the loss in household wealth between December 2007 and Decese stabilizing tendencies. In this situation, only government can protect the economy
as a whole, because most individuals and companies are involved in the self-defeating behavior of self-protection.,,
failure to perform this role in the early 1930s transformed recession into depression. That changed when newly inaugurated
Franklin Roosevelt closed all banks on March 5, 1933.
Something analogous Happened over the
past year. Scholars will debate which interventions -- the Federal Reserve propping up a failing credit system, the Troubled
Assets Relief Program, Obama's "stimulus" plan and bank "stress test" -- counted most. Regardless, they allaimed
to reassure people th the free fall would stop and thereby curb the fear perpetuating the free
fall. Confidence had to be restored so the economy's normal recovery mechanisms could operate. This seems to have happened.
By last month, the consumer confidence index had rebounded to 53.1. Housing prices had stopped falling. By the Case-Shiller
index, they've increased for three months. Many were already shut, having suffered massive withdrawals
by terrified depositors who feared their funds would be lost. Yet when banks reopened in mid-month, Americans redeposited
most of that money. The reason was not just Roosevelt's first calming fireside chat ("It is safer to keep your money in a
reopened bank than under the mattress"), argues a study by economist William Silber of New York University. FDR's pledge was
credible because the Federal Reserve was authorized to supply currency to any reopened bank equal to 100 percent of its deposits.
But this improved confidence is not optimism. It is the absence of terror. The consumer sentiment index
is still weak. Unemployment (9.8 percent) is abysmal, the recovery's strength unclear. Here, too, there is an echo from the
1930s. Despite bottoming in 1933, the Depression didn't really end until World War II. Government didn't ensure
recovery. Some policies helped, some hurt. The good news today is simply that the bad news is not worse.
Whenever you find you
are on the side of the majority, it is time to pause and reflect
--- Mark Twain
We have never observed
a great civilization with a population as old as the United States will have in the twenty-first century; we have never observed
a great civilization that is as secular as we are apparently going to become; and we have had only half a century of experience
with advanced welfare states...Charles Murray
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