March 30, 2009
Agence France Press
Russia and China are coordinating proposals on a new global currency that could replace the US dollar as a reserve currency to prevent a repeat of the global economic crisis, the Kremlin said on Monday. "We have received proposals from our colleagues in China, detailed proposals," President Dmitry Medvedev's top economic adviser Arkady Dvorkovich said. "Our positions are very similar. "We have similar positions on the development of the international financial architecture," he told reporters. Ahead of the Group of 20 summit in London later this week, the Kremlin has published a raft of proposals to overhaul the global economic order, including plans for a supra-national currency that could replace the US dollar. China has come forward with similar ideas. US President Barack Obama has said he does not see why the dollar should be replaced and British Prime Minister Gordon Brown said the summit would have more immediate issues to discuss. "So far, not everybody is ready for that," acknowledged Dvorkovich. "We will insist on that at all levels." Medvedev has said the international community should have a say when the world's richest countries make decisions with global implications, as in the US financial crisis, sparked by the collapse of the market for subprime or higher risk mortgages. Moscow also understood however, that many countries were not ready to undertake additional "political obligations," said Dvorkovich, expressing hope that major economies would at least be open to consultations on the subject. Dvorkovich said he hoped Russia and other major developing economies would also get an equal say and the attention they deserve during the G20 meeting. "We are hoping that our voice will be heard but I would like to stress that we do not have a desire to pit our voice against that of our partners," he said, referring to developing economies Brazil, India and China who join Russia in what is known collectively as 'BRIC.' "There will be no separate joint (BRIC) communique, nor should there be," Dvorkovich said. "This is the summit of the leaders of the G20 countries." Critics have suggested China and the United States, whose economies are closely intertwined, would likely steal the show by promoting their own agenda and turning the G20 forum into a 'G2' summit. Dvorkovich said the US and China would have ample time to discuss bilateral issues on the summit's sidelines. Separately, Dvorkovich said Medvedev would meet Australian Prime Minister Kevin Rudd on April 1, just before the summit. Medvedev was also scheduled to meet US President Barack Obama, China's Hu Jintao and Britain's Brown that day.
Tuesday, March 31, 2009
Home Prices in 20 U.S. Cities Fell by a Record 19% (Update2)
By Shobhana Chandra
March 31 (Bloomberg) -- Home prices in 20 U.S. cities fell 19 percent in January from a year earlier, the fastest drop on record, as demand plummeted and foreclosures rose.
The S&P/Case-Shiller index’s decrease was more than forecast and compares with an 18.6 percent decrease in December. The gauge has fallen every month since January 2007, and year- over-year records began in 2001. A glut of unsold properties may keep prices low, shrinking household wealth and damping spending. Still, sales of new and previously owned homes rose in February, indicating the housing slump, now in its fourth year, may ease as policy efforts to unclog credit and aid borrowers begin to take hold. “There is still a lot of downward momentum,” said Michelle Meyer, an economist at Barclays Capital Inc. in New York. “We don’t think we’ll see a bottom in home prices until the second half of next year. The decline in home prices will continue to depress household balance sheets.” The home price index was projected to decline 18.6 percent from a year earlier, according to the median forecast of 29 economists in a Bloomberg News survey, after an originally reported drop of 18.5 percent in December. Estimates ranged from declines of 17.2 percent to 19 percent. From a month earlier, home prices fell 2.8 percent in January, after a 2.6 percent drop in December, the report showed. The figures aren’t adjusted for seasonal effects, so economists prefer to focus on year-over-year changes instead of month-to-month.
Universal Decline
All 20 cities in the index showed a year-over-year price decrease in January, led by a 35 percent drop in Phoenix and 32.5 percent drop in Las Vegas. The index in January was at its lowest level since late 2003. All of the 20 areas covered also showed declining home prices from the prior month. “At this point it doesn’t look great for the near term,” Robert Shiller, chief economist at MacroMarkets LLC and a co- creator of the home price index, said today in a Bloomberg Radio interview. Still, he said, prices “can’t keep declining at this rate forever.” Consumer confidence this month held near a record low as Americans fretted about paying their mortgages and keeping their jobs, the New York-based Conference Board’s sentiment index showed today. Foreclosures surged 29.9 percent in February from a year earlier after rising 17.8 percent in January, according to RealtyTrac Inc. An estimated one in every 440 homes is in some stage of foreclosure.
Starts, Sales
Still, recent reports showed builders broke ground on 22 percent more homes in February than the prior month -- when starts plunged to a record low -- and that sales of new and previously owned houses increased, signaling the industry’s decline may be closer to reaching a bottom.
Lower prices and borrowing costs are attracting some buyers. The National Association of Realtors’ affordability index increased to a record in February. Mortgage rates for 30- year fixed loans fell to a record low in the week ended March 20, according to the Mortgage Bankers Association. KB Home, a Los Angeles-based homebuilder that caters to first-time buyers, last week reported a narrower loss in the quarter ended Feb. 28, and said net new-home orders rose 26 percent from a year earlier, the first gain since the fourth quarter of 2005.
Consumer Spending
Also, while job losses are hurting Americans’ confidence, retail sales fell less than forecast in February and consumer spending had a second straight monthly gain. Economists predict the recession may ease in the second half of this year after the economy shrank 6.3 percent last quarter, the most since 1982. Federal Reserve officials last week voiced confidence the economy will show signs of recovery by year end, responding to unprecedented monetary stimulus and the Obama administration’s $787 billion fiscal package. “Resumption of growth should not be too far off,” Minneapolis Fed President Gary Stern said in a speech on March 26. He added, “Once under way, the pace of expansion is likely to be subdued for some time.” Shiller, also a professor at Yale University, and Karl Case, an economics professor at Wellesley College, created the home-price index based on research from the 1980s.
To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net Last Updated: March 31, 2009
March 31 (Bloomberg) -- Home prices in 20 U.S. cities fell 19 percent in January from a year earlier, the fastest drop on record, as demand plummeted and foreclosures rose.
The S&P/Case-Shiller index’s decrease was more than forecast and compares with an 18.6 percent decrease in December. The gauge has fallen every month since January 2007, and year- over-year records began in 2001. A glut of unsold properties may keep prices low, shrinking household wealth and damping spending. Still, sales of new and previously owned homes rose in February, indicating the housing slump, now in its fourth year, may ease as policy efforts to unclog credit and aid borrowers begin to take hold. “There is still a lot of downward momentum,” said Michelle Meyer, an economist at Barclays Capital Inc. in New York. “We don’t think we’ll see a bottom in home prices until the second half of next year. The decline in home prices will continue to depress household balance sheets.” The home price index was projected to decline 18.6 percent from a year earlier, according to the median forecast of 29 economists in a Bloomberg News survey, after an originally reported drop of 18.5 percent in December. Estimates ranged from declines of 17.2 percent to 19 percent. From a month earlier, home prices fell 2.8 percent in January, after a 2.6 percent drop in December, the report showed. The figures aren’t adjusted for seasonal effects, so economists prefer to focus on year-over-year changes instead of month-to-month.
Universal Decline
All 20 cities in the index showed a year-over-year price decrease in January, led by a 35 percent drop in Phoenix and 32.5 percent drop in Las Vegas. The index in January was at its lowest level since late 2003. All of the 20 areas covered also showed declining home prices from the prior month. “At this point it doesn’t look great for the near term,” Robert Shiller, chief economist at MacroMarkets LLC and a co- creator of the home price index, said today in a Bloomberg Radio interview. Still, he said, prices “can’t keep declining at this rate forever.” Consumer confidence this month held near a record low as Americans fretted about paying their mortgages and keeping their jobs, the New York-based Conference Board’s sentiment index showed today. Foreclosures surged 29.9 percent in February from a year earlier after rising 17.8 percent in January, according to RealtyTrac Inc. An estimated one in every 440 homes is in some stage of foreclosure.
Starts, Sales
Still, recent reports showed builders broke ground on 22 percent more homes in February than the prior month -- when starts plunged to a record low -- and that sales of new and previously owned houses increased, signaling the industry’s decline may be closer to reaching a bottom.
Lower prices and borrowing costs are attracting some buyers. The National Association of Realtors’ affordability index increased to a record in February. Mortgage rates for 30- year fixed loans fell to a record low in the week ended March 20, according to the Mortgage Bankers Association. KB Home, a Los Angeles-based homebuilder that caters to first-time buyers, last week reported a narrower loss in the quarter ended Feb. 28, and said net new-home orders rose 26 percent from a year earlier, the first gain since the fourth quarter of 2005.
Consumer Spending
Also, while job losses are hurting Americans’ confidence, retail sales fell less than forecast in February and consumer spending had a second straight monthly gain. Economists predict the recession may ease in the second half of this year after the economy shrank 6.3 percent last quarter, the most since 1982. Federal Reserve officials last week voiced confidence the economy will show signs of recovery by year end, responding to unprecedented monetary stimulus and the Obama administration’s $787 billion fiscal package. “Resumption of growth should not be too far off,” Minneapolis Fed President Gary Stern said in a speech on March 26. He added, “Once under way, the pace of expansion is likely to be subdued for some time.” Shiller, also a professor at Yale University, and Karl Case, an economics professor at Wellesley College, created the home-price index based on research from the 1980s.
To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net Last Updated: March 31, 2009
World Bank, OECD Warn of Jobless Jump, Cut Forecasts (Update1)
By Sandrine Rastello and Simon Kennedy
March 31 (Bloomberg) -- The World Bank and OECD warned surging unemployment may inflict another blow on the global economy as they cut their economic outlooks for emerging and rich nations. The Organization for Economic Cooperation and Development said in Paris that the economy of its 30 members will contract 4.3 percent this year and predicted unemployment in the Group of Seven will reach 36 million late next year. The World Bank lowered its growth forecast for developing countries this year by more than half to 2.1 percent and President Robert Zoellick expressed concern of a looming “unemployment crisis.” Rising joblessness adds urgency to the London summit of Group of 20 leaders in two days to find remedies to the worst economic and financial turmoil in six decades. Unemployment is climbing in Japan and Germany, new data showed today, and job cuts from Volkswagen AG to Agilent Technologies Inc. are pressuring authorities everywhere to do more even as they run out of room to ease fiscal and monetary policies. “We must take the action necessary to prevent the suffering of the past in mass long-term unemployment,” U.K. Prime Minister Gordon Brown, who will host the April 2 G-20 talks, said in London today. Zoellick said in a speech that “2009 will be a dangerous year.”
Unemployment Growing
Japanese unemployment surged to a three-year high of 4.4 percent in February, while Germany’s jobless rate gained for a fifth month in March, reports showed today. The OECD predicted unemployment across its bloc will reach 10.1 percent by the end of 2010 from 7.5 percent in the current quarter. “It is important and necessary for the summit to take credible decisions which will help to halt and reverse the current slowdown and to instill a sense of confidence in the global economy,” Indian Prime Minister Manmohan Singh said today before leaving for London. The OECD, which in November predicted an economic contraction of 0.3 percent this year, urged policy makers to “devise and implement without delay a coherent strategy that squarely tackles the mess in financial markets.” Governments with the scope to do so should introduce more fiscal stimulus to support demand, it said, singling out Canada, Germany, South Korea and Australia.
Japanese Contraction
Still, it was unlikely that world leaders would be able to agree to coordinate global stimulus measures, and the possibility that existing national plans may prove inefficient remains one of the biggest risks to a recovery next year, OECD Chief Economist Klaus Schmidt-Hebbel said today. The OECD projected Japan’s economy will shrink 6.6 percent, outpacing declines of 4.1 percent in the euro area and 4 percent in the U.S. Central banks should keep interest rates close to zero, and the OECD also urged policy makers to find ways to rid banks of toxic assets. Deflation “appears to be a significant risk” for many economies next year, the OECD said. The organization warned its outlook was subject to “risks that remain firmly tilted to the downside,” citing the potential for another bout of problems at banks. Deutsche Bank AG Chief Risk Officer Hugo Banziger said yesterday the credit crisis is “far from over.”
‘Real Hardships’
The World Bank’s Global Economic Prospects report forecast the global economy will shrink 1.7 percent this year, and Zoellick identified central and eastern European economies as the most vulnerable to the international slump. The OECD estimates a global contraction of 2.7 percent.
While joblessness, home repossessions and the collapse in asset values are “real hardships” in the developed world, Zoellick said poorer nations “have much less cushion: no savings, no insurance, no unemployment benefits, and often no food.” Capital flows to the developing world have shrunk this year to about one-third of the peak of $1.2 trillion reached in 2007. Financing shortfalls, declining commodity prices and a drop in demand may lead to a “social and human crisis,” Zoellick said.
In a separate report also released today, the Asian Development Bank cut its own forecast for the second time in four months to show the region, excluding Japan, growing by 3.4 percent this year. The revised forecasts were coupled with warnings that governments not resort to protectionism. The OECD predicted that international trade will plunge more than 13 percent this year. While the OECD said its bloc will contract 0.1 percent next year, the World Bank predicted the global economy will grow 2.3 percent. “Even if global growth turns positive again in 2010, output levels will remain depressed, fiscal pressures will mount and unemployment levels will rise further in virtually every economy well into 2011,” Hans Timmer, a World Bank economist, said in a statement.
To contact the reporters on this story: Sandrine Rastello in Paris at srastello@bloomberg.net; Simon Kennedy at skennedy4@bloomberg.net
March 31, 2009 08:35 EDT
March 31 (Bloomberg) -- The World Bank and OECD warned surging unemployment may inflict another blow on the global economy as they cut their economic outlooks for emerging and rich nations. The Organization for Economic Cooperation and Development said in Paris that the economy of its 30 members will contract 4.3 percent this year and predicted unemployment in the Group of Seven will reach 36 million late next year. The World Bank lowered its growth forecast for developing countries this year by more than half to 2.1 percent and President Robert Zoellick expressed concern of a looming “unemployment crisis.” Rising joblessness adds urgency to the London summit of Group of 20 leaders in two days to find remedies to the worst economic and financial turmoil in six decades. Unemployment is climbing in Japan and Germany, new data showed today, and job cuts from Volkswagen AG to Agilent Technologies Inc. are pressuring authorities everywhere to do more even as they run out of room to ease fiscal and monetary policies. “We must take the action necessary to prevent the suffering of the past in mass long-term unemployment,” U.K. Prime Minister Gordon Brown, who will host the April 2 G-20 talks, said in London today. Zoellick said in a speech that “2009 will be a dangerous year.”
Unemployment Growing
Japanese unemployment surged to a three-year high of 4.4 percent in February, while Germany’s jobless rate gained for a fifth month in March, reports showed today. The OECD predicted unemployment across its bloc will reach 10.1 percent by the end of 2010 from 7.5 percent in the current quarter. “It is important and necessary for the summit to take credible decisions which will help to halt and reverse the current slowdown and to instill a sense of confidence in the global economy,” Indian Prime Minister Manmohan Singh said today before leaving for London. The OECD, which in November predicted an economic contraction of 0.3 percent this year, urged policy makers to “devise and implement without delay a coherent strategy that squarely tackles the mess in financial markets.” Governments with the scope to do so should introduce more fiscal stimulus to support demand, it said, singling out Canada, Germany, South Korea and Australia.
Japanese Contraction
Still, it was unlikely that world leaders would be able to agree to coordinate global stimulus measures, and the possibility that existing national plans may prove inefficient remains one of the biggest risks to a recovery next year, OECD Chief Economist Klaus Schmidt-Hebbel said today. The OECD projected Japan’s economy will shrink 6.6 percent, outpacing declines of 4.1 percent in the euro area and 4 percent in the U.S. Central banks should keep interest rates close to zero, and the OECD also urged policy makers to find ways to rid banks of toxic assets. Deflation “appears to be a significant risk” for many economies next year, the OECD said. The organization warned its outlook was subject to “risks that remain firmly tilted to the downside,” citing the potential for another bout of problems at banks. Deutsche Bank AG Chief Risk Officer Hugo Banziger said yesterday the credit crisis is “far from over.”
‘Real Hardships’
The World Bank’s Global Economic Prospects report forecast the global economy will shrink 1.7 percent this year, and Zoellick identified central and eastern European economies as the most vulnerable to the international slump. The OECD estimates a global contraction of 2.7 percent.
While joblessness, home repossessions and the collapse in asset values are “real hardships” in the developed world, Zoellick said poorer nations “have much less cushion: no savings, no insurance, no unemployment benefits, and often no food.” Capital flows to the developing world have shrunk this year to about one-third of the peak of $1.2 trillion reached in 2007. Financing shortfalls, declining commodity prices and a drop in demand may lead to a “social and human crisis,” Zoellick said.
In a separate report also released today, the Asian Development Bank cut its own forecast for the second time in four months to show the region, excluding Japan, growing by 3.4 percent this year. The revised forecasts were coupled with warnings that governments not resort to protectionism. The OECD predicted that international trade will plunge more than 13 percent this year. While the OECD said its bloc will contract 0.1 percent next year, the World Bank predicted the global economy will grow 2.3 percent. “Even if global growth turns positive again in 2010, output levels will remain depressed, fiscal pressures will mount and unemployment levels will rise further in virtually every economy well into 2011,” Hans Timmer, a World Bank economist, said in a statement.
To contact the reporters on this story: Sandrine Rastello in Paris at srastello@bloomberg.net; Simon Kennedy at skennedy4@bloomberg.net
March 31, 2009 08:35 EDT
Fixing Global Finance: Who Broke it, and Who Should Pay for It?
Harold James
January/February 2009
Foreign Affairs
The current economic crisis may have one winner: the Chinese financial model, which--together with the IMF--holds the keys to fixing the problem.
HAROLD JAMES is Professor of History and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University and Professor of History at the European University Institute, in Florence.
Title Fixing Global Finance
Author Martin Wolf
Publisher Johns Hopkins University Press
Pages 230 pp.
ISBN 801890489
Price $24.95
The current financial crisis poses a fundamental challenge to globalization and to its many analysts. All are now considering what the recent meltdown means -- the euphoric globalizers, few of whom are left; the tragic globalizers, who see the benefits of interdependence but worry about a great crash ahead; the managerial globalizers, who would like a better way of controlling the process; the critical globalizers, who are pushing for radical reform; and, of course, the antiglobalizers. Which global institutions might manage the international economy, and how? they all wonder. European leaders, for example, have called for a new Bretton Woods Conference to reconsider the architecture of the international financial and trading systems.
What kind of crisis is this, and what are its likely implications? Some crises are cathartic and push policymakers to take corrective measures; others, like the Great Depression, are radically destructive. Over recent decades, there have been blowouts at the financial center and storms at the periphery. After the meltdown in Latin America in the 1980s came a decade of stock-market and housing booms in the United States that eventually went bust. The Asian financial crisis of 1997-98 was also followed by a run on U.S. assets, causing a bubble (and the dot-com boom) that then burst. Is the latest financial collapse a first step on the road to a profound backlash against globalization? A decade ago, after the Asian financial crisis, Washington and various international financial institutions held up the U.S. system as a model to Asian governments. Today, it is Asia, especially China, that may be entitled to give Americans a lecture.
MASSIVE FAILURES
Martin Wolf, the Financial Times' chief economics commentator, has been a persistently insightful analyst. He has not forecast that financial globalization will necessarily end in disaster, but he has warned of its dangers and tried to address its shortfalls. Most recently, he has done so in Fixing Global Finance, an extremely helpful guide to the origins of today's problems and to possible solutions. The book was completed before the financial turmoil hit this past fall but was released in its midst, and in some respects this awkward timing makes for peculiar reading. Wolf seems to have been offering an eloquent defense of financial globalization even as it was being execrated -- not only by the usual church leaders and moralists, the French president, and the German finance minister but also by the candidates in the U.S. presidential election, who were calling for less greed from investors and more regulation by the state. Mostly, however, the book's timing is an advantage. Written before the crisis, it is unhindered by minutiae about the crescendo of ad hoc measures that several governments took throughout the fall: injecting liquidity, purchasing toxic assets, capitalizing banks, and, finally, nationalizing entire banking systems.
Fixing Global Finance begins by surveying the achievements of finance-driven economic integration over the past two decades and the vulnerabilities caused by the system's periodic crises. In a previous book, Why Globalization Works, Wolf devoted a great deal of attention to the benefits of globalization. He argued then that it was "on balance highly desirable" and that it reduced poverty, enhanced prosperity, and promoted peace and democracy. There has been no fundamental change in his main argument. In this new work, Wolf expertly relays the debates that followed the Asian financial crisis of 1997-98 and the extraordinary ballooning of the U.S. current account deficit in the first years of this century -- debates that asked whether the global imbalances that had prompted these crises were extraordinary threats or permanent features of the world economy. For Wolf, these imbalances are extraordinary, and it is they, rather than globalization itself, that threaten the stability of both mature and emerging markets.
In a move that may seem odd today, given the current talk about the end of capitalism, Wolf's book casts the American model of financial liberalization as a hero and Chinese mercantilism as a villain. Wolf argues, for instance, that China's "inordinately mercantilist currency policies" have caused dangerous imbalances. In order to maintain its exports' competitiveness on the world market and keep a vast (and potentially restive) work force occupied, Beijing prevented the Chinese currency from appreciating against the dollar and thus from driving up the price of China's exports. The result was a vast trade surplus. A byproduct, largely unintended, was the piling up of reserves of U.S. dollars, which Beijing then placed mostly in U.S. government securities. (It also invested in quasi-state institutions, such as Fannie Mae and Freddie Mac, thereby indirectly enabling their recklessly aggressive lending.) This is Wolf's international spin on Alaskan Governor Sarah Palin's explanation for the crisis -- "Darn right, it was the predatory lenders" -- only his predators are the Chinese.
As it happens, Beijing's decisions have also turned out to be more of a mixed blessing for China than is generally understood. Since 2000, Chinese assets abroad have earned very poor returns -- and with the depreciation of the dollar, by some measures they have even performed negatively. As Wolf points out, because the U.S. government was -- as it still is -- at liberty to print as many dollar bills as it wanted, it could always in effect expropriate assets denominated in its currency. The rapidity of U.S. monetary expansion in the era of Federal Reserve Chair Alan Greenspan made this more than a theoretical risk. China, or rather its citizens, paid a high price for Beijing's mercantilism. Wolf's narrative blaming China may seem remarkable now that everyone is excoriating the U.S. financial system, the U.S. Federal Reserve, and Greenspan in particular. With the Federal Reserve effectively acting as the Chinese central bank, one argument goes, an overly lax U.S. monetary policy was threatening the world with inflation. But Wolf contests this view, arguing that the Federal Reserve did roughly what central banks are supposed to do, namely, keep inflation in check. In his opinion, growth in the U.S. money supply in the early years of this decade was "not unreasonably high." At the time, the Federal Reserve insisted that its job was to look at price levels generally, not to puncture bubbles in some asset prices. For Wolf, "The United States is at least as much the victim of decisions made by others as the author of its own misfortunes." It was only natural, perhaps even inevitable, in Wolf's view, that the United States would emerge as the borrower of last resort, with its perceived reliability as a debtor fueling global growth.
But instead of quietly expropriating assets held by the Chinese by gradually devaluing the dollar, the borrower of last resort got into trouble itself. Even though the global financial system melted down after Wolf completed his book, his first chapter already warned that the world of finance was "a jungle inhabited by wild beasts." As the subprime mortgage crisis of 2007 mushroomed in 2008, a profound flaw at the core of the U.S. financial system was revealed. Partly due to a glut in global savings, assets had been repackaged so thoroughly and resold so often that it became impossible to clearly connect the thing being traded to its underlying value.
The $700 billion bailout announced by the U.S. Department of the Treasury in late September was designed to remove from banks' balance sheets mortgages and other securities that in some way corresponded to real houses. But it is still unclear today how these assets are to be valued or how that valuation might wind up benefiting or hurting their new owners. In the United States and in Europe, the hope is that governments will assume many of the risks inherent in this uncertain valuation -- and tame the wild beasts of the financial jungle through state-backed and state-run banking systems. To some, this is profoundly ironic. As Russian President Dmitry Medvedev put it in September, the experience shows that "the move from self-regulating capitalism to financial socialism is only one step." American free-market capitalism was not supposed to look like this.
FREE FALL
Wolf himself predicted the dramatic turn of events months before the worst of the crisis. In a Financial Times column last March, when U.S. government efforts to rescue the investment and brokerage firm Bear Stearns seemed to indicate that everything would soon be all right again, Wolf wrote, referring to the day of the bailout, "Remember Friday March 14 2008: it was the day the dream of global free-market capitalism died." Just six months later -- and a decade after it lectured Asian governments -- Washington seemed to adopt a Chinese-style solution to its escalating financial problems: greater state intervention to restrict the movement of capital.
But there are dangers and limitations inherent in this approach, too, especially given that, as Wolf warns, instability and vulnerability will not be confined to the United States and that "financial crises are most significant when they are international." This crisis may have originated in the United States, but it has rapidly become global.
Some emerging markets are highly vulnerable to financial implosion. Collapses have begun to happen in Brazil, Hungary, Iceland, Indonesia, Pakistan, Russia, the Baltic republics, and Central Asia, as investors stampede away from risky assets. And with these failures comes the risk of major geopolitical instability, because many of these vulnerable countries and regions lie on political fault lines. Such crises help promote anti-Western reactions, including militant forms of Islamic fundamentalism. These threats should be taken very seriously. The possibility of geopolitical turmoil is all the greater because so far the bailouts have been handled in a purely national context, while international institutions have been nervous and hesitant. The discussion has been entirely domestic in the United States and, more surprising, in Europe, too. In fact, the failure to find a supranational mechanism for dealing with Europe's large and internationally active banks is rapidly developing into the Achilles' heel of the continent's ambitious project to build a monetary union. The European Union's governing bodies can only leave bank bailouts and their fiscal implications to national authorities. Germany and Ireland each tried to create what the German finance minister, Peer Steinbrück, has called an "umbrella" over their national banking systems. But in these days of high capital mobility, this appears to be a very poor solution. It is likely only to prompt a wild rush of fund transfers as governments try, in their own idiosyncratic ways, to prop up their banking systems and as depositors move their assets away from countries at risk of needing bailouts. Every state for itself, and every depositor for him- or herself.
Meanwhile, international financial institutions have largely stood on the sidelines of the meltdown. Since the end of World War II, there has been a belief that international cooperation can tackle major problems. But that faith is now being tested. The current financial collapse is the first international financial crisis since the 1944 Bretton Woods Conference in which the International Monetary Fund has played no role at all in tackling the causes of the problem and only a secondary part in managing its consequences. In addition, the current financial crisis threatens to trigger trade protectionism precisely at a time when the sputtering of the Doha Round of multilateral trade negotiations has weakened the World Trade Organization. Institutions such as the IMF and the WTO have become largely ineffective and irrelevant because of a general shift away from the belief in a rule-based international order and toward a Machiavellian view of the world in which power is all-important. Critical decisions about an international response to the financial crisis have been left largely to the G-7 (the group of highly industrialized states), a patently unrepresentative body that excludes major new centers of global savings and trade surpluses, such as China.
A NEW BRETTON WOODS
It is thus both bold and constructive for Wolf to see current financial problems as global issues requiring global answers. In a late chapter, "Toward Global Reform," he calls for the big emerging markets, especially those, such as China, with large savings ratios, to abandon capital controls, allow their exchange rates to float, and begin borrowing mostly or entirely in their own currencies. There have been substantial steps in this direction. Several major emerging countries, including Brazil, China, and Mexico, have already developed their own capital markets and thereby overcome what the economists Barry Eichengreen and Ricardo Hausmann term the "original sin" of dependence on foreign currency borrowing (which tends to increase vulnerability to crises by creating a dangerous mismatch between liabilities in a foreign currency and assets in the domestic currency).
But Wolf rightly argues that international action is also required. In his view, the IMF should better represent the new centers of global growth: its voting rules should be altered accordingly, and its managing director should no longer be a European appointment. Wolf also proposes that the IMF more actively manage currency reserves. He advocates greater pooling of assets in order to establish funds that could be tapped promptly in times of crisis. The logic of these proposals is sound, but they should be extended: as the economist Michael Bordo and I argued in an article for VoxEU.org last June, under the present circumstances, the IMF should take on the role of asset manager. The conditions that created the global savings glut -- especially insecurity in emerging markets -- still exist, and so an important question for the future is, Who should manage these assets? Are governments and existing international institutions doing a good job? If the IMF were to manage some part of the vast global savings pool, it could act much more effectively as a crisis manager. If it oversaw a significant part of the reserves of countries with surpluses, it would be in a strong position to take bets against speculators or stabilize markets when prices moved in a disorderly way.
When the IMF was created, in 1944, there were few major private capital flows in the world; states dominated international transactions. Today, private flows play a preponderant role, and extending the IMF's mission would be a way of responding to that reality. And the need to do so has become much more urgent since Wolf finished writing his book, in the very early stages of the current crisis. Stabilizing action by the IMF would benefit both the global economy and the reserves' owners, which, simply by virtue of their accumulated surpluses, share an interest in the world's financial and economic stability. Many previous financial crises have been resolved only by the actions of massively powerful financial players, sometimes private ones (such as J. P. Morgan in 1907) but more frequently states (such as the U.S. government with the New Deal in the 1930s and the Swedish government in the 1990s). Financial giants can make bets on stabilization and recovery and reverse the momentum of the global market.
There is a further advantage to IMF action. Bringing reserve assets under the management of an internationally controlled entity would also remove suspicions about governments' use of assets for strategic political purposes. Such concerns were bedeviling discussions before the outbreak of the financial crisis; in fact, the geopolitical use of finance was one of the ills that the Bretton Woods Conference was supposed to remedy over half a century ago. The current meltdown has only magnified these fears. In October, Russia sprang in with money to assist Iceland -- a move that was interpreted as an attempt to buy greater influence over the Arctic -- and China has been gaining influence across the world through strategic investments in poor countries.
In the course of developing new functions for the IMF, it would be important to distinguish between day-to-day transactions and crisis management, much as central banks and national regulators do. Placing large stocks of assets under the routine management of the IMF could stave off speculative attacks and stem irrational panics: with the IMF in a situation to intervene preemptively, possibly at the request of targets of speculation, speculation itself would become more costly. The IMF's enhanced asset base would also enable the fund to switch into crisis mode without long discussions and formal negotiations. It could respond quickly and, like other asset managers, without setting off a geopolitical debate about the strategic implications of the investment.
Given widespread suspicion in emerging markets about the IMF's motives and standards, expanding the IMF's power would require reforming governance at the organization. Wolf's suggestions for new voting and appointment rules are steps in the right direction, but they do not go far enough. Industrial states, especially European ones, are overrepresented; the United States has too much influence; and new centers of wealth, which have accumulated massive savings, are underrepresented. If the IMF were to become a reserve manager, it might be possible to substantially reform the organization's voting rules: for example, a country's voting clout on the IMF's executive board could be partly determined by the amount of convertible currency it voluntarily deposited at the IMF. A new mechanism for calculating votes along these lines would immediately give greater voice to emerging-market economies. It would make the IMF both more representative of the real balance of economic power in the world and more legitimate.
In this new role, the IMF could directly provide crisis-stricken countries with a lot of support. In situations in which the fund's managers believed a crisis was entirely or predominantly caused by speculation rather than fundamental problems, it might also be able to intervene directly in currency markets. A decision to do so would be made not by governments or the IMF's executive board, but by the IMF's managers, who would ultimately be accountable to the board and to the governments that fund the IMF. Some might object to giving the organization such an activist role. The best way to address their concerns would be to set strict criteria for long-term performance, including regular benchmarking, and ensure oversight by the IMF's executive board.
A BEIJING CONSENSUS
A crisis with global origins cannot be adequately tackled in purely national settings, even in a country as large as the United States. An effective international financial system is needed, as well as strong incentives for powerful states to act within it. Without such an international order, countries are left to act on their own. Big countries might do a better job of this than smaller countries with more open and more vulnerable economies. But since even geopolitical giants are likely to resort to the solutions that appeal most to their domestic constituencies, they will tend to insulate themselves from the rest of the world. And that protectionist reflex could return the world to the misery of the 1930s. The need for managed international action raises the question of which country should be its main driver. Like the United Kingdom during the Great Depression, the United States today is unwilling, and probably unable, to act as the world's stabilizer. Meanwhile, China, the preeminent holder of global savings, may now be in a position comparable to that of the United States in the 1930s, when isolationism at home stymied any chance that Washington would take action abroad. Like the United States back then, China today cannot hope to stabilize the world on its own. It would need to work through an institutional framework. But Beijing is unlikely to take on a key role in reconstructing the global financial system without guarantees that its interests would be recognized in the new order.
The response to the Asian crisis of 1997-98 was the reinforcement of the American model of financial capitalism, the so-called Washington consensus. The response to the contagion caused by the U.S. subprime crisis of 2007-8 will be the elaboration of a Chinese model. One can only hope that this new approach will not reflect an autarkic or nationalist policy, whereby the Chinese stand by and continue to save (and suffer) while the world's financial order collapses. That would really spell the end of globalization -- and of the prospects for a peaceful world order.
January/February 2009
Foreign Affairs
The current economic crisis may have one winner: the Chinese financial model, which--together with the IMF--holds the keys to fixing the problem.
HAROLD JAMES is Professor of History and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University and Professor of History at the European University Institute, in Florence.
Title Fixing Global Finance
Author Martin Wolf
Publisher Johns Hopkins University Press
Pages 230 pp.
ISBN 801890489
Price $24.95
The current financial crisis poses a fundamental challenge to globalization and to its many analysts. All are now considering what the recent meltdown means -- the euphoric globalizers, few of whom are left; the tragic globalizers, who see the benefits of interdependence but worry about a great crash ahead; the managerial globalizers, who would like a better way of controlling the process; the critical globalizers, who are pushing for radical reform; and, of course, the antiglobalizers. Which global institutions might manage the international economy, and how? they all wonder. European leaders, for example, have called for a new Bretton Woods Conference to reconsider the architecture of the international financial and trading systems.
What kind of crisis is this, and what are its likely implications? Some crises are cathartic and push policymakers to take corrective measures; others, like the Great Depression, are radically destructive. Over recent decades, there have been blowouts at the financial center and storms at the periphery. After the meltdown in Latin America in the 1980s came a decade of stock-market and housing booms in the United States that eventually went bust. The Asian financial crisis of 1997-98 was also followed by a run on U.S. assets, causing a bubble (and the dot-com boom) that then burst. Is the latest financial collapse a first step on the road to a profound backlash against globalization? A decade ago, after the Asian financial crisis, Washington and various international financial institutions held up the U.S. system as a model to Asian governments. Today, it is Asia, especially China, that may be entitled to give Americans a lecture.
MASSIVE FAILURES
Martin Wolf, the Financial Times' chief economics commentator, has been a persistently insightful analyst. He has not forecast that financial globalization will necessarily end in disaster, but he has warned of its dangers and tried to address its shortfalls. Most recently, he has done so in Fixing Global Finance, an extremely helpful guide to the origins of today's problems and to possible solutions. The book was completed before the financial turmoil hit this past fall but was released in its midst, and in some respects this awkward timing makes for peculiar reading. Wolf seems to have been offering an eloquent defense of financial globalization even as it was being execrated -- not only by the usual church leaders and moralists, the French president, and the German finance minister but also by the candidates in the U.S. presidential election, who were calling for less greed from investors and more regulation by the state. Mostly, however, the book's timing is an advantage. Written before the crisis, it is unhindered by minutiae about the crescendo of ad hoc measures that several governments took throughout the fall: injecting liquidity, purchasing toxic assets, capitalizing banks, and, finally, nationalizing entire banking systems.
Fixing Global Finance begins by surveying the achievements of finance-driven economic integration over the past two decades and the vulnerabilities caused by the system's periodic crises. In a previous book, Why Globalization Works, Wolf devoted a great deal of attention to the benefits of globalization. He argued then that it was "on balance highly desirable" and that it reduced poverty, enhanced prosperity, and promoted peace and democracy. There has been no fundamental change in his main argument. In this new work, Wolf expertly relays the debates that followed the Asian financial crisis of 1997-98 and the extraordinary ballooning of the U.S. current account deficit in the first years of this century -- debates that asked whether the global imbalances that had prompted these crises were extraordinary threats or permanent features of the world economy. For Wolf, these imbalances are extraordinary, and it is they, rather than globalization itself, that threaten the stability of both mature and emerging markets.
In a move that may seem odd today, given the current talk about the end of capitalism, Wolf's book casts the American model of financial liberalization as a hero and Chinese mercantilism as a villain. Wolf argues, for instance, that China's "inordinately mercantilist currency policies" have caused dangerous imbalances. In order to maintain its exports' competitiveness on the world market and keep a vast (and potentially restive) work force occupied, Beijing prevented the Chinese currency from appreciating against the dollar and thus from driving up the price of China's exports. The result was a vast trade surplus. A byproduct, largely unintended, was the piling up of reserves of U.S. dollars, which Beijing then placed mostly in U.S. government securities. (It also invested in quasi-state institutions, such as Fannie Mae and Freddie Mac, thereby indirectly enabling their recklessly aggressive lending.) This is Wolf's international spin on Alaskan Governor Sarah Palin's explanation for the crisis -- "Darn right, it was the predatory lenders" -- only his predators are the Chinese.
As it happens, Beijing's decisions have also turned out to be more of a mixed blessing for China than is generally understood. Since 2000, Chinese assets abroad have earned very poor returns -- and with the depreciation of the dollar, by some measures they have even performed negatively. As Wolf points out, because the U.S. government was -- as it still is -- at liberty to print as many dollar bills as it wanted, it could always in effect expropriate assets denominated in its currency. The rapidity of U.S. monetary expansion in the era of Federal Reserve Chair Alan Greenspan made this more than a theoretical risk. China, or rather its citizens, paid a high price for Beijing's mercantilism. Wolf's narrative blaming China may seem remarkable now that everyone is excoriating the U.S. financial system, the U.S. Federal Reserve, and Greenspan in particular. With the Federal Reserve effectively acting as the Chinese central bank, one argument goes, an overly lax U.S. monetary policy was threatening the world with inflation. But Wolf contests this view, arguing that the Federal Reserve did roughly what central banks are supposed to do, namely, keep inflation in check. In his opinion, growth in the U.S. money supply in the early years of this decade was "not unreasonably high." At the time, the Federal Reserve insisted that its job was to look at price levels generally, not to puncture bubbles in some asset prices. For Wolf, "The United States is at least as much the victim of decisions made by others as the author of its own misfortunes." It was only natural, perhaps even inevitable, in Wolf's view, that the United States would emerge as the borrower of last resort, with its perceived reliability as a debtor fueling global growth.
But instead of quietly expropriating assets held by the Chinese by gradually devaluing the dollar, the borrower of last resort got into trouble itself. Even though the global financial system melted down after Wolf completed his book, his first chapter already warned that the world of finance was "a jungle inhabited by wild beasts." As the subprime mortgage crisis of 2007 mushroomed in 2008, a profound flaw at the core of the U.S. financial system was revealed. Partly due to a glut in global savings, assets had been repackaged so thoroughly and resold so often that it became impossible to clearly connect the thing being traded to its underlying value.
The $700 billion bailout announced by the U.S. Department of the Treasury in late September was designed to remove from banks' balance sheets mortgages and other securities that in some way corresponded to real houses. But it is still unclear today how these assets are to be valued or how that valuation might wind up benefiting or hurting their new owners. In the United States and in Europe, the hope is that governments will assume many of the risks inherent in this uncertain valuation -- and tame the wild beasts of the financial jungle through state-backed and state-run banking systems. To some, this is profoundly ironic. As Russian President Dmitry Medvedev put it in September, the experience shows that "the move from self-regulating capitalism to financial socialism is only one step." American free-market capitalism was not supposed to look like this.
FREE FALL
Wolf himself predicted the dramatic turn of events months before the worst of the crisis. In a Financial Times column last March, when U.S. government efforts to rescue the investment and brokerage firm Bear Stearns seemed to indicate that everything would soon be all right again, Wolf wrote, referring to the day of the bailout, "Remember Friday March 14 2008: it was the day the dream of global free-market capitalism died." Just six months later -- and a decade after it lectured Asian governments -- Washington seemed to adopt a Chinese-style solution to its escalating financial problems: greater state intervention to restrict the movement of capital.
But there are dangers and limitations inherent in this approach, too, especially given that, as Wolf warns, instability and vulnerability will not be confined to the United States and that "financial crises are most significant when they are international." This crisis may have originated in the United States, but it has rapidly become global.
Some emerging markets are highly vulnerable to financial implosion. Collapses have begun to happen in Brazil, Hungary, Iceland, Indonesia, Pakistan, Russia, the Baltic republics, and Central Asia, as investors stampede away from risky assets. And with these failures comes the risk of major geopolitical instability, because many of these vulnerable countries and regions lie on political fault lines. Such crises help promote anti-Western reactions, including militant forms of Islamic fundamentalism. These threats should be taken very seriously. The possibility of geopolitical turmoil is all the greater because so far the bailouts have been handled in a purely national context, while international institutions have been nervous and hesitant. The discussion has been entirely domestic in the United States and, more surprising, in Europe, too. In fact, the failure to find a supranational mechanism for dealing with Europe's large and internationally active banks is rapidly developing into the Achilles' heel of the continent's ambitious project to build a monetary union. The European Union's governing bodies can only leave bank bailouts and their fiscal implications to national authorities. Germany and Ireland each tried to create what the German finance minister, Peer Steinbrück, has called an "umbrella" over their national banking systems. But in these days of high capital mobility, this appears to be a very poor solution. It is likely only to prompt a wild rush of fund transfers as governments try, in their own idiosyncratic ways, to prop up their banking systems and as depositors move their assets away from countries at risk of needing bailouts. Every state for itself, and every depositor for him- or herself.
Meanwhile, international financial institutions have largely stood on the sidelines of the meltdown. Since the end of World War II, there has been a belief that international cooperation can tackle major problems. But that faith is now being tested. The current financial collapse is the first international financial crisis since the 1944 Bretton Woods Conference in which the International Monetary Fund has played no role at all in tackling the causes of the problem and only a secondary part in managing its consequences. In addition, the current financial crisis threatens to trigger trade protectionism precisely at a time when the sputtering of the Doha Round of multilateral trade negotiations has weakened the World Trade Organization. Institutions such as the IMF and the WTO have become largely ineffective and irrelevant because of a general shift away from the belief in a rule-based international order and toward a Machiavellian view of the world in which power is all-important. Critical decisions about an international response to the financial crisis have been left largely to the G-7 (the group of highly industrialized states), a patently unrepresentative body that excludes major new centers of global savings and trade surpluses, such as China.
A NEW BRETTON WOODS
It is thus both bold and constructive for Wolf to see current financial problems as global issues requiring global answers. In a late chapter, "Toward Global Reform," he calls for the big emerging markets, especially those, such as China, with large savings ratios, to abandon capital controls, allow their exchange rates to float, and begin borrowing mostly or entirely in their own currencies. There have been substantial steps in this direction. Several major emerging countries, including Brazil, China, and Mexico, have already developed their own capital markets and thereby overcome what the economists Barry Eichengreen and Ricardo Hausmann term the "original sin" of dependence on foreign currency borrowing (which tends to increase vulnerability to crises by creating a dangerous mismatch between liabilities in a foreign currency and assets in the domestic currency).
But Wolf rightly argues that international action is also required. In his view, the IMF should better represent the new centers of global growth: its voting rules should be altered accordingly, and its managing director should no longer be a European appointment. Wolf also proposes that the IMF more actively manage currency reserves. He advocates greater pooling of assets in order to establish funds that could be tapped promptly in times of crisis. The logic of these proposals is sound, but they should be extended: as the economist Michael Bordo and I argued in an article for VoxEU.org last June, under the present circumstances, the IMF should take on the role of asset manager. The conditions that created the global savings glut -- especially insecurity in emerging markets -- still exist, and so an important question for the future is, Who should manage these assets? Are governments and existing international institutions doing a good job? If the IMF were to manage some part of the vast global savings pool, it could act much more effectively as a crisis manager. If it oversaw a significant part of the reserves of countries with surpluses, it would be in a strong position to take bets against speculators or stabilize markets when prices moved in a disorderly way.
When the IMF was created, in 1944, there were few major private capital flows in the world; states dominated international transactions. Today, private flows play a preponderant role, and extending the IMF's mission would be a way of responding to that reality. And the need to do so has become much more urgent since Wolf finished writing his book, in the very early stages of the current crisis. Stabilizing action by the IMF would benefit both the global economy and the reserves' owners, which, simply by virtue of their accumulated surpluses, share an interest in the world's financial and economic stability. Many previous financial crises have been resolved only by the actions of massively powerful financial players, sometimes private ones (such as J. P. Morgan in 1907) but more frequently states (such as the U.S. government with the New Deal in the 1930s and the Swedish government in the 1990s). Financial giants can make bets on stabilization and recovery and reverse the momentum of the global market.
There is a further advantage to IMF action. Bringing reserve assets under the management of an internationally controlled entity would also remove suspicions about governments' use of assets for strategic political purposes. Such concerns were bedeviling discussions before the outbreak of the financial crisis; in fact, the geopolitical use of finance was one of the ills that the Bretton Woods Conference was supposed to remedy over half a century ago. The current meltdown has only magnified these fears. In October, Russia sprang in with money to assist Iceland -- a move that was interpreted as an attempt to buy greater influence over the Arctic -- and China has been gaining influence across the world through strategic investments in poor countries.
In the course of developing new functions for the IMF, it would be important to distinguish between day-to-day transactions and crisis management, much as central banks and national regulators do. Placing large stocks of assets under the routine management of the IMF could stave off speculative attacks and stem irrational panics: with the IMF in a situation to intervene preemptively, possibly at the request of targets of speculation, speculation itself would become more costly. The IMF's enhanced asset base would also enable the fund to switch into crisis mode without long discussions and formal negotiations. It could respond quickly and, like other asset managers, without setting off a geopolitical debate about the strategic implications of the investment.
Given widespread suspicion in emerging markets about the IMF's motives and standards, expanding the IMF's power would require reforming governance at the organization. Wolf's suggestions for new voting and appointment rules are steps in the right direction, but they do not go far enough. Industrial states, especially European ones, are overrepresented; the United States has too much influence; and new centers of wealth, which have accumulated massive savings, are underrepresented. If the IMF were to become a reserve manager, it might be possible to substantially reform the organization's voting rules: for example, a country's voting clout on the IMF's executive board could be partly determined by the amount of convertible currency it voluntarily deposited at the IMF. A new mechanism for calculating votes along these lines would immediately give greater voice to emerging-market economies. It would make the IMF both more representative of the real balance of economic power in the world and more legitimate.
In this new role, the IMF could directly provide crisis-stricken countries with a lot of support. In situations in which the fund's managers believed a crisis was entirely or predominantly caused by speculation rather than fundamental problems, it might also be able to intervene directly in currency markets. A decision to do so would be made not by governments or the IMF's executive board, but by the IMF's managers, who would ultimately be accountable to the board and to the governments that fund the IMF. Some might object to giving the organization such an activist role. The best way to address their concerns would be to set strict criteria for long-term performance, including regular benchmarking, and ensure oversight by the IMF's executive board.
A BEIJING CONSENSUS
A crisis with global origins cannot be adequately tackled in purely national settings, even in a country as large as the United States. An effective international financial system is needed, as well as strong incentives for powerful states to act within it. Without such an international order, countries are left to act on their own. Big countries might do a better job of this than smaller countries with more open and more vulnerable economies. But since even geopolitical giants are likely to resort to the solutions that appeal most to their domestic constituencies, they will tend to insulate themselves from the rest of the world. And that protectionist reflex could return the world to the misery of the 1930s. The need for managed international action raises the question of which country should be its main driver. Like the United Kingdom during the Great Depression, the United States today is unwilling, and probably unable, to act as the world's stabilizer. Meanwhile, China, the preeminent holder of global savings, may now be in a position comparable to that of the United States in the 1930s, when isolationism at home stymied any chance that Washington would take action abroad. Like the United States back then, China today cannot hope to stabilize the world on its own. It would need to work through an institutional framework. But Beijing is unlikely to take on a key role in reconstructing the global financial system without guarantees that its interests would be recognized in the new order.
The response to the Asian crisis of 1997-98 was the reinforcement of the American model of financial capitalism, the so-called Washington consensus. The response to the contagion caused by the U.S. subprime crisis of 2007-8 will be the elaboration of a Chinese model. One can only hope that this new approach will not reflect an autarkic or nationalist policy, whereby the Chinese stand by and continue to save (and suffer) while the world's financial order collapses. That would really spell the end of globalization -- and of the prospects for a peaceful world order.
Monday, March 30, 2009
Doctor doom: Gerald Celente on Weekly
For 2008, Gerald Celente predicts the total collapse of an already
damaged economy
By Steve HopkinsThese are the times that make Gerald Celente salivate. The Mid-Hudson region’s resident internationally-renowned talking head, Celente – and his alleged organization, the Trends Research Institute – are again swinging into high gear to herald what he has dubbed an “Economic 9/11,” a meltdown that sometime this year he claims will be equal to and perhaps surpass the devastation wrought by the Great Depression. Here’s a typical passage from his Winter 2008 issue of The Trends Journal newsletter, which should go down as a classic even amongst avid Celente collectors: “With the nation on the skids and heading down … and with bigger problems coming up on the horizon … the biggest media mouths were busy broadcasting primetime slime for endless hours about Anna Nicole Smith, Britney Spears, Paris Hilton, lost Boy Scouts, kidnapped kids and the sexploits of Teachers Gone Wild. … Their minds saturated with junk news, bodies bloated on junk food, working non-stop, talking constantly, hardly listening, self indulged or just tuned out … the reasons for Americans being out of touch, ignorant of the facts and unprepared for what’s to come are academic. How they prepare to deal with the future is what will count. … But just as they didn’t see 9/11 coming and were frozen in shock when terror struck, they’ll be frozen in shock when terror strikes again.”
Yikes!
It’s the kind of stuff that warms the hearts of constitutionally pessimistic misanthropes such as myself, but doesn’t exactly endear itself to the American mainstream horde Celente has courted so effectively over the past decade and a half. The Trends Journal, available a from a post office box in Rhinebeck for $99 for a one-year on-line subscription, goes on to pontificate darkly about the coming economic meltdown. “Just as the Twin Towers collapsed from the top down, so too will the U.S. economy from an Economic 9/11, when the high-stakes speculators, banks, brokerages, and buyout firms that leveraged billions with millions get hit,” writes Celente, breaking down the carnage into easily digestible “trendposts,” including this priceless chestnut: “‘Self Storage’ will soon live up to the meaning of its name. Down and out, thrown onto the streets … homeless Americans will empty out storage lockers of useless junk … to store themselves. When Panic strikes, it will only be a matter of time and a question of survival before they move in. Whether on their own or with family in tow, living in concrete and steel 4x8s will be a step up from sleeping in the streets or risking a night at a homeless shelter.” As somebody who rents a 6x10 to store all the unclassified detritus from my former three-story Victorian house that I can’t stuff into a two-bedroom apartment, I feel somehow ahead of the curve on this one. Thanks, Gerald.
It feels like the truth, Oprah says
Celente, whom I interviewed early last week as stocks were tumbling from the mid-13,000s to almost 12,000, says the predicted economic apocalypse is already underway. Under pressure from President Bush, Federal Reserve Chairman Ben Bernenke on Thursday of last week relented and alluded to another round of interest rate-lowering that temporarily kicked things out of a free-fall, but according to Celente, that sort of tinkering won’t do any good in the end.
But should we believe him? What are Celente’s credentials? His Web site doesn’t make clear where he learned his skills or who in the murky world of prognostication he admires; neither does he reference the work or thoughts of any professional colleagues or fellow experts. The man eschews footnotes. Besides the fact that he’s been on cable television news and talk shows more times than most retired two-star generals, Celente’s qualifications as a socioeconomic prognosticator include running a mayoral campaign in Yonkers, serving as executive assistant to the secretary of the New York State Senate and shuttling between Chicago and Washington D.C. as a “government affairs specialist” during the 1970s before becoming a “political atheist” in 1978 after hearing Jimmy Carter pronounce the about-to-be-disposed Shah of Iran “the island of stability in the Middle East.” This revelation prompted him to sink some of his money into gold and oil futures, and jump-started him on the path of using his newly tested analytical skills to create a cottage industry advising others how to profit by looking dispassionately at the numbers and other data without letting one’s feelings get in the way. “That’s how I was able to leave my job, and when I realized that if you keep following these things, current events form future trends,” says Celente for about the millionth time in his career. “So when you read all we’ve written, it’s all backed up with data.”
Still, it’s no picnic. Celente has carved out an almost impossible-to-fulfill niche for himself as a forecaster of the next big thing in economics, geopolitics and social change. A prisoner of his own middling success, when Celente is not on the road appearing on television shows and speaking before various trade groups and corporations for his bread and butter, he’s trapped in his sun-dappled John Street headquarters – the partially renovated former Mohican Market – for much of the week doing free telephone interviews with down-market radio stations. The author of several books including the bestselling “Trends 2000,” Celente is a relentless self-promoter who bristles angrily when he loses access to even the most pedestrian media outlet, as he did when Taconic Newspapers publisher Ira Fusfeld apparently decided to ban his periodic editorial contributions. “It was deemed that my views were unpalatable; the advertisers complained, and the publisher said they’re not being run,” seethes Celente. “Whoever did it in my estimation is a coward. What, are they afraid of hearing what I have to say? It’s disgusting.”
Celente is obviously no shrinking violet, and despite his slender resume seems to possess the ironclad sense of self-worth necessary to compete and even thrive on the mine-encrusted playing field of cable TV, commonly characterized by egotistical personalities mouthing over-the-top hubris in the most dumbed-down manner they can. Perhaps the most telling artifact in this respect is the nightmarish YouTube promo video showing Celente being interviewed and/or introduced on a slew of TV shows, including by Matt Lauer on Today; The O’Reilly Factor (“a guy that obviously knows his trends,” Bill O’Reilly gushes), and Oprah (who asks her audience, “Doesn’t this resonate with you? Doesn’t it feel like the truth?”) The thing devolves from a series of sound bites into a blizzard of jump cuts featuring all the introductions by helmet-haired anchor-people over the past 10 years, chanting: “Gerald Celente … Gerald Celente … Gerald Celente … Gerald Celente … Gerald Celente …” interspersed with the occasional lightning bolt intended to hasten the sense of unease. The voices are then spliced together into a frightening unison mass: “Gerald Celente! Gerald Celente!” as the images multiply and re-arrange themselves to fill a spinning globe. Talk about media overkill.
Anyway, whatever Celente is doing, it keeps him in food and drink and pays the bills, but is apparently insufficient to cover the considerable nut needed to fund his dream of converting the Mohican Market into a first-class eatery and hangout for the local glitterati, to be called Zizi’s after his stunning and tough-minded late aunt. “Culture and dignity … class … ethics … style … passion … respect,” intones Celente as he gives me a tour of the second floor of his domain. “Do me a favor, don’t walk on the cement, only because it carries the dust. This used to be an oven here before I got here. Mohican Markets, there was a chain of them on the East Coast. They were known for their breads. There were 13 of them, I understand. This becomes a boutique catering facility.”
Nobody’s perfect
Although he takes every opportunity to brag about the trends he has forecast – including the demise of the Soviet Union; the October 1987 world stock market crash; the current quagmire in Iraq (about which he stuck his neck out back in 2003, a month before the war began); the 2000 dotcom stock correction and his year’s real estate downturn – he doesn’t claim to be infallible. He admits to having wrongly bet against George W. Bush twice. Celente has a balanced, noncommittal early take on the upcoming presidential election cycle, which he likes to call the “Presidential Reality Show.” He’s not impressed by Barack Obama, substance-wise. “Obama has Oprah-quality production. And I’ve been on Oprah twice, so I know what Oprah-quality production looks like,” he says. “And I know that there’s not a moment when they don’t have Obama like this (poses presidentially) or like that (strikes another thoughtfully presidential pose). That whole speech that he gave – it made it seem like it was extemporaneous – and it was teleprompted. … Meanwhile, he’s a cipher. He voted for the Patriot Act.”
He’s also not convinced that manipulated events won’t tear into Obama’s obvious experiential weakness in foreign policy. A day before the New Hampshire primary, he offered this typically prescient assessment: “Having said that, now that we’re hearing more Iranian news, we’ll probably see a move back toward people like Hillary or John McCain – people who make us feel safe,” says Celente, before covering all his bases by predicting the possible emergence of a none-of-the-above dark horse into the race who could take it all. He’s more surefooted regarding his dire economic prognostications. He is certain that Wall Street will not be able to handle the disruptions it is encountering. “The panic is on. It’s on, it’s on; it’s now. The financial markets are unraveling at warp speed,” he says. Celente is easily every bit as glib on his feet as Sen. Obama, and without the teleprompter. Last Monday afternoon, I dropped back into his office while Celente was doing a radio interview with someone at 1610 AM in Pensacola, Fla., and heard virtually the same spiel he had given me an hour earlier, with minor variations in response to the business orientation of the interviewer, who was of course asking how to profit off the upcoming Doomsday scenario. “I believe gold prices are going to escalate way above $1,000 an ounce in the near term, and probably hit about $2,000 an ounce if not more,” says Celente, sitting behind a computer with nothing on it but a goofy screensaver. “Because, adjusted for inflation the gold price right now is about $860 an ounce. It should be around $2,000. And having said that, I began my career in D.C.; I began tracking and forecasting trends in the late 1970s, and I started buying into gold when the Iranian crisis broke out. I realized that current events form future trends, so I speculated that gold and oil futures would go up. And we’re saying the same thing now about gold futures.”
Garbage in, garbage out
During an interview of an hour and a half, Celente was personable and relentlessly engaging on any topic I brought up. He’s a music buff, and wants to install a house band of young players in Zizi’s, to play classic jump-style blues from the ’40s and early ’50s on the donated drums and a nice-sounding Steinway spinet. He’s not just a doom-and-gloom prophet, but espouses a reasonable-sounding agenda for making things right, including an emphasis on quality over quantity. “Slim down, America. Cut the fat,” he chides the Pensacola radio audience. “Cut the fat out of the budget, cut the fat out of your diets, and really go back to small. Smaller in every way. Buy local. Build quality, and support local in every way you can. That goes for food as well. Microfarms. A great opportunity for investment; people are looking for higher quality product.”
“I’m talking to you now from Kingston, New York,” he says, giving props to his adopted home base. “It was the former capital of New York State in the Revolutionary days. And I’m in this beautiful, beautiful local community right off the most historic four corners in these United States; the only place where on each corner there’s a building from the 17th century made of stone. These are the kind of communities; because right out from me, there are farms. There are cheese processors, and the local farmers’ markets thrive.
“We’re in the USSA,” he continues, coining a phrase that probably won’t ever be repeated, not that he really cares. “Just like back in the days of the Soviet Union, in the USSR. They’re doing the same kind of things. When you look at the government numbers, for example, they don’t add in food – for which prices have gone up over 25 percent in the last year – and fuel – oil prices have gone up some 60 percent year to date. They don’t add those numbers into core inflation. This is criminal; it’s criminal activity. And the government is taking over the country in a lot of different ways, so people have to take steps themselves. They have to stop buying a lot of garbage that they don’t need. And here’s a country with self-storage units? This is something unique around the world; nobody’s ever heard of such a thing. So we have to start cutting back, we have to start doing a lot of smart things and becoming more locally involved. Because if a lot of people do little things collectively, big things can happen. And I believe the vacuum is so big right now; that it can be filled with anything.”
Good luck with that, Gerald. At least you’re out there trying. Me, I’m going to take that extra two Gs out of what’s left of my Roth IRA and try to score a couple of ounces of gold while there’s still time. If there’s any change from the deal I’ll run over to Gander Mountain and plunk it down on an AK-47 knockoff and a couple of 30-round clips of ammo, just in case.
World stocks fall amid renewed auto, banking fears
World stock markets slide amid new auto, banking fears, pessimism on upcoming G-20 summit
Pan Pylas, AP Business Writer
Monday March 30, 2009
LONDON (AP) -- World stock markets slid Monday amid renewed fears about the fate of the U.S. auto industry and the global banking sector as well as mounting pessimism surrounding this week's G-20 meeting of leaders. The FTSE 100 of leading British shares was down 79.39 points, or 2 percent, at 3,819.46, while Germany's DAX slumped 129.32 points, or 3.1 percent, to 4,074.23. The CAC-40 in France fell 60.63 points, or 2.1 percent, to 2,779.99. Earlier in Asia, Japan's Nikkei 225 stock average sank 390.89 points, or 4.5 percent, to 8,236.08, and Hong Kong's Hang Seng slid 663.17, or 4.7 percent, to 13,456.33. The retreat in Europe and Asia followed a sell-off Friday on Wall Street, where investors booked profits on the Dow Jones industrial average's 21 percent gain over 13 trading days. U.S. stock futures pointed to more losses Monday on Wall Street. Dow futures fell 161, or 2.1 percent, to 7,601 while Standard & Poor's 500 futures fell 17.6 points, or 2.2 percent, to 798.50. Stock market sentiment was hit by a combination of factors on Monday, with automakers under particular pressure after the White House rejected the turnaround plans from General Motors Corp. and Chrysler. The Obama administration also replaced GM's CEO Rick Wagoner with the company's chief operating officer, Fritz Henderson. In Japan, Toyota Motor Co., the world's largest automaker, fell 3.7 percent, Honda Motor Co. shed 6.7 percent, and Nissan Motor Co. dived 7.7 percent. In Europe, Germany's BMW AG and Daimler AG both fell around 8 percent, while France's Renault SA and PSA Peugeot-Citroen SA dropped 9 percent and 7 percent. Banking stocks were also sold off heavily after U.S. Treasury Secretary Tim Geithner failed to rule out in a weekend interview the possibility that some of the U.S. banks may need more government funds to get them lending again. A bailout fund for battered banks still has $135 billion left in it, although Geithner said a second batch of money might be needed, despite public frustration with the already allocated money. Investors have also been unnerved by the news that Spain was bailing out Caja Castilla-La Mancha -- its first bank rescue in 16 years -- and reports that UBS AG is about to cull another 8,000 jobs. The main focus of attention in markets this week will be Thursday's meeting in London of G-20 leaders of industrialized and developing countries. While the leaders will look to present a show of unity, especially on global markets regulation, earlier hopes of a coordinated fiscal boost appear to have been dashed by skepticism in many European governments. In an interview with the Financial Times newspaper, President Barack Obama conceded that there was a "legitimate concern" that many countries will want to see how their earlier stimulus measures have worked before unveiling further packages. With new fiscal stimulus plans not expected to feature in the ensuing communique and differences of opinion between Europe and the U.S. still persisting, stock markets have started the week on a fragile note. "Taken in conjunction with news of fresh U.S. automotive problems and with some negative benchmark data releases in the offing -- notably the (Japanese) Tankan survey and U.S. non-farm payrolls -- this means that the coming week will be a particularly testing period in what is already an unprecedented era in financial market history," said Neil Mellor, an analyst at Bank of New York Mellon. Elsewhere in Asia, South Korea's benchmark fell 3.2 percent while markets in Singapore, Taiwan, and India fell 3 percent or more. In oil markets, prices tumbled to below $51 a barrel as investors cashed in on recent gains. Benchmark crude for May delivery fell $1.80 to $50.58 in electronic trading on the New York Mercantile Exchange. The dollar fell to 96.97 yen from 97.84 yen late Friday, while the euro dropped to $1.3193 from $1.3288.
Associated Press Writer Stephen Wright in Bangkok contributed to this story.
Monday, March 23, 2009
Economic Crisis and Regional Integration
By Harold James
Project Syndicate
PRINCETON ― Everyone now knows that we are in the worst economic crisis since the 1930s. The protectionist responses are sadly familiar: protests against foreign workers, demands for trade protection, and a financial nationalism that seeks to limit the flow of money across national frontiers.In the 1930s, however, economic nationalism was not the only show in town. Many people started to think of regional integration as the answer to depression. But the sort of integration that occurs in times of economic crisis is often destructive. The most unattractive versions of 1930s regionalism came from Germany and Japan, and represented nothing less than a practical extension of their power over vulnerable neighbors, which were forced into trade and financial dependence on the basis of Germany's Grosswirtschaftsraum or its Japanese equivalent, the Greater East Asia Co-Prosperity Sphere. As a consequence of the horrors of the 1930s, there remains substantial suspicion of concepts like ``Greater East Asia."In the second half of the 20th century, Europe had the chance to build a much more benevolent form of regionalism. But today, the European Union is stymied by having squandered the chance to build stronger institutions when times were better and tempers less strained.The EU is suffering from a number of problems that have been widely discussed for many years, but never seemed to be that urgent. Suddenly, in the face of the economic crisis, these problems have become major sources of political instability.There is a common monetary policy in the euro-zone countries, and an integrated capital market with financial institutions that are active across national frontiers. But banks are regulated and supervised nationally ― as they must be, because any rescue in the event of a large bank failure becomes a fiscal issue, with the cost borne by taxpayers in individual states rather than by the EU as a whole. But this setup makes little sense in the face of the economic logic of European integration.
The second obvious problem is the smallness of the EU's budget relative to those of the member states. The vast part of government activity takes place on a national level. But different governments have different degrees of fiscal room for maneuver.Italian, Greek, or Portuguese public debt is so high that any attempt to use fiscal spending as part of a strategy to combat the economic crisis is doomed to fail. But Ireland, with previously modest deficit and debt levels, also suddenly and unexpectedly faces the same kind of issue, owing to the government's need to take over private debt from the banking sector. France and Germany, by contrast, have an inherently strong fiscal position. So only the EU's strongest countries can really do anything against the sharply worsening recession.Moreover, the whole idea of Keynesian demand stimulus was developed, again in the 1930s, in the context of self-contained national economies. Keynesians filled up the warm water of fiscal stimulus in a national bathtub. When the national bathtub has holes, and other people benefit from the warmth, the exercise loses its attraction. In any case, it only ever worked for the larger states. The smaller states could not do Keynesianism in a hand basin.There are ways to fix both the banking and the fiscal problem. Control of banking is the simplest. The European Central Bank clearly has the technical and analytical capacity to take on general supervision of European banks, using the member central banks as information conduits. The fiscal problem could be dealt with by issuing generally guaranteed European bonds, which might be a temporary measure, restricted to the financial emergency.Both bank regulation and fiscal policy require a great deal more Europeanization. The most obvious way is to use existing mechanisms and institutions, in particular the ECB or the European Commission.The difficulty with such a suggestion is that it would imply a relative weakening of the national states, including the largest, Germany and France. They would most likely resist, and try to stay in their own bathtubs.Indeed, the crisis has turned France and Germany once more into the key players of the European process. But the more the crisis affects them, the more they think largely in national terms. From the perspective of Berlin or Paris, there should be no systematic Europeanization. Instead, the large states are now promoting informal groupings to look for worldwide solutions. Overtones of the 1930s are amplified, clearly exposing the Union's predicament, because of an odd coincidence: the Czech Republic now holds the EU's rotating presidency. The Czechs, probably the people with the most vivid historical memory of the bad regionalism of the 1930s, succeeded France, the European country that today is the least constrained in asserting its national interest. The clash of two visions of Europe is eroding the political stability of an area that once represented the best model and greatest hope for benign regionalism.Harold James is professor of history and international affairs at the Woodrow Wilson School, Princeton University and professor of history at the European University Institute, Florence. For more stories, visit Project Syndicate (www.project-syndicate.org).
Project Syndicate
PRINCETON ― Everyone now knows that we are in the worst economic crisis since the 1930s. The protectionist responses are sadly familiar: protests against foreign workers, demands for trade protection, and a financial nationalism that seeks to limit the flow of money across national frontiers.In the 1930s, however, economic nationalism was not the only show in town. Many people started to think of regional integration as the answer to depression. But the sort of integration that occurs in times of economic crisis is often destructive. The most unattractive versions of 1930s regionalism came from Germany and Japan, and represented nothing less than a practical extension of their power over vulnerable neighbors, which were forced into trade and financial dependence on the basis of Germany's Grosswirtschaftsraum or its Japanese equivalent, the Greater East Asia Co-Prosperity Sphere. As a consequence of the horrors of the 1930s, there remains substantial suspicion of concepts like ``Greater East Asia."In the second half of the 20th century, Europe had the chance to build a much more benevolent form of regionalism. But today, the European Union is stymied by having squandered the chance to build stronger institutions when times were better and tempers less strained.The EU is suffering from a number of problems that have been widely discussed for many years, but never seemed to be that urgent. Suddenly, in the face of the economic crisis, these problems have become major sources of political instability.There is a common monetary policy in the euro-zone countries, and an integrated capital market with financial institutions that are active across national frontiers. But banks are regulated and supervised nationally ― as they must be, because any rescue in the event of a large bank failure becomes a fiscal issue, with the cost borne by taxpayers in individual states rather than by the EU as a whole. But this setup makes little sense in the face of the economic logic of European integration.
The second obvious problem is the smallness of the EU's budget relative to those of the member states. The vast part of government activity takes place on a national level. But different governments have different degrees of fiscal room for maneuver.Italian, Greek, or Portuguese public debt is so high that any attempt to use fiscal spending as part of a strategy to combat the economic crisis is doomed to fail. But Ireland, with previously modest deficit and debt levels, also suddenly and unexpectedly faces the same kind of issue, owing to the government's need to take over private debt from the banking sector. France and Germany, by contrast, have an inherently strong fiscal position. So only the EU's strongest countries can really do anything against the sharply worsening recession.Moreover, the whole idea of Keynesian demand stimulus was developed, again in the 1930s, in the context of self-contained national economies. Keynesians filled up the warm water of fiscal stimulus in a national bathtub. When the national bathtub has holes, and other people benefit from the warmth, the exercise loses its attraction. In any case, it only ever worked for the larger states. The smaller states could not do Keynesianism in a hand basin.There are ways to fix both the banking and the fiscal problem. Control of banking is the simplest. The European Central Bank clearly has the technical and analytical capacity to take on general supervision of European banks, using the member central banks as information conduits. The fiscal problem could be dealt with by issuing generally guaranteed European bonds, which might be a temporary measure, restricted to the financial emergency.Both bank regulation and fiscal policy require a great deal more Europeanization. The most obvious way is to use existing mechanisms and institutions, in particular the ECB or the European Commission.The difficulty with such a suggestion is that it would imply a relative weakening of the national states, including the largest, Germany and France. They would most likely resist, and try to stay in their own bathtubs.Indeed, the crisis has turned France and Germany once more into the key players of the European process. But the more the crisis affects them, the more they think largely in national terms. From the perspective of Berlin or Paris, there should be no systematic Europeanization. Instead, the large states are now promoting informal groupings to look for worldwide solutions. Overtones of the 1930s are amplified, clearly exposing the Union's predicament, because of an odd coincidence: the Czech Republic now holds the EU's rotating presidency. The Czechs, probably the people with the most vivid historical memory of the bad regionalism of the 1930s, succeeded France, the European country that today is the least constrained in asserting its national interest. The clash of two visions of Europe is eroding the political stability of an area that once represented the best model and greatest hope for benign regionalism.Harold James is professor of history and international affairs at the Woodrow Wilson School, Princeton University and professor of history at the European University Institute, Florence. For more stories, visit Project Syndicate (www.project-syndicate.org).
Downturn will only end when 'banks are fixed'
Elizabeth Judge
March 23, 2009 Times Online
The recession gripping the world will not end until the banks are cleaned up, the International Monetary Fund (IMF) said today.
In the latest in a series of a bleak assessments, Dominique Strauss-Kahn, head of the IMF, said that bailouts may be politically unpopular but the banking sector needs to be overhauled if the economy is to recover and businesses and households are to function normally.
"You can put in as much stimulus as you want. It will just melt in the sun as snow if, at the same time, you are not able to have a generally smaller financial sector than before but a healthy financial sector at work," he said. The global economic situation remained "bluntly dire" and was "extremely worrying and difficult," he said. Speaking at a meeting of the International Labour Organisation (ILO), he said that the economic crisis would push millions into poverty and unemployment and could lead to social unrest and even war. His pessimistic comments are in sharp contrast to those of Ben Bernanke, the Federal Reserve Chairman, who last week forecast that America's recession will end "probably this year". Mr Bernanke said he had seen the first "green shoots" of recovery and that the prospect of America entering its first depression in seven decades had been averted. However, he stressed that a recovery would not take root unless banks could be persuaded to lend more freely.
Mr Strauss-Kahn's comments came as the US Government stepped up efforts to stablise the banking sector. It announced today the launch of a $500 billion (£343 billion) investment programme which will use public and private finance to create a fund that will buy the so-called "toxic assets" that are preventing banks from providing more liquidity to the lending markets. Timothy Geithner, the US Treasury Secretary, outlined details of the fund in a piece in the Wall Street Journal. The IMF has already said that it expects global growth to slow below zero this year for the first time since the Second World War. It had previously forecast growth of 2.2 per cent. Mr Strauss-Kahn said the IMF would shortly officially update its economic forecasts, with the world economy set to contract by between 0.5 and 1.0 per cent this year. Global unemployment is rising towards the 50 million mark.
Developed countries' economies would shrink by a post-war record of about 3 per cent, he said. Mr Strauss-Kahn said that stimulus packages around the world were running at about 1.6 per cent to 1.7 per cent of world gross domestic product, close to the two per cent he had called for.
He also called on emerging countries to ensure that they restored confidence so as to attract private capital.
March 23, 2009 Times Online
The recession gripping the world will not end until the banks are cleaned up, the International Monetary Fund (IMF) said today.
In the latest in a series of a bleak assessments, Dominique Strauss-Kahn, head of the IMF, said that bailouts may be politically unpopular but the banking sector needs to be overhauled if the economy is to recover and businesses and households are to function normally.
"You can put in as much stimulus as you want. It will just melt in the sun as snow if, at the same time, you are not able to have a generally smaller financial sector than before but a healthy financial sector at work," he said. The global economic situation remained "bluntly dire" and was "extremely worrying and difficult," he said. Speaking at a meeting of the International Labour Organisation (ILO), he said that the economic crisis would push millions into poverty and unemployment and could lead to social unrest and even war. His pessimistic comments are in sharp contrast to those of Ben Bernanke, the Federal Reserve Chairman, who last week forecast that America's recession will end "probably this year". Mr Bernanke said he had seen the first "green shoots" of recovery and that the prospect of America entering its first depression in seven decades had been averted. However, he stressed that a recovery would not take root unless banks could be persuaded to lend more freely.
Mr Strauss-Kahn's comments came as the US Government stepped up efforts to stablise the banking sector. It announced today the launch of a $500 billion (£343 billion) investment programme which will use public and private finance to create a fund that will buy the so-called "toxic assets" that are preventing banks from providing more liquidity to the lending markets. Timothy Geithner, the US Treasury Secretary, outlined details of the fund in a piece in the Wall Street Journal. The IMF has already said that it expects global growth to slow below zero this year for the first time since the Second World War. It had previously forecast growth of 2.2 per cent. Mr Strauss-Kahn said the IMF would shortly officially update its economic forecasts, with the world economy set to contract by between 0.5 and 1.0 per cent this year. Global unemployment is rising towards the 50 million mark.
Developed countries' economies would shrink by a post-war record of about 3 per cent, he said. Mr Strauss-Kahn said that stimulus packages around the world were running at about 1.6 per cent to 1.7 per cent of world gross domestic product, close to the two per cent he had called for.
He also called on emerging countries to ensure that they restored confidence so as to attract private capital.
Soon there may be nobody left to lend to America
Times Online, March 22, 2009
Irwin Stelzer
Anyone who thought Ben Bernanke and his Federal Reserve Board colleagues were out of ammunition received a rude, or pleasant, shock last week. Rude, if you worry that a few extra trillions sloshing around the economy might one day trigger a wave of inflation; pleasant, if you worry that the economy is sinking fast, and the Obama administration and Congress haven’t a clue what to do about it. The Fed plans to buy $300 billion of Treasury IOUs in the next six months (more to come if needed), pour $1.45 trillion into the mortgage market, and keep interest rates close to zero for “an extended period”. There’s more in the Fed’s “do whatever it takes” arsenal if these steps don’t bring interest rates down so people can borrow more cheaply to buy houses, cars and other durable goods. But so far, so good: interest rates on 30-year mortgages fell below 5%. Whether that will encourage enough creditworthy borrowers to sop up the huge inventory of unsold homes, much less trigger new construction, is difficult to predict. But the dollar dropped like a stone. Earlier, Chinese premier Wen Jiabao said he was “a little bit worried” that America might cheapen its currency and pay back the $1.2 trillion it owes in depreciated dollars. Now that the Fed has moved, he must be a lot worried.
The Fed’s decision to pump trillions into the money markets comes on top of President Barack Obama’s proposal to drive the federal deficit to 12% of GDP by borrowing trillions to fund a few stimulus projects, universal healthcare, a green energy system and a host of other programmes on his wish list. Obama’s assurance that America will never default on its debt hasn’t completely soothed the markets: The Wall Street Journal reports that it now costs seven times as much to buy insurance against an American government default as it did only a year ago. Besides, America can always inflate its way out of its obligations. Not to worry, says the president. The economy will soon be growing at an annual rate of about 4%. Along with the tax increases to be imposed on the top 2% of earners, billions from the sale of carbon-pollution permits and reductions in age-related entitlements, the growth will drive the deficit down to 3% of GDP in 2013. Unfortunately, 2% of earners can’t or won’t carry the entire burden, the carbon-permit programme might not produce the predicted revenues after Democratic congressmen from coal-producing states chop away at it, and Congress has told the president that any proposal to reduce the huge entitlement payments due the ageing baby-boomers will be DOA – dead on arrival.
Where China’s Wen sees problems, Paul Paulson (no relation to former Treasury secretary Hank) sees opportunity. Paulson, you will recall, is the hedge-fund manager who made $10 billion in 2007 betting that the subprime mortgage market would implode. The day before Bernanke’s announcement, Paulson made another wager. He shelled out $1.28 billion for a stake in the gold-mining company AngloGold Ashanti. He is betting that by debasing their currencies, governments will trigger inflation that will cause a flight from paper currencies to gold. Within 24 hours of Paulson’s bet, it paid off, thanks to the Fed: the price of gold jumped 7%, one of the many commodities to experience large increases. So here is where we are at. The combination of the Fed’s surprise attack on the credit markets and the president’s decision to borrow-and-spend will give the economy a lift. My own guess, and that of many economists with whom I have spoken, is that by the middle of next year, if not sooner, the economy will start growing again at a decent rate. At that point, Bernanke will have to decide whether to start pulling money out of the system by selling off some of the assets on his swollen balance sheet, and the Obama administration will have to decide how to bring down the fiscal deficit. Bernanke is keenly aware that during the Great Depression the Fed tightened the money supply prematurely, nipping a nascent recovery in the bud. So he is likely to stall.
Meanwhile, there is little prospect that Congress will do what is necessary to bring spending and borrowing down to levels that do not trigger inflation. Politicians just don’t worry as much about inflation as about catering to their multiple constituencies. So the Treasury will have more trillions in IOUs to peddle. But its best customers just might be unenthusiastic about adding significantly to their holdings. Wen already owns trillions in Treasury bills that are depreciating in value. Besides, China’s mounting needs for infrastructure and an improved safety net will sop up funds once used to buy American securities. Japan, another large customer, is now running a current-account deficit, and so it won’t have as many dollars to recycle. Nor will Middle East buyers, no longer receiving a flood of dollars from $140-a-barrel oil. Little wonder that Larry Lindsey, former economic adviser to President George W Bush, says he “cannot figure out what combination of foreign buyers is going to acquire . . . [the] debt” that Obama’s plans will generate. Which leaves Americans and the Fed as customers. Even if they save more, domestic consumers can’t absorb all the Treasury bonds that will be on offer. And if the Fed keeps buying, it will pour fuel on the inflationary fires.
I have never before doubted the resilience of the American economy – its ability to survive inevitable downturns after periods of excess, and to weather the burdens heaped on it by politicians. Obama, however, has me shaken, perhaps because I am not stirred by his rhetoric.
Fortunately, even some liberal Democrats are suffering from “bailout fatigue”. More important, Bernanke has so far shown a sure touch in managing monetary policy, and might head off a bout of inflation by shrinking the money supply when the economy is no longer too cold, has not yet gotten too hot, and is in just the right condition for such a move. If so, Goldilocks might just have a new life.
Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute. stelzer@aol.com
Irwin Stelzer
Anyone who thought Ben Bernanke and his Federal Reserve Board colleagues were out of ammunition received a rude, or pleasant, shock last week. Rude, if you worry that a few extra trillions sloshing around the economy might one day trigger a wave of inflation; pleasant, if you worry that the economy is sinking fast, and the Obama administration and Congress haven’t a clue what to do about it. The Fed plans to buy $300 billion of Treasury IOUs in the next six months (more to come if needed), pour $1.45 trillion into the mortgage market, and keep interest rates close to zero for “an extended period”. There’s more in the Fed’s “do whatever it takes” arsenal if these steps don’t bring interest rates down so people can borrow more cheaply to buy houses, cars and other durable goods. But so far, so good: interest rates on 30-year mortgages fell below 5%. Whether that will encourage enough creditworthy borrowers to sop up the huge inventory of unsold homes, much less trigger new construction, is difficult to predict. But the dollar dropped like a stone. Earlier, Chinese premier Wen Jiabao said he was “a little bit worried” that America might cheapen its currency and pay back the $1.2 trillion it owes in depreciated dollars. Now that the Fed has moved, he must be a lot worried.
The Fed’s decision to pump trillions into the money markets comes on top of President Barack Obama’s proposal to drive the federal deficit to 12% of GDP by borrowing trillions to fund a few stimulus projects, universal healthcare, a green energy system and a host of other programmes on his wish list. Obama’s assurance that America will never default on its debt hasn’t completely soothed the markets: The Wall Street Journal reports that it now costs seven times as much to buy insurance against an American government default as it did only a year ago. Besides, America can always inflate its way out of its obligations. Not to worry, says the president. The economy will soon be growing at an annual rate of about 4%. Along with the tax increases to be imposed on the top 2% of earners, billions from the sale of carbon-pollution permits and reductions in age-related entitlements, the growth will drive the deficit down to 3% of GDP in 2013. Unfortunately, 2% of earners can’t or won’t carry the entire burden, the carbon-permit programme might not produce the predicted revenues after Democratic congressmen from coal-producing states chop away at it, and Congress has told the president that any proposal to reduce the huge entitlement payments due the ageing baby-boomers will be DOA – dead on arrival.
Where China’s Wen sees problems, Paul Paulson (no relation to former Treasury secretary Hank) sees opportunity. Paulson, you will recall, is the hedge-fund manager who made $10 billion in 2007 betting that the subprime mortgage market would implode. The day before Bernanke’s announcement, Paulson made another wager. He shelled out $1.28 billion for a stake in the gold-mining company AngloGold Ashanti. He is betting that by debasing their currencies, governments will trigger inflation that will cause a flight from paper currencies to gold. Within 24 hours of Paulson’s bet, it paid off, thanks to the Fed: the price of gold jumped 7%, one of the many commodities to experience large increases. So here is where we are at. The combination of the Fed’s surprise attack on the credit markets and the president’s decision to borrow-and-spend will give the economy a lift. My own guess, and that of many economists with whom I have spoken, is that by the middle of next year, if not sooner, the economy will start growing again at a decent rate. At that point, Bernanke will have to decide whether to start pulling money out of the system by selling off some of the assets on his swollen balance sheet, and the Obama administration will have to decide how to bring down the fiscal deficit. Bernanke is keenly aware that during the Great Depression the Fed tightened the money supply prematurely, nipping a nascent recovery in the bud. So he is likely to stall.
Meanwhile, there is little prospect that Congress will do what is necessary to bring spending and borrowing down to levels that do not trigger inflation. Politicians just don’t worry as much about inflation as about catering to their multiple constituencies. So the Treasury will have more trillions in IOUs to peddle. But its best customers just might be unenthusiastic about adding significantly to their holdings. Wen already owns trillions in Treasury bills that are depreciating in value. Besides, China’s mounting needs for infrastructure and an improved safety net will sop up funds once used to buy American securities. Japan, another large customer, is now running a current-account deficit, and so it won’t have as many dollars to recycle. Nor will Middle East buyers, no longer receiving a flood of dollars from $140-a-barrel oil. Little wonder that Larry Lindsey, former economic adviser to President George W Bush, says he “cannot figure out what combination of foreign buyers is going to acquire . . . [the] debt” that Obama’s plans will generate. Which leaves Americans and the Fed as customers. Even if they save more, domestic consumers can’t absorb all the Treasury bonds that will be on offer. And if the Fed keeps buying, it will pour fuel on the inflationary fires.
I have never before doubted the resilience of the American economy – its ability to survive inevitable downturns after periods of excess, and to weather the burdens heaped on it by politicians. Obama, however, has me shaken, perhaps because I am not stirred by his rhetoric.
Fortunately, even some liberal Democrats are suffering from “bailout fatigue”. More important, Bernanke has so far shown a sure touch in managing monetary policy, and might head off a bout of inflation by shrinking the money supply when the economy is no longer too cold, has not yet gotten too hot, and is in just the right condition for such a move. If so, Goldilocks might just have a new life.
Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute. stelzer@aol.com
Saturday, March 21, 2009
MONEY & BREAD!
by Puru Saxena
Editor, Money Matters
March 20, 2009
The cat is out of the bag. The Federal Reserve is waging an all-out inflationary war on the economic contraction. Two days ago, Mr. Bernanke announced that the Federal Reserve would buy US$300 billion worth of US Treasuries and another US$700 billion worth of government-agency mortgage debt. In order to finance these purchases, the Federal Reserve would simply create this money out of thin air.
It is worth noting, that the Federal Reserve has already dropped the Fed Funds Rate to a historically low range of 0–0.25% and now it is desperately trying to use other unconventional methods (Quantitative Easing) to stimulate the economy. In my view, this latest development of the Federal Reserve monetising debt is inflationary and confirmation that the Federal Reserve wants to debase the US Dollar. It is worth noting that the total debt in the US now exceeds US$60 trillion and its economy is around US$14 trillion. So, the US is already bankrupt and the only way it can ever hope to repay this gigantic sum is through monetary inflation and debasement. Allow me to explain:
Suppose your grandparents borrowed US$100,000 from their friends roughly 50 years ago. Back then, US$100,000 was a lot of money and the chances of your grandparents ever repaying this loan were slim at best. However, thanks to monetary inflation and the debasement of the US Dollar, today, US$100,000 isn’t a very large sum of money and your grandparents would find it much easier to repay their debt.
Turning to the present situation, the US owes its creditors a gigantic amount of money and a debt so large that it can never hope of repaying it in today’s dollars! So, the US has two options:
a. Default or bankruptcy
b. Monetary inflation
Given the fact that the US is still the world’s largest economy, owns the world’s reserve currency and has a democratically elected government, I think we can pretty much rule out the possibility of sovereign default. Therefore, you can bet your bottom dollar that the US will try its best to inflate its way out of trouble. Remember, politicians borrow money when it buys them a loaf of bread and they repay it when the same money is worth only a slice of bread!
It is my firm belief that over the years ahead, the US and all other debt-laden nations in the West will engage in massive money-creation in order to debase their currencies and dilute the purchasing power of paper money. Remember, monetary inflation is a debtor’s best friend as it makes the debt easier to service and repay. On the other hand, monetary inflation goes against the interests of savers and creditors. Given the fact that most of the ‘developed’ nations are up to their eyeballs in debt, you don’t have to be a genius to figure out that monetary inflation is our future. At present, the global economy is dealing with deflationary forces due to credit contraction in the private-sector. However, even now, total credit in the US is expanding due to rampant borrowing by the US government. So, I don’t expect deflation to take hold; rather, I anticipate accelerating inflation which has always led to rising asset and consumer prices.
It is worth noting that apart from the Federal Reserve, other nations have also started monetising their debt. Recently, the Bank of England announced that it plans to buy GBP150 billion worth of its government debt by creating money out of thin air. Needless to say, such a move is inflationary and terrible for the health of the British currency.
Now that we have established that monetary inflation is our future, let us examine which currencies and assets will maintain their purchasing power. If history is any guide, nations which engage in monetary inflation always diminish the purchasing power of their currency. So, in the years ahead, we can expect currencies in the West to depreciate in terms of purchasing power but the trouble is that none of the fundamentally sound nations want a strong currency either! As the world engages in competitive currency devaluations, I expect all the currencies in the world to lose significant purchasing power against hard assets. Therefore, in the years ahead, precious metals and other commodities with intrinsic value should appreciate considerably. Even the values of fundamentally sound businesses with clean balance-sheets should sky-rocket as a result of inflation.
Over the past couple of days, in the aftermath of the latest announcement by the Federal Reserve, we have seen significant strength in precious metals, crude oil and grains. Conversely, we have seen a huge decline in the US Dollar. If the Federal Reserve continues on this inflationary path, we can expect a resumption of the commodities bull-market and renewed weakness in the US Dollar.
Contrary to popular opinion, I am of the view that most commodities and stock markets have seen the lows for the entire bear-market and we may be in the early stages of a new cyclical bull-market which could last for a few years. Now, I am aware that my bullish stance may lead to ridicule from some of my readers, but I would like to point out that new bull-markets are always born during abject pessimism and scepticism. Even if some asset prices break to fresh lows in the near-term, I suspect such a move will prove to be a ‘head fake’ and prices will soon rebound. So if you have a 4 – 5 year investment horizon, now may be a good time to convert some of your temporarily powerful cash into hard assets (precious metals, energy and industrial metals), related producing-companies and sound businesses in the fast-growing Asian economies.
At the current levels, the energy complex looks extremely attractive and should prove to be a fantastic long-term investment. After years of extensive research, I am convinced that the world’s oil production is peaking and we are likely to see much higher energy prices in the future. So, investors may want to add to their positions in upstream oil/gas companies and the energy service stocks. Finally, it looks as though the precious metals complex is becoming over-heated and long-term investors may want to wait for the usual summer correction before adding to their positions in physical gold and silver.
Editor, Money Matters
March 20, 2009
The cat is out of the bag. The Federal Reserve is waging an all-out inflationary war on the economic contraction. Two days ago, Mr. Bernanke announced that the Federal Reserve would buy US$300 billion worth of US Treasuries and another US$700 billion worth of government-agency mortgage debt. In order to finance these purchases, the Federal Reserve would simply create this money out of thin air.
It is worth noting, that the Federal Reserve has already dropped the Fed Funds Rate to a historically low range of 0–0.25% and now it is desperately trying to use other unconventional methods (Quantitative Easing) to stimulate the economy. In my view, this latest development of the Federal Reserve monetising debt is inflationary and confirmation that the Federal Reserve wants to debase the US Dollar. It is worth noting that the total debt in the US now exceeds US$60 trillion and its economy is around US$14 trillion. So, the US is already bankrupt and the only way it can ever hope to repay this gigantic sum is through monetary inflation and debasement. Allow me to explain:
Suppose your grandparents borrowed US$100,000 from their friends roughly 50 years ago. Back then, US$100,000 was a lot of money and the chances of your grandparents ever repaying this loan were slim at best. However, thanks to monetary inflation and the debasement of the US Dollar, today, US$100,000 isn’t a very large sum of money and your grandparents would find it much easier to repay their debt.
Turning to the present situation, the US owes its creditors a gigantic amount of money and a debt so large that it can never hope of repaying it in today’s dollars! So, the US has two options:
a. Default or bankruptcy
b. Monetary inflation
Given the fact that the US is still the world’s largest economy, owns the world’s reserve currency and has a democratically elected government, I think we can pretty much rule out the possibility of sovereign default. Therefore, you can bet your bottom dollar that the US will try its best to inflate its way out of trouble. Remember, politicians borrow money when it buys them a loaf of bread and they repay it when the same money is worth only a slice of bread!
It is my firm belief that over the years ahead, the US and all other debt-laden nations in the West will engage in massive money-creation in order to debase their currencies and dilute the purchasing power of paper money. Remember, monetary inflation is a debtor’s best friend as it makes the debt easier to service and repay. On the other hand, monetary inflation goes against the interests of savers and creditors. Given the fact that most of the ‘developed’ nations are up to their eyeballs in debt, you don’t have to be a genius to figure out that monetary inflation is our future. At present, the global economy is dealing with deflationary forces due to credit contraction in the private-sector. However, even now, total credit in the US is expanding due to rampant borrowing by the US government. So, I don’t expect deflation to take hold; rather, I anticipate accelerating inflation which has always led to rising asset and consumer prices.
It is worth noting that apart from the Federal Reserve, other nations have also started monetising their debt. Recently, the Bank of England announced that it plans to buy GBP150 billion worth of its government debt by creating money out of thin air. Needless to say, such a move is inflationary and terrible for the health of the British currency.
Now that we have established that monetary inflation is our future, let us examine which currencies and assets will maintain their purchasing power. If history is any guide, nations which engage in monetary inflation always diminish the purchasing power of their currency. So, in the years ahead, we can expect currencies in the West to depreciate in terms of purchasing power but the trouble is that none of the fundamentally sound nations want a strong currency either! As the world engages in competitive currency devaluations, I expect all the currencies in the world to lose significant purchasing power against hard assets. Therefore, in the years ahead, precious metals and other commodities with intrinsic value should appreciate considerably. Even the values of fundamentally sound businesses with clean balance-sheets should sky-rocket as a result of inflation.
Over the past couple of days, in the aftermath of the latest announcement by the Federal Reserve, we have seen significant strength in precious metals, crude oil and grains. Conversely, we have seen a huge decline in the US Dollar. If the Federal Reserve continues on this inflationary path, we can expect a resumption of the commodities bull-market and renewed weakness in the US Dollar.
Contrary to popular opinion, I am of the view that most commodities and stock markets have seen the lows for the entire bear-market and we may be in the early stages of a new cyclical bull-market which could last for a few years. Now, I am aware that my bullish stance may lead to ridicule from some of my readers, but I would like to point out that new bull-markets are always born during abject pessimism and scepticism. Even if some asset prices break to fresh lows in the near-term, I suspect such a move will prove to be a ‘head fake’ and prices will soon rebound. So if you have a 4 – 5 year investment horizon, now may be a good time to convert some of your temporarily powerful cash into hard assets (precious metals, energy and industrial metals), related producing-companies and sound businesses in the fast-growing Asian economies.
At the current levels, the energy complex looks extremely attractive and should prove to be a fantastic long-term investment. After years of extensive research, I am convinced that the world’s oil production is peaking and we are likely to see much higher energy prices in the future. So, investors may want to add to their positions in upstream oil/gas companies and the energy service stocks. Finally, it looks as though the precious metals complex is becoming over-heated and long-term investors may want to wait for the usual summer correction before adding to their positions in physical gold and silver.
Informed Citizen Network
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Terence Corcoran: Is this the end of America?
March 19, 2009
The National Post, Canada
U.S. law-making is riddled with slapdash, incompetence and gamesmanship
By Terence Corcoran
Helicopter Ben Bernanke’s Federal Reserve is dropping trillions of fresh paper dollars on the world economy, the President of the United States is cracking jokes on late night comedy shows, his energy minister is threatening a trade war over carbon emissions, his treasury secretary is dithering over a banking reform program amid rising concerns over his competence and a monumentally dysfunctional U.S. Congress is launching another public jihad against corporations and bankers.As an aghast world — from China to Chicago and Chihuahua — watches, the circus-like U.S. political system seems to be declining into near chaos. Through it all, stock and financial markets are paralyzed. The more the policy regime does, the worse the outlook gets. The multi-ringed spectacle raises a disturbing question in many minds: Is this the end of America?Probably not, if only because there are good reasons for optimism.
The National Post, Canada
U.S. law-making is riddled with slapdash, incompetence and gamesmanship
By Terence Corcoran
Helicopter Ben Bernanke’s Federal Reserve is dropping trillions of fresh paper dollars on the world economy, the President of the United States is cracking jokes on late night comedy shows, his energy minister is threatening a trade war over carbon emissions, his treasury secretary is dithering over a banking reform program amid rising concerns over his competence and a monumentally dysfunctional U.S. Congress is launching another public jihad against corporations and bankers.As an aghast world — from China to Chicago and Chihuahua — watches, the circus-like U.S. political system seems to be declining into near chaos. Through it all, stock and financial markets are paralyzed. The more the policy regime does, the worse the outlook gets. The multi-ringed spectacle raises a disturbing question in many minds: Is this the end of America?Probably not, if only because there are good reasons for optimism.
The U.S. economy has pulled out of self-destructive political spirals in the past, spurred on by its business class and corporate leaders, the profit-making and market-creating people who rose above the political turmoil to once again lift the world out of financial crisis. It’s happened many times before, except for once, when it took 20 years to rise out of the Great Depression.Past success, however, is no guarantee of future recovery, especially now when there are daily disasters and new indicators of political breakdown. All developments are not disasters in themselves. The AIG bonus firestorm is a diversion from real issues , but it puts the ghastly political classes who make U.S. law on display for what they are: ageing self-serving demagogues who have spent decades warping the U.S. political system for their own ends. We see the system up close, law-making that is riddled with slapdash, incompetence and gamesmanship.One test of whether we are witnessing the end of America is how many more times Americans put up with congressional show trials of individual business people and their employees, slandering and vilifying them for their actions and motives. And for how long will they tolerate a President who berates business and corporations as dens of crime and malfeasance? If the majority of Americans come to accept the caricatures of business as true, then America is closer to the end of its life as a global leader, as a champion of markets and individualism.But America is at risk in other ways, especially in the technical business of setting and executing policy. The presidency of Barack Obama has set out on a course that has no precedent in U.S. history. Franklin D. Roosevelt, whose New Deal transformed the U.S. economy during the Great Depression, pushed America off on a sharply different political and ideological course. The Obama administration is different in many ways, not least in its supreme self-confidence in its methods and objectives.Reform of health care, environmental policy, education, energy, banking, regulation — every nook and cranny of the U.S. economy has been put on alert for major change. Expansion of government spending, plunging the U.S. into unprecedented deficits, is without parallel. In economic policy, through regulation and control of energy output, financial services and monetary expansion, the U.S. government has embarked on a fundamental reshaping of America. It is designed, in short, to bring on the end of America.The spillover effect of all this on the rest of the world promises to be dramatically disruptive. The greatest global risk is in monetary and currency policy. Below is a chart that graphically demonstrates the sharp deviation in monetary policy from past norms. Under the chairmanship of Ben Bernanke, the Federal Reserve is in the midst of a giant economic experiment, flooding the world with U.S. dollars, hoping that flood will stimulate economic activity.The total monetary base, already at astronomical levels, is now expected to take another big hit with the new Fed policy of buying up U.S. longer-term treasury bills in a bid to drive down long-term interest rates.Mr. Bernanke is sometimes known as “Helicopter Ben” because he once in an academic paper referred to the use of “helicopters” full of money to rescue an economy from deflation. In comments Wednesday to explain the Fed’s new policy of buying $300-billion in U.S. treasury bills, Mr. Bernanke noted that the Fed is now more worried about inflation being too low than about it getting too high in the future.For the rest of the world, however, the worry is that America is at risk of becoming the fountainhead of a new inflationary outburst. The U.S. dollar is now in decline, gold is moving sharply higher, and new global currency turmoil is on the horizon. It may not happen. A paper just published by the Federal Reserve Bank of St. Louis, source of the chart above, says that the Fed will have to be prepared to absorb all the excess money it has poured into the U.S. economy. It will be a technical and political challenge unlike any central bank has ever undertaken. The future of America is at stake.-->
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