Monday, June 22, 2009

Putting the World to Right

Don’t start me talking, I could talk all night
My mind goes sleepwalking while I’m putting the world to right


                          — Elvis Costello, “Oliver’s Army”

The opportunity for the United States to protect the long-term value of its currency has passed.

The Obama administration has responded to the financial crisis by taking on an unprecedented additional burden of debt, bailing out and buying up shaky banks and financial institutions, and increasing federal meddling in the operations of failing private enterprises. This poison cocktail — an inflated currency plus measures that are all but guaranteed to drive down productivity — is certain to deepen and extend the current recession and generate a run on the dollar before the economy fully recovers.

The rest of the world is beginning to sense that the United States will likely be unable to repay all its debts without degrading the value of the dollar. At some point the creditor nations are going to stop buying new Treasuries as the old ones come due, and when that happens the USA will not have enough dollars to pay off its outstanding notes. Inflation will be the only way out, and the funny money that the Fed has been spreading around for the last three quarters will have to be converted into dollar bills worth substantially less than they are now.

Last week’s meeting of the BRIC nations in Yekaterinburg was a preliminary attempt by the major developing nations to chart a way out of this dilemma. Russia and China hold large amounts of dollar-denominated debt, and are searching for a way to rid themselves of it and find an alternative reserve currency, one which will remain largely untouched when the dollar and the euro finally collapse.

Lula da Silva, the president of Brazil — another member of the BRICs — is confident that his country will be one of the leaders of the new order that emerges from the smoking ruins of American hegemony. According to AFP:

Time for ‘New World Order’: Brazilian President

ASTANA (AFP) — The global financial crisis has reduced the differences between nations and created the opportunity to form a new world order, Brazilian President Luiz Inacio Lula da Silva said Wednesday.

Speaking after a meeting with Kazakhstan’s President Nursultan Nazarbayev in the Kazakh capital Astana, Lula called on the global community to seize on the crisis to create a fairer world for developing nations.

A “fairer world” — what does that mean?

Presumably it means that the various corrupt sinkholes of the Third World will be able to scavenge the corpse of the industrial West with impunity as soon as American protection vanishes.

Or maybe not. Maybe Lula is more high-minded than that, and really does have the interests of the poor and downtrodden at heart.

He went on:
- - - - - - - - -
“I want to say that before the crisis, there were many countries which had greater significance than others, and some countries which had no significance at all,” he said through a translator.

“After the crisis, everyone has become similar. We have the possibility to create a new world order and together we should improve our relations.”

He’s right about that — when the current global fever runs its course, everyone will be similar. But the similarity will likely result from the developing nations becoming more like the Third World, and not vice versa. In a decade or so, after Obama and the European Commission get through with us, we’ll all look like Zimbabwe.

The primary power brokers of the New Order will be Russia and China, if the BRIC discussions are any indication. Russia is much smaller than China, and still quite damaged from seven decades of communism, but given its military and nuclear capability, it manages to wield a lot of clout.

Asia News analyzes the results of the meeting in Yekaterinburg:

BRIC nations (Brazil, Russia, India and China) yesterday ended their historic first summit saying the world needs a more diversified international monetary system that is less dependent on the dollar. Russian President Dmitry Medvedev, who hosted the summit in Yekaterinburg, invited the four emerging nations to “create the conditions for a fairer world order”. But experts observe that their differences still outweigh their common interests.

Their primary common interest is to somehow maintain the value of the assets they hold as the dollar enters its inevitable decline. But it will be very difficult to engineer a new reserve currency without one country having control of it — the yuan, the rupee, the ruble: something has to replace the dollar.

It would be all but politically impossible to pool their various resources and create a new currency that is independent of any one country, at least in the amount of time they have to work with. After all, it took the European Union forty years to birth the Euro, and that was a group of nations sharing a contiguous geography under the military umbrella of the United States.

What happens when Russia and China run into a major dispute about the new currency? Who will mediate between them?

But the pressure is on. Something has to be done, and soon:

The four BRIC countries account for 40% of the world’s population and 15% of the global economy, for which they claim a greater voice and representation in international financial institutions. They said there was a strong need for a stable, predictable and more diversified global monetary system and urged support for a more democratic and just “multipolar” world order. There was no explicit mention of the US dollar or the United States in the statement, but the desire to remove it from the role of dominant international currency is evident.

However, a common vision on immediate steps is lacking. Medvedev called for a “more diversified” monetary system yesterday to reduce dependency on the world’s reserve currency. But China has over 2 billion US dollars in its reserve and does not want the American currency to lose its value now. Instead Beijing is in favour of a progressive extension of Yuan value across neighbouring states: yesterday the Chinese Communist Party’s official newspaper, the People’s Daily, explained in an editorial that the substitution of the dollar with other currencies had already begun through bi- or multilateral agreements between states and that the process will be gradual.

That’s the problem: how to get rid of all those dollars without taking a bath when their value drops.

There are so many players in this game: the Fed, the central banks of all the major countries, the World Bank, and the IMF, not to mention all the international corporations and wealthy speculators who hold large dollar reserves.

They’re playing a high-stakes game of chicken. Nobody wants the value of his stockpile to drop, and nobody wants to be the first to dump dollars.

But nobody wants to go second, either — especially if China or George Soros goes first. Once that happens, the dollar will go into freefall.

Hong Kong is up for grabs
London is full of Arabs
We could be in Palestine
Overrun by a Chinese line
With the boys from the Mersey and the Thames and the Tyne


Hat tips: C. Cantoni and heroyalwhyness.

13 comments:

Zenster said...

BRIC nations (Brazil, Russia, India and China) yesterday ended their historic first summit saying the world needs a more diversified international monetary system that is less dependent on the dollar.

In other words, "One that is more easily manipulated by us two-bit thugocracies."

Russian President Dmitry Medvedev, who hosted the summit in Yekaterinburg, invited the four emerging nations to “create the conditions for a fairer world order”.

"[F]airer", for whom? It will be a cold day in Hell before someone invents a system more 'fair' than the free market economy of ethically administered capitalism.

But experts observe that their differences still outweigh their common interests.

And, so, the weasel's snout pokes out from the bag. What one 'common interest' is so important as to make them set aside their manifest "differences"?

As any good detective will tell you: "Follow the money." You can bet the farm this 'common interest' has nothing to do with humanitarian or spiritual goals.

Zenster said...

The four BRIC countries account for 40% of the world’s population and 15% of the global economy, for which they claim a greater voice and representation in international financial institutions.

Far be it from the BRICs to note that America has less than 5.0% of the World's Population (WP) but manages to constitute almost 25.0% of the global economy. Let's look at the GDP figures: (from Wikipedia, unfortunately).

- In millions of USD -

World GDP = 60,690

China = 4,402
Russia = 1,676
Brazil = 1,573
India = 1,210
_______________
Total = 8,961 @ 40% WP

USA = 14,264 @ >5% WP

With over EIGHT times the population, the BRICS barely manage to make a little more than ONE HALF of America's GDP. Despite how unreliable any GDP numbers are, this still tells us a lot.

In terms of productivity, it would seem as though Americans are almost SIXTEEN TIMES MORE PRODUCTIVE than the average BRIC citizen. Let's look at the international IQ numbers: (again, sadly from Wikipedia).

China = 100 - Rank #11
Russia = 96 - Rank #26
Brazil = 87 - Rank #45
India = 81 - Rank #59
_______________
Average: IQ = 91 - Rank = #35

USA = 98 - Rank = #17

America's average IQ is less than 10% above the BRIC mean. Clearly, overall citizen intelligence does not play a significant role.

Obviously, Americans most certainly aren't sixteen times smarter than BRIC people. So what could be the real drag upon this less productive group?

Could it be the BRIC's blood-sucking Vampire Elite governments?

Let's average out the Transparency International corruption indicies: (low numbers mean less corruption).

- Out of 180 rankings total -

China = 72
Brazil = 80
India = 85
Russia = 147
_______________
Average = 96

USA rank = 18

Now let's examine the "Confidence Range" for the above numbers: (on a scale of 1.0 to 10.0).

China = 3.1 - 4.3
Brazil = 3.2 - 4.0
India = 3.2 - 3.6
Russia = 1.9 - 2.5
_______________
Average = 2.85 - 3.60

USA = 6.7 - 7.7

Qu'ell suprise! America has nearly DOUBLE to TRIPLE the confidence rating of the average BRIC member.

Even omitting cellar dweller Russia, the numbers still come out to:

2.4 - 3.0 vs 6.7 - 7.7

Still well within the TRIPLE range.

What does this tell you about the BRIC countries and their intent or potential impact with respect to influencing any international monetary standard?

Baron Bodissey said...

Zenster --

I have no quibble with your figures, but the issue is not GDP, it is DEBT. America cannot service its debt. Even our GDP is not big enough to do the job.

It's no help living in the largest mansion in town if it's completely mortgaged, and we can't make the payments. Foreclosure is inevitable.

We have two choices: default or inflation. The first is politically impossible, and the second will reduce our GDP in reference to other countries' currencies by 80%-90%.

We are so screwed.

Zenster said...

Baron Bodissey: I have no quibble with your figures, but the issue is not GDP, it is DEBT. America cannot service its debt. Even our GDP is not big enough to do the job.

That's as needs be and I agree with you. Still, one of the best ways to erase debt is by being productive.

Quite clearly, the BRIC nations know diddly squat about being productive even as they salivate about wresting away the dollar's control over international currency.

My only point is that the BRIC nations are wholly incompetent to do anything about the situation, save to make it worse.

Dan said...

In the long run the value of all fiat currencies goes to zero but in the short to mid term the USD will strengthen, perhaps dramatically relative to other currencies and commodities save possibly gold; because gold is money. Our government is hitting the Kool-Aid hard but most Americans aren’t they are starting to save. Switching from negative saving to positive, sky high unemployment, and defaulting on or paying down your debts in a fractional reserve system are all deflationary.

Betting against the dollar now is a good way to get sent home a bit lighter in the wallet.

Baron Bodissey said...

Zenster --

I think I agree with your last point. But our situation is almost as bad.

We have gotten to the point where our productivity is not enough to pull us out of this hole. To make matters worse, Obama -- what with buying automakers, Cap 'n' Trade, socialized health care, expanded powers for the Fed, and just about everything else -- is absolutely determined to run our productivity into the ground.

His administration could not have come up with a more systematic plan to destroy the US economy.

But we would be hard-pressed to produce our way out of this mess, even without Obama sticking a crowbar into the spokes.

Baron Bodissey said...

Dan --

I hope you're right. But given the ratio of dollars owed to currency now in circulation, consumer price inflation is inevitable. It may take a while to kick in, but it is coming. It can't be avoided, as far as I can tell.

People are saving now, but in a couple of years those savings will be worth a lot less.

The brick wall at the end of this comes in about 15 years, when all the unfunded liabilities -- private pensions, Social Security, Medicare, etc. -- come due. Europe, Canada, the USA, and Australia will all be in big trouble by 2025. The ratio of workers to beneficiaries will be 3:1 or 2:1, much worse than now. And, at least in the USA, all of the benefits are inflation-adjusted, meaning that they will be owed in "new dollars", unlike the repayment of China's T-bills.

Henrik Ræder said...

Zenster (on diversified currencies):
In other words, "One that is more easily manipulated by us two-bit thugocracies."

Actually, no. Huge currencies are more prone to manipulation, as we see in the yuan, dollar and the euro. They are large relative to the market, and the market cannot respond very appropriately to the machinations behind them.

Using a variety of currencies (which I think is a Good Idea) would make it much easier for market forces to react to economical stupidity, and that will help keep the leaders honest, at least WRT economics.

The European Union is - from one perspective - the worst offender in this "You can't manipulate us" game. There are 16 states in the eurozone, and some have absolutely awful fiscal policies. As a reaction to that, the free markets would - if the currency markets were free - react by sending those currencies in a tailspin, sending a stark warning to other countries to balance their budgets etc. That's a good mechanism.

Other countries, like Venezuela and Russia, have so large raw material exports that their currencies are surviving in spite of idiotic domestic policies. But it was duly noted in Moscow that their incursion into Georgia caused an immediate flight of capital - probably a more severe punishment than any "unified EU response" and the other BlahBlah our Dear Leaders came up with.

The US dollar is in a special position, too. Its status as 'reserve currency' has permitted endless inflation without a corresponding drop in the dollar. That's peculiar - but could reverse almost overnight in a frentic rout, if some administration came to power on promise on huge budget deficits.

Oh? That happened already? Go figure...

Getting rid of the 'reserve currency' idea altogether is probably a good idea.

Personally, I'd like to see gold return to use for international trade. Unfortunately, the IMF explicitly bans that practice.

Henrik Ræder said...

It will be a cold day in Hell before someone invents a system more 'fair' than the free market economy of ethically administered capitalism.

Yes

Unfortunately, the Federal Reserve does not, in any sensible way, fit into the description "Ethically administered capitalism". It controls - and manipulates - the most important currency on the planet, and it does so to the unilateral advantage of the US, in creating more fiat currency to fund an otherwise obviously unsustainable debt.

The panic we risked this winter seems to have been avoided. But Chinese (and other) investors do obviously not have confidence in the situation, GDP figures be damned.

As for confidence, there is no greater destroyer than systematic inflation.

Austerity is bound to come, one way or another.

Zenster said...

Henrik Ræder: Using a variety of currencies (which I think is a Good Idea) would make it much easier for market forces to react to economical stupidity, and that will help keep the leaders honest, at least WRT economics.

I'm just curious about what sort of monetary confabulation BRIC intends for the world. As the Baron noted:

They’re playing a high-stakes game of chicken. Nobody wants the value of his stockpile to drop, and nobody wants to be the first to dump dollars.

But nobody wants to go second, either — especially if China or George Soros goes first. Once that happens, the dollar will go into freefall
.

One of the only good things about China's extensive US treasury holdings is that they are so huge that such a vast amount of notes simply cannot be sold off fast enough without the trailing end of them being rendered worthless.

Additionally, no other country on earth could possibly absorb all of the US debt that China has amassed. It's sort of like a heroin dealer knowingly taking endless post-dated checks from his best junkie customer. Both are addicted to the easiness of trade even as both simultaneously understand the deeply flawed nature of their arrangement.

Slightly off topic (but not really), it turns out that the top FIVE executive positions in the average large corporation consume NINE PERCENT of its profits. This lopsided CEO compensation, in combination with the cronyism of the usual board of directors good-old-boy network is one of the things that permitted this entire situation to spiral out of control.

The immense greed of those who were able to game the securitized mortgage market is almost unparalleled in history. It is a "me first" mentality writ large that is gnawing at the social fabric of America and the world in general.

A truly amusing observation I ran across noted how American CEOs reveive 300 TIMES the wage of their average workers. This is in contrast to 11 times in Japan and 50 times in Venezuela.

Yet, one still hears America's large corporations piss and moan about how they must pay these exorbitant salaries to secure the best talent.

One question: Where would all of this supposed executive talent shuffle off to were their mammoth paychecks slashed? Further, could anyone less skilled who replaced them do much worse than these supposed titans of industry have done on their watch?

The above observation applies equally to our current crop of politicians, financial wizards and leaders in general. To a man Jack and Jacqueline, these self-interested vultures are as dispensable as single use razors.

We now return you to your regularly scheduled comments.

Henrik R Clausen said...

It is a "me first" mentality

Which I don't mind. Am reading Ayn Rand these days.

Slightly off topic (but not really), it turns out that the top FIVE executive positions in the average large corporation consume NINE PERCENT of its profits.

Which shows off the psychedelic unrealness of the current financial environment.

The immense greed of those who were able to game the securitized mortgage market is almost unparalleled in history.

Greed is a nice, driving force in capitalism. No hard words from my side about making a penny or a million.

However, in an inflationary environment, like in 1921-1929, 1927-1929 in particular, things get messed up big way. People make money on the most incredible business ideas, fast money. Others emulate that and make more fast money - until market returns to sanity, interest rates return to reasonable levels, and the money supply (sensibly) crashes.

If we estimate inflation since the 1920's to be in the range 4000 - 5000 %, the bailout / stimulus packaages of now are roughly an order of magnitude larger than they were in the Great Depression.

Those insane CEO wages are, in a sense, deserved. For it takes that kind of insane money to pick out the winners in an insane financial environment. These people know the woodoo craft of turning huge profits in an inflation-ridden environment.

In a sane world, where production and trade were considered the basis of wealth and income, CEO's would get less. But they'd deserve it more.

Zenster said...

Henrik R Clausen: It is a "me first" mentality

Which I don't mind. Am reading Ayn Rand these days
.

Henrik, I know that you did not do so maliciously, but please do not quote me out of context.

The original quote is:

It is a "me first" mentality writ large that is gnawing at the social fabric of America and the world in general.

I am a staunch supporter of Ayn Rand who has read many of her works and find them inspirational. Human ego is just fine with me but self-absorption to the point of ignoring the social contract is WRONG and EVIL. That is what happens when people put too high a priority upon their own welfare.

We all have a moral obligation to leave this world a better place than when we found it. Me me me me me me me me me me, does not achieve that end.

Greed is a nice, driving force in capitalism. No hard words from my side about making a penny or a million.

Clearly, you do not know the actual definition of "greed".

excessive desire to acquire or possess more (especially more material wealth) than one needs or deserves

avarice: reprehensible acquisitiveness; insatiable desire for wealth (personified as one of the deadly sins)
.

One must EARN whatever wealth they acquire. Greed largely precludes that notion and is unhealthy for all involved. You conflate ambition with cupidity.

Greed is the selfish desire for or pursuit of money, wealth, power, food, or other possessions, especially when this denies the same goods to others. [emphasis added]

Those insane CEO wages are, in a sense, deserved. For it takes that kind of insane money to pick out the winners in an insane financial environment. These people know the woodoo craft of turning huge profits in an inflation-ridden environment.

Ummmm ... no.

These insatiable CEOs are all part of the same system that rationalizes inflationary economics. Rewarding people because they have insinuated themselves into a good-old-boy network better than most others perpetuates the system and penalizes fair players who operate ethically. In essence, you advocate rewarding cronyism and insider trading.

In a sane world, where production and trade were considered the basis of wealth and income, CEO's would get less. But they'd deserve it more.

Then please try to remember that it is the CEOs who have intentionally bred up this insanity that they can capitalize upon the moral and economic turmoil.

It is malfeasance and essentially criminal in nature.

Henrik R Clausen said...

Zenster, I'm not really quoting you out of context, and I think we agree more than it comes across here.

What you were pointing at was the games in the mortgage market. I consider that a consequence of, not a cause of, the real problem:

Systematic, undocumented inflation

These insatiable CEOs are all part of the same system that rationalizes inflationary economics.

Now you quote me out of context...

I just called the financial environment 'insane', didn't I? It is so because it's a bubble driven by inflation, which in turn is created by the Fed. And I think the inflation is what we need to focus on first of all, more than the CEO's who get a greater share of the spoils for enabling their banks to get a greater share of the spoils.

I'm digging through information on the Fed to really understand the system. It would appear that since its creation in 1913, it has removed several traditional safeguards in the financial system, since it now guarantees everything. Here, for one, is their 1933 bulletin stating that banking reserves are really not needed, since we now have the all-wonderful Fed. I found it in an article at Market Sceptics, which argues that the reserves in the US banking system are effectively 0. None. But not to worry, the Fed guarantees everything, right?

How? To a great extent through Open Market Operations.

One quote shows how explictily this is tied to fiat currency and inflation:
Under a gold standard, notes would be convertible to gold, so there would be no open market operations.

The phrase "Systemic risk" comes to mind...

Oh. The ECB just pumped €442 billion 'into the economy' - that is, into the banks - in order to fix the problems. Watch out for more inflation...