Commodity commentary as of January 3, 2011
1) … Commodities, DBC, USCI, seen in this Finviz Screener, with the exception of oil, USO, and gold, GLD, are headed down in dollar terms in the first quarter 2011; but are going to cost more more in local currency terms in Q1 2012. These include SLV, UNG, DBB, JJN, JJC, JJT, CUT, LD, JJU, BAL, JJA, FUE, JO, GRU, COW, FUD, CORN; yes all will be going down in the first quarter.
A Trader Mind relates The Euro Is Pulling Down All Risk Currencies. The failure of world major currencies, DBV, and the emerging market currencies, CEW, and the rise of the US Dollar, $USD, UUP, in September 2011, means that commodities, which are priced in dollars, are going to cost more in local currencies. This inflation is going to moderated some as inflation destruction, stagflation, and deleveraging out of carry trade investments, reduces aggregate demand.
Avoidance of the risk trade, is going to turn Junk Bonds, JNK, lower. The Morgan Stanley Cyclical Index, ^CYC, is trading lower. Debased currencies are unable to support risk and growth.
M3 Financial Analysis presents a chart of commodities, and the Euro. An inquiring mind asks, will a continuing falling Euro, FXE, pull commodities, DBC, lower? And an inquiring mind asks will continuing falling Commodity Currencies, CCX, pull Commodities, DBC, lower? The weekly chart of Commodities relative to Commodity Currencies, … DBC:CCX … shows an Elliott Wave 3 down commenced in September 2011. Unfortunately, people will be INCREASINGLY unable to afford commodities with their cheapened currencies: and commodities, which in non-dollar based countries will see price inflation.
There will come a time when producers of commodities will require more dollars, or require some other currency, or require a barter, as the loss of debt sovereignty of the US becomes pronounced. The failure of debt sovereignty (Italy and Spain), the failure of credit (Brazil and Argentina), banking (Austria), carry trade investing (Poland, Russia, Turkey), trade (Taiwan), political collapse (Egypt), and a run on currencies (India), are currently making currencies less valuable. There will come a time when debt depreciation worsens so severely that the absolute price of commodities will start to increase; this is called hyper inflation or Weimar inflation. Doug Noland reports the currency deflation loss leaders of the year the Turkish lira fell 18.4%, the South African rand 17.9%, the Indian rupee, INR, 15.8%, the Hungarian forint 14.4%, the Polish zloty 14.0%, the Mexican peso 11.7%, the Brazilian real 11.0%, and the Chilean peso 9.9%. Falling currencies, means the end of the risk trade as is seen in the chart of VTI, TUR, EZA, INP, EPOL, EWW, EWZ, VGK; the risk trade in foreign stocks has been turned off.
Expansionary monetary policy is proving toxic to investment in Argentina. Bloomberg reports Argentina To Maintain Cash Supply Growth At Inflationary Pace. Argentina’s central bank plans to keep injecting cash into the economy at the current pace, a move that may further stoke inflation that’s already among the fastest in the world. The bank, in its 2012 monetary program published yesterday, said it aims to expand the M2 money supply, which includes cash plus checking and savings accounts, by 26.4 percent in 2012. This year it targeted 28 percent monetary growth. South America’s second-biggest economy should expand for a 10th straight year in 2012, by between 4.5 percent and 7.5 percent, the bank said.
“The bank is not fighting inflation and there’s a risk of inflation shooting up” if the money supply continues to grow at the current pace, said Fausto Spotorno, an economist at Buenos Aires-based Orlando Ferreres & Asociados in Buenos Aires. Consumer prices in Argentina rose about 25 percent this year, according to private economists. That’s more than any major global economy except Venezuela as President Cristina Fernandez de Kirchner increases government spending to spur consumer demand and boost local production. The government says inflation was running at 9.5 percent in November. “The level of economic activity in 2012 will continue being anchored by a robust internal market” sustained by higher employment, wealth redistribution and public and private investment, the central bank said in the nine-page report. The central bank, which stepped up dollar purchases in recent weeks to absorb revenue the government is forcing exporters to repatriate, said it plans to buy $9 billion in the foreign exchange market in 2012 to prevent excessive peso volatility.
Policy makers have been able to offset decade-high capital flight of $8.4 billion in the third quarter by increasing money supply, which grew 5.9 percent in the 30 days ended Dec. 16, the fastest pace since January, according to central bank data. The bank targeted M2 to reach 322.4 billion pesos ($75 billion) by yesterday.
Argentina, is a debt deflation loss leader as is seen in the chart of ARGT, EWI, EWZ, EWO, EPOL, RSX, TUR, EWT, EGPT. Cristina Fernandez de Kirchner’s flood of money is proving to be “bad money” as it has literally laid wast to Argentine banks as is seen in the chart of IXG, BMA, GGAL, BFR. The only “money good” in the age of deleveraging will be physical possession of gold bullion.
The leverage of stocks relative to commodities has reached another falling point. The chart of US Stocks, VTI, relative to US Commodities, USCI, … VTI:USCI … shows a topping out. And the chart of World Stocks, VT, relative to Commodities, DBC, … VT:DBC, also shows topping out. The death of fiat money is deleveraging not only commodities but stocks, ACWI, but also world government bonds, BWX, as well.
2) … Currencies are now sinking and global financial derisking and deleveraging is underway, with the result that a new dynamo of economic and political action is at work. Political capital is replacing investment capital; diktat is replacing choice as the dynamo in economies and politics.
An inquiring mind asks will deleveraging mean that investment capital will be replaced by political capital? And what will be the nature and way of that political capital?
The word dynamo comes from Greek dynamis, means power, and carries the connotation of an electrical generator.
Regional cooperation and diktat are rising to replace credit and financial deregulation as the dynamos of economic and political organization, now that currencies are sinking not floating.
Murry Rothbard reported that the fiat monetary system began on August 15, 1971, when the US government suspended the convertibility of the US dollar to gold.
Investopedia relates Milton Friedman took an active dislike to the Bretton Woods Agreement, an attempt to fix currencies rather than let them float in free-market fashion. In 1967, Friedman was positive that the British pound was overvalued and attempted to sell it short. He was refused by all the Chicago banks he called and vented his indignation in his Newsweek column, laying out the necessity of floating currencies for both public futures and a currency trading markets. Friedman's articles inspired Leo Melamed of the Chicago Mercantile Exchange to push for the creation of a forex market in 1972. Melamed consulted with Friedman about the probability of Bretton Woods falling apart - an event the viability of the new markets depended on. As Friedman assured Melamed, the Bretton Woods agreement collapsed and one currency after another was given over to float.
Milton Friedman set investors and bankers free. Doug Noland remarked in Safehaven.com that Wildcat Finance And Credit Bubbles have ensued. “Never before had the possibilities for credit creation, and resulting fees and speculative profits, been so unfettered and incentivized. That is, as long as asset prices continue to inflate. Over time, this resulted in "money" and credit becoming dangerously and increasingly detached from real economic wealth and wealth producing capacity. Global central bank balance sheets ballooned uncontrollably, "bad money" took the world by storm. Generally, the goal of the financial entrepreneur was to profit through growth and building enterprise value. However, and especially over the past year, financial power has subtly yet markedly shifted from traditional institutional fund managers, the crowded venture capitalist arena, and the scores of IPO dealmakers to "sophisticated" Wall Street financial players incorporating various forms of financial engineering (typically, variations of "spread trades"). While assets have shrunk and scores of equity mutual funds have been closed, 1,000 new hedge funds are said to have joined the fray as industry assets continue their historic Bubble ascent."
3) … The death of fiat money, that is, the death of fiat currencies, began on September 1, 2011, as the US Dollar, $USD, began to rise from 73.50.
Emerging market currencies, CEW, and world major currencies, DBC, began to turn lower in September 2011, this as stock traders, ACWI, became aware that a debt union had formed in the Euro zone, and when Angela Merkel and Nicolas Sarkozy called for a true European economic government in August 2011 and sold stocks. The order of falling was first stocks and currencies, then commodities as is seen in the chart of ACWI, VTI, EEM, CEW, DBV, DBC,
4) ... Stocks, especially US Stocks small cap stocks, PSCE, PSCM, PSCT, PSCI, PSCD, have had a fourth quarter recovery rally, it was a rally based upon a rising dollar as investors sought safe haven from falling currencies.
The flight to safety in US Dollar stocks and out of other currency stocks is seen in this chart of IWO, AMJ, DVY, REZ, XHB, VGK. This Finviz Screener showcases a number of the dollar rally stocks, many of these were the best performing stocks of the last-quarter, that is the fourth-quarter of 2011 … utility company, DTE, ... education company, EDMC, … chemical company, NEU, … automobile parts manufacturer, AXL, … internet services company, GOOG, … motel REIT, RLJ, ... agricultural equipment manufacturer, CASC, … heavy construction company, DY, … industrial equipment manufacturer, ROLL, … paper company, IP, …. consumer staples company, KMB, … energy pipeline company, KMP, … home builder, MTH, … credit provider, NICK, … apparel store, TJX, … special eatery, SBUX, … railroad, TRN, … communications services provider, AMT, ,... small tools manufacturer, LECO, … health care REIT, HCP, … business services provider, WXS, … tobacco manufacturer, RAI, … health care provider, AGP, … industrial equipment manufacturer, CLC, … networking equipment manufacturer, VSAT, … electrical equipment manufacturer, AME, … industrial distributor, FAST, … automobile dealership, CRMT, … synthetics manufacturer, MTX, … real estate manager, BLK, … money company, WRLD,
US based small cap lenders World Acceptance Corp, WRLD, and Nicholas Financial, NICK, got the “cool aid” investment juice, where as regional banks, KBE, the Too Big To Fail Banks, RWW, Investment Bankers, KCE, and Stock Brokers, IAI, lagged behind in the fourth quarter 2011, as is seen in the chart of WRLD, KBE, RWW, KCE, IAI, NICK, NNI, V, MA.
The hot money flow leveraged up a number of companies which have terrific levels of debt, such as Next Era Energy, NEE, and International Paper, IP, and in doing so is destroying the concept of value investing. When stocks do turn down, the down action will be so strong that companies which received value investing rewards such as Starbucks, SBUX, ball bearing manufacturer, ROLL, and communications company, AMT, will never ever again be worthy of value investing until all investment capital globally is consumed by the 3 of 3 down wave that is coming to stocks world wide.
Outside of the US, value investing has failed as is seen in the case of German Small Caps, GERJ, and Siemens, SI, having collapsed, despite a surging export market, as fears of bank insolvency and sovereign insolvency took all of Europe, VGK, down.
Michael Brush of MSN Money writes one company on the ropes because of debt is Rite Aid, RAD, the third-largest drugstore chain in the U.S., with a big presence in California, New York and Pennsylvania. But despite this promising positioning, the retailer may need a magic pill to survive 2012. It faces problems on several fronts, including a mountain of debt that threatens to bring the house down.
The swell of money into US stocks conveys a false belief that the economy is recovering. Granted there has been an increase in automobile sales and industrial electrical equipment; but sales of washers and dryers are down, resulting in Whirlpool’s, WHR, stock value plummeting, and resulting in Sears, SHLD, having to close up a number of stores. Housing stocks, ITB, XHB, have replaced silver mining companies, SIL, as the prime risk trade. But unlike before, where the funding came through bank financed carry trades, this the dollar risk trade comes from a hot money flow out of Europe and former hot money flow countries seeking a safe haven investment.
Garry White of The Telegraph writes Dollar And Yen Higher In 2011 On Flight To Safety The dollar reasserted itself as the global reserve currency of choice in 2011, despite concerns about US debt.
Worries over borrowing in recent years have seen the dollar weakening, despite successive Treasury Secretaries repeating their mantra that the country has a "strong dollar policy". However, as a lack of safe-haven alternatives and a liquidation of risky assets unfolded, the US currency rallied sharply in the last few months of the year. The dollar index, which tracks the greenback against a basket of currencies, jumped by about 9pc from its lows earlier in the year. Worries over eurozone sovereign debt prompted the dollar gains, as did the removal of the Swiss franc as an alternative safe haven currency in September. The Swiss central bank intervened to dampen the currency's appreciation as the exchange rate hit an export-damaging level. The Swiss National Bank (SNB) set a minimum exchange rate of 1.20 francs to the euro, arguing the current value of the franc was a threat to the economy. To achieve this, the bank said it would buy foreign currency in "unlimited" quantities. In December, speculation mounted that the Swiss would move to weaken its currency further, as data showed that orders at Swiss industrial companies had fallen by about 5pc. However, the SNB did not make such a move. It does, however, remain a possibility for 2012. A couple of weeks ago, UBS said that the SNB's intervention meant that the Swiss franc could no longer be regarded as a safe haven. "As we enter 2012, neither gold nor the Swiss franc retains a safe haven status," Alexander Friedman, Zurich-based chief investment officer at UBS Wealth Management, said. At the start of 2011 UBS said investors considered gold, the franc, the US dollar, US Treasuries and Japanese government bonds as safe havens. Gold, which many believe is an alternative currency, spike to all time highs during August, hitting $1,923 an ounce, but retrenched sharply over the next few months.
The recent flight to safety means that Japanese yen, FXY, is likely to be the best performing currency of the year in 2011, for a second year in a row. The Japanese central bank was also forced to intervene this year, selling yen to protect its exporters. At the end of October, the bank sold $100bn (£64bn) worth of yen. However, dollar strength at the end of the year meant that the Japanese currency weakened against the dollar. As we enter 2012, City strategist expects the dollar and yen to continue to strengthen
Chart of the USD/JPY shows a year end trade of 77.5 up from 75.7 two months ago; its inverse, the JYN hs fallen from 77.9 to 76.5.
The rise of the Yen, FXY, began in July 2011, as investors became aware that a debt union had formed in the EU, and this unwound carry trade investments in stocks world wide, as is seen the chart of FXY, FXE, ACWI, EEM. This funder of investment liquidity, along with US Federal Reserve credit liquidity, has been shut down; and as a result the traditional spigots of investment liquidity are completely shut off and have turned toxic, requiring that investors sell out of once profitable investments.
5) … Failed currencies cannot sustain economic and political life as they are currently known.
Have you ever asked yourself why the Euro, FXE, has not utterly collapsed as of yet? Part of the answer resides in the Der Spiegel report that Banks Bunker Hundreds of Billions in Deposits at ECB: Just before Christmas, the European Central Bank flooded the financial markets with 500 billion euros, a move that may not ultimately have the desired effect of stabilizing banks. Instead of passing that money on in loans to businesses to spur the economy, European banks have redeposited the money with the ECB at low interest rates.
Italian debt costs are shooting back into danger zone. The Independent reports that despite a successful debt auction, Rome's 10-year borrowing costs rise above critical level. Reuters reports that Italy seeks bigger euro fund after tough debt sale. The Daily Mail reports Eurozone debt fears confirmed as Italy auctions off ten-year bonds at 'unsustainable' level. Euro News reports that Italy calls for bigger euro fund after tough debt sale.
Failed currencies reflect sovereign insolvency and banking insolvency. Failed sovereigns and credit depleted financial institutions are unable to support growth and do not provide security and stability. Failed currencies cannot support stocks or commodies. The Equal Weight S&P, RSP, is poised to enter an Elliott Wave 3 of 3 down; these are the most sweeping and dramatic of all down waves, as they take out practically all of the combined wealth built up on the five waves up. The fall in the S&P in 2012 will be most stunning. HSBC reports Chinese PMI is worse than the preliminary estimate of 49.0, at 48.7. This compares with a reading of 47.7 in November and marks the second straight month of contraction. Company inventories of finished goods rose for the first time in 17 months as new business wasn’t enough to offset production, according to HSBC. Chinese Industrials, CHII, rose in the fourth quarter, but are going to resume their decline in 2012 as growth contracts.
Steel manufacturers, SLX, along with Metal Manufacturers, XME, Coal Producers, KOL, Copper Miners COPX, Aluminum Producers, ALUM, and Rare Earth Miners REMX, has been a leading stock market loss leader as is seen in the chart of SLX, XME, KOL, COPX, ALUM, REMX.
Kate Randall of WSWS reports Sparrows Point, Maryland Mill Suspends Steelmaking Operations.
RG Steel began laying off workers at its Sparrows Point, Maryland steel mill December 23 as the company suspended its steelmaking operations. RG Steel, the country’s fourth-largest flat-rolled steelmaker, furloughed over 700 workers last Friday as part of its “cash conservation” efforts. The RG Steel mill, located just south of Baltimore, employs about 1,800 unionized workers. The shutdown comes nine months after RG Steel purchased the mill from Severstal, a Russian company. Severstal had temporarily shut down Sparrows Point in 2010, and the new owners have had difficulty bringing back old customers after reopening the plant. Steel prices fell just as Renco Group, RG Steel’s parent company, took over operations. Renco Group is a New York City based holding company controlled by Ira Rennert. RG Steel also owns plants in West Virginia and Ohio. In the mid-20th century, Sparrows Point was the world’s largest steel mill, employing tens of thousands of workers. Steel produced by Bethlehem Steel, which purchased the facility from the Pennsylvania Steel Company in 1916, was used in the construction of the Golden Gate Bridge in San Francisco and the George Washington Bridge in New York. In the 1960s, the mill produced some 672,000 tons of steel per year. In the ensuing half-century, the plant has changed hands numerous times, being owned by Bethlehem Steel successor company International Steel, then by Mittal Steel, Severstal, and now RG Steel. By the 1970s and 1980s, production had sharply declined due to changes in steel production methods, imports and other factors, and the workforce had dwindled.
Bloomberg reports Commodities Poised for First Annual Decline Since 2008 on Europe. Commodities headed for the first annual drop since 2008, paced by declines in cotton, copper and cocoa, on concern that the European sovereign-debt crisis and a cooling Chinese economy will sap demand for raw materials. Cocoa in New York plunged 31 percent in 2011 on signs of expanding supplies from Ivory Coast, the biggest producer. Cotton, BAL, is down 37 percent this year amid increasing output and dwindling demand. Copper, JJC, often seen as an indicator of economic activity as it is used in construction and automobiles, set for the first losses since 2008. China is the biggest consumer of copper. This decline is seen in the monthly chart of commodities DBC.
6) … As fiat currencies are dying, a new paradigm of regional global governance is emerging.
A paradigm shift is occuring in globalism. The former focus of globalism was for banking and corporate profit; but as nations loose their debt sovereignty and banks are nationalized, the focus of globalism will increasingly be on coordinated governance of corporations and government for regional stability and security.
It was Milton Friedman who provided the Free To Choose script of floating currencies. But now his Banker Regime of Neoliberalism is crumbling. The economic, political, and financial tectonic plates have shifted an an authoritarian tsunami is on the way.
Floating currencies, credit and financial deregulation were the dynamos of the Milton Friedman Free To Choose floating currency and Banker Regime. Now diktat and regional global governance are the dynamos of the Beast Regime of Neoauthoritarianism.
The seigniorage of diktat is rising to replace the seigniorage of fiat money, as the political capital of diktat is rising out of the ashes of the Milton Friedman Free To Choose floating currency known as Neoliberalism.
The economic capital that underwrote democracy is history. Choice is now a epitaph on the tombstone of a prosperous bygone era. The cherished Libertarian concepts of Freedom and Free Enterprise are mirages on the Neoauthoritarian Desert of the Real.
Fate is operating too replace all current political and banking rule with the rule of authoritarians, as evidenced by the appointment of emergency financial managers in Michigan by Public Act 4, and by the appointment of technocratic governors in the EU’s periphery. Destiny is passing the baton of sovereign authority from nation states to the EU ECB and IMF Troika. WSWS reports that Detroit Politicians Are Attempting To Outdo One Another In Eliminating Jobs in order to salvage the city of Detroit. Millionaire Detroit Mayor Bing proposed that Governor Snyder appoint him as an emergency manager to run the city. Bing has called for a 10 percent pay cut for city workers, 1,000 layoffs, and a “voluntary” reduction in benefits on the part of the city’s 22,000 retirees. The city council is calling for even more drastic attacks, including the layoff of 2,300 city workers. An inquiring mind asks, will martial law be declared to deal with a collapse of government in Detroit?
Yahoo Finance chart shows that the most toxic of debt, Michigan Municipal Bonds, MIW, has had a terrific run up since QE1, rising from 6.84 on Dec 8, 2008 to a high of 14.87, far exceeding the gain in Junk Bonds, JNK, and the toxic debt taken in by the US Treasury under QE1, which is approximated in the value of the mutual fund FAGIX. US Central Bank monetary policies and a “flight to safety” out of the Euro, FXE, have boosted the most bad credit to a spectacular level. The debt debauchery practiced central bankers, has run up bad credit to grotesque levels. The monetization of debt by the world central banks is causing the death of fiat currencies, and a most painful deleveraging and derisking out stocks. A strong rise in municipal debt in the 1920s was a leading cause of the 1929 to 1932 depression. This time the depression is going to be so terrific, that a change of governance will be required.
Nature economist and historian Elaine Meinel Supkis writes The Outer Darkness is a very odd place. This is where infinity and zero happen at the same time. And where wishes, when they come true, lead to disaster. If we wish for something and get it, it is really a curse. This odd situation is a paradox that humans refuse to understand. We hate this sort of paradox and want absolutes that always makes us happy. Only, when we get what we want, we are then profoundly unhappy. Why this is so is absolute yet hard to grasp: the challenges of living in difficulties is what makes life ‘living’ rather than an endless moral and mental death! It is boring. It drives us insane.
Outer Darkness has been achieved in the world’s sovereign debt marketplace. Infinity and Zero finally met as the coordinated central provision of Dollar FX Swaps and the ECB’s provision of the LTRO facility has coupled with the US Federal Reserve ZIRP policy and disaster is the result, as the world government treasuries, BWX, is about to enter an Elliott Wave 3 of 3 down: the Global Government Finance Bubble is about to burst big time. Warren Buffet has said that “you only find out who is swimming naked when the tide goes out.”
The growing extend of US Central Bank provisions of Dollar FX Swaps is seen in the Tyler Durden report Fed Swap Lines Jump 59% In A Week As Japan Shows Its Hand. It seems that it is not just the Europeans that are USD cash starved heading into year-end as the Swiss and Japanese gorged themselves on two-week maturity FX swap lines during the last week. The total outstanding under the Federal Reserve's US Dollar Liquidity Swap Operations jumped from $62.599bn to $99.823bn - or more than 59% during the week ending 12/28. Admittedly, the size of the additional Swiss draw-down, $320mm more compared to $75mm the previous week, is a drop in the bucket compared to the ECB's additional $33bn this week. However, the more-than-$9bn additional draw-down by the Bank of Japan perhaps helps explain why USD-JPY cross-currency basis swaps eased so much this week (as the desperate need for USD through this counterparty-risk-exposed form of funding reduced by around 12bps or more than 25%). Perhaps it is time to take a closer look at some of the Japanese banks as while the stigma of borrowing from these lines is talked down, clearly there are funding/liquidity needs that are rising dramatically.
Enter zombification, Damon W Root writes in Reason, “Bernanke describes the Fed’s frantic, flailing, near-panicked actions, especially from September 2008 through the early months of 2009, in calm, measured terms, as “strong and creative measures to help stabilize the financial system and the economy.” This begs the question of whether the Fed’s actions actually did “stabilize the financial system and the economy.” A strong argument can be made that, instead, the Fed’s actions created immense uncertainty and confusion about which commercial banks, investment banks, and other big firms would be bailed out and, if they were to be bailed out, how they would be bailed out. This uncertainty deterred private parties from undertaking the necessary revaluation of assets and from devising new arrangements, including reorganized post-bankruptcy firms, that would be able proceed on a sounder basis, as a rule under new, more prudent managements. In short short, many mortally wounded firms were kept on life support by the Fed, and others clung to the hope that with some creative accounting to carry them for a while, they might ultimately secure a bailout. Think of it as the zombification of High Finance.”
The coordinated central bank Dollar FX liquidity swaps and the ECB’s LTRO facility are a monetary policy that zombifies banks world wide. Zombification brings forth a global moral hazard which temporarily privatizes profits to bankers and permanently socializes losses to all Americans. Mr Durden’s chart shows that the Fed is bailing out banks globally just as before. But this round of moral hazard operations will place debt onto the Fed’s books that will never be repaid. So Americans pay twice, first by having a depreciating dollar, they paid an ongoing inflation premium for oil and all kinds of commodities. Now the Fed is placing carry trade debts that have accumulated at world banks around the necks of every man, woman and child in the US. Zombification via the Fed, the ECB, and a number of world banks means resurrection of the debts of Neoliberalism to be borne under Neoauthoritarianism.
The Coming Crisis relates the Damian Reece, Telegraph report Mario Draghi donned his plague suit on Wednesday and urged European banks to "Bring out your dead". But rather than financial corpses it was €489bn (£408bn) of zombie debt from zombie banks that emerged blinking into the daylight. Far from reassuring markets, the scale of Wednesday's bail-out for eurozone banks by Draghi's European Central Bank (ECB) should simply confirm worst fears. European banks face a €600bn tsunami of debt coming due in 2012 (mostly in the first quarter) and many simply can't pay up because the usual source of refinancing, wholesale money markets, are refusing to lend them any more. Sound familiar? One Northern Rock-style collapse after another would have reverberated around the eurozone over the next three months if the ECB hadn't stepped in with unlimited cash costing 1pc. Almost certainly there would have been a euro-Lehman moment too as a once mighty lender, probably in France, fell over. Draghi has had to ignore any sense of moral hazard and agree to fund weak banks at the expense of strong. He has opened a quantitative easing (money printing) exercise of enormous proportions. Weak banks unable to fund themselves on the open market are now hooked on cheap ECB money. Click here to see a zombie protester, courtesy of PA Staff of the Telegraph.
The act of saving banks is only temporary as Bill Bonner relates: as an “economy becomes more zombified, the part of it dominated by these non-productive industries increases, leaving fewer resources for the productive part. And as the productive part weakens, so does the entire economy’s ability to produce real wealth, or grow its way out of debt.” An inquiring mind asks, have you ever wondered why there have been so many zombie and vampire movies coming out of Hollywood? It’s because the movie writers know something: dead things are rising that will destroy humanity.
Zombification is an alternative for now to liquidation; the debts will never be liquidated; soon the world’s banks will be nationalized; and then their “assets” centralized regionally. These banks will be called the government banks or gov banks for short. And the debts applied to the world’s people.
Zombification of banks makes Libertarians squirm and holler, as it is a form of taxation without representation.
For now, Washington has retained control of the global so called free market order; but the Beast Regime of Neoauthoritarianism is rising up out of the Mediterranean Sea. This monster of statism has seven heads, symbolic of its occupation in mankind’s seven institutions and ten horns symbolic of its rule in the world’s ten regions.
The Beast REgime is being called forth by the 1974 Clarion Call of the Club of Rome for regional global governance, as a means of providing security and stability, in a world of chaos, that is coming from derisking and deleveraging out the Banker Regime of Neoliberalism. The first region of global governance to form is the Asia Region; Before Its News reports New Asian Union Means The Fall Of The Dollar
While Neoliberalism featured wildcat finance, a Doug Noland term, Neoauthoritarianism features wildcat governance, where leaders bite, rip and tear one another, and only the most fierce top dog comes out on top. Markus Salzmann of WSWS reports Hungarian Government Passes Authoritarian New Laws
Throughout history, fate has provided a series of kings and a progression of kingdoms to rule mankind. Freedom and Free Enterprise, the Libertarian dream, has come only recently and existed for a brief period, that is from the end of the Revolution War to the beginning of the Civil War. Fate appointed kings have included Nebuchadnezzar ruling Babylon; Cyrus and Cyrus and Darius ruling Merdo Persia; Charlemagne ruling Rome; Tony Blair ruling Great Britain, and George Bush, The Decider, ruling America with Unilateral Authority. And fate is pushing political and economic power of the UK and the US, the two iron legs of global hegemony, into the hands of ten kings, who will eventually come to rule, each in his own regional power base. With this distribution of power to regions, we see the rising of the Ten Toed Kingdom of regional global governance, where rule in the ten toes will be mired in the clay of democracy and the iron of diktat. The coming President of the EU will be one knowledgeable with the scheme of framework agreements. As credit instruments break down, not by any human action, but rather by fate, the curtains will open, and The Sovereign, and his banking partner, The Seignior, will step onto the world’s stage. In a credit exhausted and currency devalued world, the people will come to place their faith in the word, will, and way of these two; they will give their full allegiance to their diktat.
Richard Fisher in speech on November 8, 2010, before the Dallas Fed, “The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation’s central bank will be monetizing the federal debt. This is risky business. We know that history is littered with the economic carcasses of nations that incorporated this as a regular central bank practice.”
The reproduction of bad money via credit easing policies, QE1, QE2, and now, coordinated central bank dollar FX Swaps, and the ECB's LTRO, have goosed up stocks; but this constitutes global debt monetization, which eventually will destabilize all nations, and is resulting in an economic, and political coup de etat in Europe, whereby, a credible ruler and his banking partner, will rise to power and provide order out of chaos.
The full economic and investment expansion of Bernankeism has been achieved as seen first, in the most toxic of municipal bonds Municipal Bond, Michigan Municipal Bonds, MIW, topping out, and secondly, a steeping of the of US Treasury curve, with the Flattner ETF, FLAT, turning topping out.
“Credit has turned bad”, and lacking any more “money good”, stocks do not have any more central bank juice to keep going. Furthermore with the strong rise of the Yen, FXY, and the fall of the world major currencies, DBV, and CEW, a global collateral shortage has developed, and carry trade loans need to be repaid. Thus the twin spigots of investment liquidity, central bank credit liquidity, and carry trade lending, have not only been turned off, they have turned toxic, and stocks that rose in the fourth quarter 2011, will be turning lower in first quarter 2011.
Investment toxicity will be restimulating an investment demand for gold which is trading around $1,500. The ongoing failure of fiat money, that is ongoing competitive currency devaluation, and rising sovereign debt interest rates globally, will cause disinvestment out of stocks, and deleveraging out of commodities, and be the basis for devolution into diktat. The seigniorage of fiat wealth and fiat money will fail desperately in 2012. The current pullback in gold is nothing more than a correction in a long term bull market as the fundamental backdrop of currency debasement (especially with the recent explosion higher in the size of the ECB balance sheet) has never been greater. Daniel in Investment Watchdog writes currency debasement has been going on feverishly, if behind the scenes, for the past 6 months, and gold is nothing more, or less, than a hedge against monetary dilution. The only form of sovereign wealth in 2012 will be gold bullion. I recommend that one start dollar cost averaging a purchase and possession of gold bullion at this time as gold will be bottoming out and rising higher.
Central bank monetary policy has led to debasement of currencies and is giving rise to regional regional global governance.
The failure of monetary credit will give rise to people placing trust in totalitarian rulers: totalitarian collectivism is the Eurozone’s future where public private partnerships work for the region’s security and stability. An example of this symbiotic relationship is seen in the David S. Cloud, Los Angeles Times report Civilian Contractors Playing Key Roles In U.S. Drone Operations. Relying on contractors has brought companies that operate for profit into some of America's most sensitive military and intelligence operations. "What company do you work for?" Maj. Gen. Timothy McHale demanded of the contractor after he learned that she was not in the military, according to a transcript obtained under the Freedom of Information Act. "SAIC," she answered. Her employer, SAIC Inc., SAI, is a publicly traded Virginia-based corporation with a multiyear $49-million contract to help the Air Force analyze drone video and other intelligence from Afghanistan. America's growing drone operations rely on hundreds of civilian contractors, including some, such as the SAIC employee, who work in the so called kill chain before Hellfire missiles are launched, according to current and former military officers, company employees and internal government documents. Relying on private contractors has brought corporations that operate for profit into some of America's most sensitive military and intelligence operations.
Macquarie Infrastructure Company, MIC, is a type of public private partnership that invests, owns, and operates in a diversified group of infrastructure businesses in the United States. Its businesses comprise the energy-related businesses and an aviation-related business.
Paul Danos provides a listing of PPP in his 2011 Survey of Public-Private Partnerships Worldwide, many of these are based in Spain, France, and Australia and provided creative financing of projects in the Eurozone, so that governments on all levels could conceal debt, enabling the profligate PIGS to enter the EU. All things have a progenitor, I relate that Prince Charles is the Pioneer And King Of Public Private Partnerships. Juraj Mesík writes in European Voice A failure to book public-private partnerships on balance-sheets allows governments to drive a hole through plans to cap deficits.
Destructionism is marked by recession not growth. The fall in Whirlpool’s, WHR, share price is an ominous omen for growth. Growth cannot be sustained in a world of failed sovereigns, that is a world characterized by sovereign insolvency. The Global Government Finance Bubble, BWX, is poised for a strong decline, and Whirlpool, a Morgan Stanley Cyclicals Index component, is leading the way down in a world characterized by disinvestment due to collapsing growth.
The Morgan Stanley Cyclicals Index, ^CYC, peaked the week ending April 25, 2011 at 1131, and closed this week at 874 as seen in this Wiki Invest Chart. The Morgan Stanley Cyclicals Index, $CYC, is down 18% for the year. Not only is growth ending because of the failure of government, it ending because the consumer is exhausted and manufacturers cannot compete when US wage structure is applied to finished goods. On October 28, 2011 CNNMoney reported Whirlpool cutting jobs and closing a plant, and FT reported Whirlpool warns consumer being squeezed. America is witness Destructionism as CNN Money also reported on October 28, 2011 Arkansas city loses two factories in one day. And on October 31, 2011, Suzi Parker and Scott Malone of Reuters reported U.S. manufacturing jobs at risk as demand slows. When Whirlpool Corp closes its refrigerator factory in Fort Smith, Arkansas next year, the plant's 974 workers will lose their jobs. They will not be the only ones who will feel the pain.
An inquiring mind asks what role will asset management companies such as Blackrock, BLK, have in a world of disinvestment, deleveraging and derisking out of the Inflationism that characterized the former Milton Friedman Free To Choose floating currency regime of Neoliberalism. The world is now transitioning into a new regime, the Beast Regime of Neoauthoritarianism, where august leaders such as Angela Merkel, Nicolas Sarkozy and Herman Van Rompuy provide diktat to cope with falling currency values. The ongoing Yahoo Finance Chart of BLK, shows this asset manager has outperformed the S&P, as it has been a safe haven investment for European investors transferring out of the Euro and in the Dollar. Just what service will this asset manager provide in a world that is rapidly moving away from financial services?
North American oil pipeline companies and North American oil companies will play a pivotal role to the Continents’ security and stability in the Age of Destructionism. Daniel Gross of Daily Ticker writes Oil Hits $100 Per Barrel. It’s All About the Pipelines. A host of factors play into the price of a West Texas Intermediate crude demand, global market conditions, the activity of speculators. Evan Smith, co-manager of the Global Resources Fund at U.S. Global Investors believes the recent run-up can be ascribed in part to activity (or the lack of activity) surrounding pipelines.
It's hard to get excited about the tubes that facilitate the movement of crude oil around the country. But pipelines have been in the news in recent weeks. First, the U.S. government decided November 10 to postpone a decision about the proposed Keystone line, which would allow the movement of a large quantity of oil from Canada to the southern U.S. Recently Canadian company Enbridge said it would buy a 50% interest in a pipeline that runs from the huge oil terminal in Cushing, Oklahoma, to the Gulf Coast. As Smith tells me and The Daily Ticker's Aaron Task in the accompanying video, both moves have helped push the price of WTI up.
Here's why. Oil is priced on global markets. But the price can vary depending on where you're buying. WTI, the benchmark commonly used in the U.S., refers to the price of oil at the landlocked Cushing, Oklahoma terminal. Brent crude, the benchmark for oil traded in the U.K., is a much more (excuse the pun) liquid market, and is a better indicator of the global market price. Historically, WTI has traded at a small premium to Brent, in part because Americans guzzled gas as domestic production fell. But for much of the past year, WTI has traded at a huge discount to Brent, of up to $30 per barrel. As Smith explains, that's because demand for oil in the rest of the world is growing far more rapidly in the U.S., while production in the middle of the U.S. has soared, thanks to a boom in oil production in North Dakota. On Wednesday, Enbridge, ENB, said it would buy a stake in a pipeline that runs from Cushing, Oklahoma to the Texas Gulf Coast. The significance is that the company is going to reverse the flow, and start sending oil from the terminal to refiners operating on the coast. In theory, increasing the supply of crude to refiners on the Gulf Coast should bring down the price of oil. "Right now, there's too much oil production in the mid-continent, and not enough capacity to get it to the Gulf Coast," said Smith. But oil used by refiners on the coast can come from anywhere, and is therefore priced closer to global prices than to regional ones. "Now that there is a prospect that some of the oil will get down to the coast, it raises the price closer to global benchmarks," said Smith. In other words, opening up more of the supply languishing in Cushing to refiners who operate on the coasts has the effect of pushing up prices. That's bad news for consumers, on the one hand. But it also means that refiners will buy less foreign oil going forward. That's a short-term impact.
The decision on the Keystone pipeline will have a longer-term impact, and may serve to keep the price of domestic oil and gas high. On Monday, the State Department, responding to environmental concerns raised in Nebraska and elsewhere along the route, said it would defer until 2013 a decision on whether to permit the construction of the pipeline from Canada to the southern U.S. "That's a 600,000 barrel-a-day pipeline that would bring crude down to the Gulf Coast and keep the U.S. well supplied," said Smith. The decision means it is likely that the supply of crude to U.S. refiners won't be as large as previously thought, and that Canadians might look for other routes to export oil production, to Asia, for example. All things considered, the prospect of less supply over the long-term will push prices higher. Smith argues that bringing more crude from Canada is vital to the U.S. market. For even though production is booming in North Dakota and Texas.
Infrastructure companies, electric utilities, XLU, energy companies, XLE, such as Enbridge, ENB, and pipeline companies, DPM, KMP, EEP, EPD, MWE, TLLP, EEP, OKS, WMB, MMP, PAA, APL, seen in this Finviz Screener, will be overseen by stakeholders appointed from government and industry, as political capital, replaces investment capital, to manage the factors of production in the age of diktat. Canadian energy shares, ENY, Canadian Small Caps, CNDA, and Energy Partnerships, AMJ, are going to be strong fallers in the age of deleveraging. Macquarie Infrastructure Group, MIC, will be a major player in the critical realm of public private partnership management of natural resources and commodities for regional security and stability.
Public private partnerships will grow on the local level as well. Florida Governor Rick Scott recently said “Florida is committed to moving forward on important restoration projects like improving water quality in the Everglades. The state and federal governments have invested significant resources, yet we both recognize there is more work to do. We cannot continue to let costly, ongoing lawsuits derail our progress, which is why recently I put forward a strategy that puts the Everglades first. We can all agree that the Everglades ecosystem is the crown jewel of Florida, and it deserves our best efforts to resolve differences and deliver results. The state’s water management districts and the Department of Environmental Protection continue to employ some of the best environmental professionals in the country, and we will look to them to help identify creative, cost-saving solutions that do not impact the districts’ core missions. In addition, we should look to public-private partnerships to help meet our water quantity and quality goals, while keeping land on the tax rolls and agriculture in business”.
Soon out of sovereign armageddon, that is a credit bust and financial system breakdown, leaders will meet in summits to announce regional framework agreements, cede sovereignty to a Federal Europe, establish a fiscal union, provide a committee for fiscal sovereignty, announce austerity measures, institute structural reforms, and impose debt servitude, and provide stakeholder committees from government and industry to provide credit as well as to manage the factors of production via public private partnerships in order to provide for regional security and stability.
The need for regional stakeholder management of the factors of production and provision of credit is seen in the Tyler Durden report of credit evaporation Refinery Crunch In Europe, A few weeks ago we discussed the pressure the Greeks were under to source their energy needs from Iran since no one else would extend them credit. The European credit strain contagion now appears to be spreading rapidly as Europe's largest independent refiner by capacity, Petroplus Holdings AG, is suspending operations at three plants as banks freeze a $1bn revolving loan facility. S&P cut its rating from B to CCC+ citing a sharp deterioration in the firm's liquidity position. As a pure play refiner, meaning it needs to buy all of its crude supplies (on credit obviously) to feed its plants, it seems evident that both vendor- and bank-financing mechansims are starting to clog up very seriously. Bloomberg notes that refining margins are down considerably and we suspect that the closure of the Petroplus plants will help margins implicitly but as headlines show: Petroplus Says Temporary Economic Shutdowns In January and Petroplus Says Restart Depends On Economic Conditions, Credit Available.
Fate is operating to effect a EU wide political, economic and military coup d etat which will result in the death of all forms of economic life. The economic capital of credit and carry trade investing is being replaced with the political capital of diktat. Investment capital is being replaced by technocratic governments which enforce strict fiscal rule demanding even more austerity measures in Ireland and Spain, fiscal tightening to eliminate welfare in Argentina, mandates to eliminate state worker patronage systems in Greece, and structural reforms turning back of national wage contracts throughout Europe.
An inquiring mind has Bernankeism and global central bank monetary policy reached the point of no return? The financial crisis was a natural consequence of extravagant credit policies. Has the world reached another crisis point, that no central bank monetary policy can resolve? Has fiscal profligacy and central bank profligacy reached its toxic tipping point? Has central bank monetary policy only served to zombify banks? Will a sacrifice of sovereignty be required for such credit profligacy?
John Chapman writes in the Daily Capitalist Mises knew, and predicted, that a regime of fiat currencies everywhere in the world would not end well. He asserted at the time that this would lead to an era of unprecedented monetary instability, fiscal profligacy that guaranteed retrograde government policies, depressions, and inevitably, social conflict. Without a sound monetary system to facilitate trade and harmonious cooperation between countries, peaceful and progressive economic order disintegrates.
Mises Institute relates One of the most famous quotations of Austrian economist Ludwig von Mises is that regarding debt deflation which comes via the currency debauchery of central banks, “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.” The US economy is in a downward spiral of debt deflation despite the bold actions of the federal government and of the US Federal Reserve taken in response to the financial crisis that began in 2008 and the associated recession. Although the vicious circle of debt deflation is not widely recognized, precisely what von Mises described is happening before our eyes.
Paul Krugman in NYT article Keynes Was Right communicates that Keynesian policy is not currently being applied in the U.S. and that "...one of these years we might actually end up taking Keynes’s advice, which is every bit as valid now as it was 75 years ago." Sadly this agent of the east coast establishment is believed by countless many. (Hat tip to Robert Wenzel of EconomicPolicy Journal)
Neoliberalism was characterised by a Spirit of the Cat in the Hat, where bankers, national legislators and country presidents waived their magic wands and conjured up prosperity and electric growth. But Neoauthoritarianism is characterized by a Spirit of Wilding, where authoritarian leaders waive clubs and subject people to debt servitude.
7) … A child’s fairy tale explains fiat money
Katherine Thorsteinson writes of the Greenback in The Cause Of Oz. With bimetallism, the monetary unit (NYSEARCA:USD) would have had its value determined by both a measurement of gold and silver. As a result, a fixed exchange rate would have been established between both metals, and supposedly a more stable currency would have subsequently ensued. The debate arose during the economic depression following the Civil War, for which the government had converted from bimetallism to a fiat money currency in order to more easily pay for military costs. After the war, the government opted for a mono-metallic gold standard which led to clashes between gold advocates and silverites. Throughout this entire economic struggle though, it was the land laborers and factory workers who truly found their lives and futures caught up in the unpredictable currents of a storm. It was this group of people, says Littlefield, which L. Frank Baum was allegorically championing in his novel ‘The Wonderful Wizard of Oz’.
In Littlefield’s view, “Oz” is the abbreviated version of ounce, a standard measurement of gold. The Yellow Brick Road symbolizes the gold standard. Dorothy’s silver shoes (though ruby slippers in the film adaptation) represent the Populist’s promotion of a bimetallic standard, offering personal comfort and home security. The scarecrow becomes a simple farmer, the tin man becomes a dehumanized factory worker, and the cowardly lion becomes the impotent politicians of the time. The Wicked Witches of the East and West signify the trade and banking centres of the American East, as well as the oil and railroad tycoons of the American West. Both opposed the bimetallic standard for its potential to devalue the dollar and their financial investments.
On the other spectrum, the Populist Party created a platform uniting land laborers of the south with northern industrial workers. Both sought to alleviate their debts through currency inflation by reverting back to economic bimetallism, and the Good Witches of the North and South stand in for these two working class groups. Many other comparisons have been made by Littlefield and later readers who have been influenced by his ideas.
Some historical scholarship has cast doubt upon these curious interpretations however. For one, it is not clear from Baum’s other literary works, or from the events of his life, that he supported Populism at all. There is also very little textual or historical evidence to suggest that specific political events during the turn of the century share much in common with the story, beyond a few superficial details which only now with hindsight seem beyond coincidence.
With these developments, the following observation made in the novel’s introduction becomes a useful warning to us all: “Folklore, legends, myths and fairy tales have followed childhood through the ages, for every healthy youngster has a wholesome and instinctive love for stories fantastic, marvelous and manifestly unreal.” We should therefore be skeptical of the theories proposed by writers and critics. Perhaps though, if Littlefield has offered us any insight at all, it is that making money is largely a product of make-believe. The standard of our belief, not of gold or silver, is finally and irrefutably what determines the value of the currency we use.
An inquiring mind asks, if the currency in use fails, might diktat be imposed as a currency?
8) … Life under Neoauthoritarianism is characterized by crushing diktat
BBC News reports Fury As Fuels Prices Double As Nigeria Ends Fuel Subsidy
Mike Mish Shedlock relates Obama signs legislation killing the bill of rights, road to tyranny. Larry Wilkerson says National Defense Authorization Act that passed the Senate giving the military power for indefinite detention without trial is a draconian violation of our rights. Ron Paul says defense bill establishes martial law In America
9) … Conclusion … Ongoing competitive currency devaluation will continue to destabilize stocks, commodities and sovereign debt, resulting in the rise of diktat and regional global governance.
Tim Kelly writes in Future of Freedom Foundation article The Debt Crisis and Fiat Money. The best summation I’ve come across of the crisis in the eurozone was given by Charles Biderman, the founder and CEO of TrimTrabs Investment Research writing in 321Gold.
European leaders are searching for a relatively quick and easy way out of the government debt bubble that has been building for decades and just started to burst a few years ago. Unfortunately, there is no quick or easy way out. Debt has to be reckoned with one way or another. It either has to be repaid, or someone has to bear the losses on what cannot be repaid, either through default or inflation and currency debasement. If it were otherwise, everyone could be rich.
The bailouts proposed for the Eurozone do not solve the underlying solvency problem. Instead, they are little more than shell games to shift losses on bad debt from bondholders to taxpayers. Europe’s debt problems were created by excessive borrowing. That much is obvious. But these governments were only able to borrow heavily because the prices of their bonds were kept artificially high by artificially low interest rates. Interest rates can only be kept low through the expansion of the money supply. And this inflation is only possible under a system of fiat money.
Had there been a commodity-based monetary system in place, like the gold standard, there is no way these governments could have borrowed so heavily for so long. Interest rates would have gone up as the supply of loanable funds was depleted, thus discouraging further indebtedness.
The problem is there are no longer any institutional constraints on money creation. When governments enter the credit markets, they don’t have to compete with other borrowers for a finite supply of money, because they can pay off debt by issuing paper money.
Debt monetization sets in motion the destructive process whereby overvalued sovereign debt enables governments to spend more, which creates more debt, which inevitably leads to a fiscal crisis when tax revenues are no longer sufficient to maintain the level of government spending and service of the debt. This is where the governments of Greece, Italy, Portugal, and Spain find themselves today.
The United States bears much of the blame for the European Union’s sovereign-debt problem, because the U.S. dollar is the world’s dominant reserve currency. The monetary policies of foreign central banks are heavily influenced by the Federal Reserve, because they pyramid their currencies on their U.S. dollar reserves. The more dollars the Fed creates, the more money the central banks of the world create.
Fiat money has resulted in a borrowing binge that now must come to an end. The financial writer Gary North made this observation in a recent column: This is hedge fund manager Kyle Bass's assessment of the situation in Europe. He stated this in a rousing interview on the BBC's TV network. He made two crucial points that stock market investors are ignoring. First, over the last nine years, there has been an increase of world debt from $80 trillion to $210 trillion. These numbers are staggering. Global debt over the last nine years has grown at 12% per year, while GDP has grown at 4% per year.While he did not verbally spell out the conclusion for the interviewer, it is this: when credit must grow by 12% per year in order to produce 4% GDP growth, at some point there will not be enough GDP to supply sufficient credit.
It is time once again to quote economist Herb Stein: “When something cannot go on forever, it has a tendency to stop.” While the media’s spotlight is on the eurozone right now, the United States has a sovereign-debt problem that is every bit as serious as Europe’s, perhaps worse, given that the U.S. government is borrowing heavily to maintain not only a domestic welfare state but also a global empire. The country’s national debt is now 100 percent of GDP and predicted to exceed 120 percent by 2015. The situation looks even bleaker when you consider that the federal government’s unfunded liabilities are estimated to exceed $100 trillion ($200 trillion by some estimates).
Since Nixon closed the gold window in August 1971, there has been an explosion in credit and price inflation. The Consumer Price Index has gone up by more than 500 percent while total U.S. debt increased from $9 trillion to over $60 trillion. In that time, the country’s GDP grew from $1.1 trillion to $15 trillion. The US has borrowed $51 trillion over the last 40 years to yield an increase in annual GDP of $14 trillion.
This explosion in public and private-sector debt would not have been possible had the United States remained on the gold standard. Some may argue the inflation was necessary to spur growth, but that is nonsense. Economic growth comes from capital investment, which is only possible if people defer consumption and save. Low interest rates discourage saving and encourage consumption. Whatever growth the U.S. has enjoyed in the last four decades has occurred despite inflation, not because of it.
The fiat-money system has created a corrupt and unstable political economy. The Fed’s ability to monetize government debt (inflation) has enabled the expansion of the parasitical public sector, which now appears to have overwhelmed the productive private sector.
Debt and inflation have distorted the economic structure of the country. The U.S. economy, rather than being based on production financed through equity, is now based on consumption financed through debt. Despite the severity of the federal government’s problems, the country’s political leadership still does not take them seriously. This was made clear by the failure of Congress’s so-called Super Committee to agree on a deficit reduction plan to cut $1.2 trillion in federal spending over ten years. Remember that the budget deficit for 2011 alone was $1.3 trillion. Given that level of deficit spending, “cutting” $120 billion annually for the next ten years will never balance the budget. The country’s fiscal problems will not begin to be addressed until Congress stops borrowing and takes an axe to the federal budget. Congress simply needs to bring spending into line with revenue, which is around $2.3 trillion. That would require cutting spending by $1.5 trillion in a single year. But what is mathematically simple is not necessarily politically simple. Spending cuts of that size will be politically feasible only after there is a radical rethinking of the role of government in our society.
Americans would have to be willing to give up so called entitlements like Social Security, Medicare, and Medicaid, as well as the federal government’s interventionist foreign policy. These programs are outrageously expensive, and there is no way the country can approach fiscal sanity while continuing with them. Brian Moriarty of 321gold puts it succinctly There is $195 trillion dollars of debt in the world but only $150 trillion in assets. That assumes there isn't trillions more of debt hidden in the $600 trillion in derivatives. I suspect the debt may be far higher than anyone anticipates today.
The debt cannot be paid, even if the entire load is dumped like bales of hay onto the backs of the taxpaying camels. The debt must be written off and governments, like corporations and families, must learn to live within their budgets. We cannot float in a sea of debt attached to an anchor of unpaid obligations.
The global economy will only truly recover when governments contract to a fraction of their current gargantuan size. So-called austerity measures need to be implemented and, most importantly, the “too-big-to-fail” megabanks need to be allowed to fail. These institutions are parasitical, corrupt, and obviously incompetent.
Currencies need to be stabilized within a commodity-based monetary system (i.e., gold and silver) and those institutions that devalue them must be shut down. This means abolishing central banking and introducing full-reserve free banking. I do not expect this to happen anytime soon. The global elite are likely to resort to almost anything to preserve their central-banking and fiat-money system. Thus, we are likely to see more inflationary bailout schemes, diversionary international crises, wars, and further encroachments on civil liberties.
My conclusion is that 2011 saw the death of fiat money, that is, the death of fiat currencies, with the rise of the US Dollar from 73.50 beginning in September 2011. In 2012, currencies will continue sinking and global financial derisking and deleveraging will be ongoing taking even the US stocks that rallied in the fourth quarter lower. A new dynamo of economic and political action is at work. Political capital is replacing investment capital. Diktat not choice will rule economics and politics. Soon out of sovereign armageddon, that is a credit bust and financial system breakdown, European leaders will meet in summits to announce regional framework agreements, cede sovereignty to a Federal Europe, establish a fiscal union, provide a committee for fiscal sovereignty, announce austerity measures, institute structural reforms, and impose debt servitude, and provide stakeholder committees from government and industry to provide credit as well as to manage the factors of production via public private partnerships in order to provide for regional security and stability. As credit instruments break down, not by any human action, but rather by fate, the curtains will open, and The Sovereign, and his banking partner, The Seignior, will step onto the world’s stage. In a credit exhausted and currency devalued world, the people will come to place their faith in the word, will, and way of these two; they will give their full allegiance to their diktat. Credit easing by the world central banks has led to the death of fiat currencies, which will in turn result in a flight to a safe haven in gold as fears of banking insolvency and nation insolvency grow greater.