The G20 and the multilateral trade impasse
By Diana Tussie
FLACSO. Buenos Aires, Argentina
http://www.clubmadrid.org/img/secciones/G20_FINAL_REPORT.pdf
[[HAZ: Este fue uno de los documentos circulados para debate en el reciente meeting del G20 en Korea]]
In many countries, the surge in national industry bailouts, stimulus packages
and subsidies contains worrying aspects of foreign commercial discrimination
to protect domestic jobs. These policies represent an emerging trade agenda
that the G20 will need to tackle, regardless of the fate of the stalled Doha round.
Nonetheless, Doha retains symbolic value in terms of providing a cooperative
climate for multilateral trade talks, precisely because of this longer term agenda
looming in the background.
Trade stagnation
The onset of the global fi nancial crisis saw dramatic global trade deterioration.
After a 27 year boom, fi gures for 2009 suggest a contraction of 12.2 per cent
in global trade, the sharpest decline in almost 70 years. Even those countries
whose exports had boomed over previous years, such as China, India and
Argentina, experienced a signifi cant decline. China’s exports fell by 16 per cent,
while India, Argentina, South Africa and Brazil recorded declines of over 20 per
cent.
The fear of collapsing trade that gripped world leaders helped to bring about
the fi rst G20 Leaders Summit in Washington DC in November 2008. While
pushing forward fi nancial regulatory reform, they were quick to commit to an
open global economy. In their communiqué, G20 leaders declared that it was
critically important to reject protectionism and avoid turning inward in the face
of falling growth and rising unemployment. The G20 committed to the following:
‘we will refrain from raising new barriers to investment or to trade in goods and
services, imposing new export restrictions, or implementing WTO inconsistent
measures to stimulate exports’. And for extra emphasis on the importance of
trade to global economic health, they tasked their trade ministers to ‘reach
agreement this year on modalities that lead to the successful conclusion to the
WTO’s Doha Development Agenda with an ambitious and balanced
outcome’.
The G20 leaders remained alert to the prospects of trade wars. In their April
2009 London meeting they declared that: ‘Reinvigorating world trade and
investment is essential for restoring global growth. We will not repeat the historic
mistakes of protectionism of previous eras’. The leaders renewed their public
commitment to what was known, by then, as the Standstill Provision and
agreed to extend it through 2010. On the question of completion of the Doha
Round, the leaders once again reaffi rmed their call to reach ‘an ambitious and
balanced conclusion’. However, notwithstanding declarations in several G20
communiqués, efforts to conclude the Doha Development Agenda negotiations
have made little progress.
In January 2009 Pascal Lamy, director general of the World Trade Organisation
(WTO), referred to the global trading system as ‘an insurance policy against
protectionism’. To enhance the trade system, Lamy declared that the WTO
would issue periodic reports on global trends in international trade policy
developments as part of the WTO’s surveillance mandate. The Secretariat’s
hope was that members would fi nd these reports useful in facilitating discussions
to cope with the crisis. At the London Summit, the G20 urged the WTO and
other international bodies ‘to monitor and report publicly on our adherence to
these undertakings on a quarterly basis’. The WTO, UNCTAD and the OECD
now jointly issue periodic reports.
The Framework for Strong, Sustainable and Balanced Growth adopted at
Pittsburgh in September 2009 calls for aligning fi scal, monetary, foreign
exchange, trade and structural policies among the G20 nations. The collective
examination of global imbalances is identifi ed as one of the elements in the
Framework. The need for global economic balance has been brought home
painfully by the Greek debt crisis.
So how determined have the G20 countries been – beyond rhetorical
pronouncements at the G20 summits – in avoiding protectionism? The short
answer is not very determined, but nor has the result been deplorable. Many
international and regional organisations have monitored trade policy since the
Washington summit, and all have noted that high intensity protection has not
occurred.
The focus on trade has declined somewhat since the Washington summit
despite the repeated mention of the subject in subsequent meetings and the
collapse of world trade in 2009. The dismal performance of international trade
fl ows can mostly be explained by the sharp contraction in global demand. This
was magnifi ed by the limited availability of trade fi nance and the fact that the
decline in trade occurred simultaneously across a number of countries and
regions.
The decrease in demand and the explosion of unemployment across the G20
countries as the fi nancial crisis spilled over into the ‘real economy’ have led to
a new trade predicament. This is because many government measures have
included potentially discriminatory features. Even if serious protectionism has
been averted and trade relations have remained amicable, a new series of
concerns is now simmering in the background. Given the spiralling number of
bailouts and stimulus packages, the trade agenda will need revamping,
regardless of whether a Doha Round package is agreed upon.
Addressing core concerns
A number of leading think tanks have come together to monitor state measures
that might discriminate against foreign trade interests, related to imports,
exports, foreign workers and investments.
With the assistance of trade experts from across G20 countries, Global Trade
Alert began to collect trade measures that might discriminate against foreign
commercial interests. The table below summarises measures initiated by G20
countries since the Standstill Provision up to 1 July 2010.
[[see tables in web above]]
The table shows that since the Standstill Provision was agreed, G20 countries
have implemented at least 658 measures (red and amber coded measures)
that are almost certain to discriminate against foreign commercial interests. Of
the measures initiated by G20 countries through June 2010, about half are
almost certainly discriminatory. While some measures have been taken that
improve trade (mostly introduced to offset the effect of an overvaluation of the
exchange rate) the number of discriminatory measures is signifi cant.
This record cannot be seen as adherence to a global commitment. Rich
countries have relied on subsidies and poor countries have used duties to
restrict imports.
If G20 leaders have been less than vigilant when it comes to maintenance of the
Standstill Provision, what then of their commitment to conclude the Doha
Round? Here, too, it seems that rhetoric far exceeds real commitment.
From the outset, much convincing was required of developing countries,
especially the poorest in Africa, that this Round would bring them substantial
benefi ts. Though the Round was supposed to deal with development issues, in
fact it came down to concerns over agriculture and non-agricultural manufactured
products (NAMA). Originally scheduled to reach conclusion by January 2005,
the start-stop cycle has been painfully prolonged as parties dissected as never
before the domestic implications of the tabled proposals.
Emerging and developing economies cannot be expected to commit to an
institution in which they are marginalised. Doha mobilised a set of new coalitions
among Southern countries, most prominently the G20 trade coalition (not to be
confused with the current leaders G20 Summit). Operated under various guises,
it was led by India and Brazil and supported in various manners by a number of
other developing countries.
Following the Washington Summit in November 2008, senior offi cials in Geneva
failed to make progress in the fi ve critical areas identifi ed by WTO DG Pascal
Lamy: NAMA, tariff cutting, initiatives for specifi ed sectors, the special safeguard
mechanism for developing countries to protect against agricultural import
surges, and the issue of preference erosion. With this setback, Lamy called off
the December 2008 ministerial meeting.
At the London Summit in April 2009, the G20 reiterated its call to conclude the
Round by 2010. Yet just a few days later, Rahul Khullar, India’s commerce
secretary, publicly stated that completion of the Doha Round was out of reach,
given public anger over job losses and the collapse of economic growth. During
2009 Argentina (subsequently supported by several developing G20 countries)
raised the concern that bailouts and fi scal support in developed countries have
a strong protectionist and distorting impact on international trade, resulting in a
lsubsidise. Yet these packages were not reported in a symmetrical fashion in
WTO reports, in contrast to the border measures that developing countries
have resorted to.
The G20’s role
The alarm over trade protection has receded into the background of the G20
agenda despite the reiterated call for good behaviour. But a looming trade
agenda is taking shape. Competitiveness has become more complex and
cutthroat requiring support from the state to assist industries to be competitive
in the global marketplace. Contingent legalised protectionism has a very large
place inside the WTO and all free trade agreements. While not insurmountable,
the challenges presented to global trade by the economic crisis demand
appropriate recognition.
• WTO members should anticipate that the continued effort at a broad
Doha agreement will falter against the reality of domestic resistance.
• The G2O should accept the “smallest” agreements possible towards a
conclusion of the Doha Round, as a means to support the legitimacy
of the WTO. Generous market opening offers for LDCs must be part of
the package.
• The G20 must encourage open discussions at the WTO to examine
the sources of discrimination that lie not so much with the issues that
concern the current Doha Round, but on matters emerging from the
current economic crisis: discriminatory procurement, bailouts and
subsidies.
• The G20 must start a work programme on this emerging trade agenda,
as laid out in Table 2.oss of competitiveness on the part of countries without any capacity to subsidise. Yet these packages were not reported in a symmetrical fashion in WTO reports, in contrast to the border measures that developing countries
have resorted to.
[[see table in the original doc above]]
The G20 has a responsibility to maintain momentum around these issues
beyond the current crisis, with the acknowledgement that these issues are
pertinent to all countries, including 172 non-members. That means broadening
the voices it listens to. There are signifi cant advantages to be had from greater
openness to so-called ‘systemically unimportant’ non-member states. Usually
bigger countries harbour the leading thinkers and public debates, but small
countries understand the issues as well and they understand implementation
more than most.
The G20 could rectify this bias by undertaking structural changes and thorough
outreach. Changes to the G20´s structure might include adding seats for LDCs
on a rotating-basis, including two or three countries as formal G20 members.
Creating a constituency system and reshuffl ing membership with a greater
regional focus (limiting European representation to one EU seat) is vital. Outreach
could include formal meetings and seminars and joint work on global public
good issues, inviting select observes to participate in G20 meetings and holding
meetings in non-member countries.
The G20 will not be able to move the emerging trade agenda if process issues
are not tackled. A basic step would be to consider establishing a permanent
secretariat, outside North America or Europe. This would provide a permanent
provision of substantive technical support independent of the G8 dominated
institutions. A G20 secretariat could also provide space for consultation on
sensitive issues which does not adequately exist in the WTO agenda, as
presently configured.
With the establishment of a secretariat the G20 could also undertake regional
dialogues that would feed into the formal G20 process. This could include a
network of horizontal capacity building to strengthen widespread technical
ability to contribute to the formal G20 process.
Along the above lines the G20 should broaden its working groups from the
current priority reform areas (regulation and transparency; international
cooperation and market integrity; IMF reform; World Bank and other multilateral
development bank reforms). Thematic working groups could focus on crosscutting
issues. In these ways the G20 would be better equipped to address the
trade dimension of economic recovery.
http://www.clubmadrid.org/img/secciones/G20_FINAL_REPORT.pdf
martes, 16 de noviembre de 2010
G20 FINAL REPORT EXTRACTOS
G20 FINAL REPORT ACCORDING TO CLUB OF MADRID.
[[HAZ:Disregard the previous sending. This seems to be a more reliable source]]
The G20’s Role in the Post-Crisis World. Seoul, Republic of Korea
http://www.clubmadrid.org/img/secciones/G20_FINAL_REPORT.pdf
Executive Summary
The November G20 Summit, chaired by the Republic of Korea, will be the fi rst
one overseen by a non-G8 country. This represents a unique opportunity to
enhance this leadership forum’s effectiveness and credibility and to broaden
the confi dence and momentum that the Korean Presidency has already
generated and that needs to be maintained.
The Korean Presidency should be ambitious but also pragmatic. The G20 must fi rst
show it can deliver on existing commitments. It is in delivering that the G20 will
ensure its legitimacy. The Korean Presidency needs to strike a delicate balance: it
must encourage the G20 to begin thinking and acting long-term, beyond the
exigencies of crisis management; but also make sure that such strategic foresight
does not divert efforts from short-term imperatives. The Toronto summit was billed
as a ‘post-crisis’ meeting but was forced to narrow its focus to questions of fiscal
retrenchment. Barring further instability and crisis, Seoul will provide an opportunity for the G20 finally to deliberate on its role beyond reactive crisis fire-fi ghter.
We welcome the Korean Presidency’s initiative to include development in the
agenda. There is a case for adding some new items to the agenda; but this
should be done in a way that facilitates progress on economic cooperation and
governance issues and not distract from them.
Even an eventual slowdown in global economic recovery should not shake the
political resolve of G20 leaders in the compliance of commitments and the
pursuit of their agenda.
Against this background the following recommendations were put forward for
the Seoul Summit and the G20 in the years to come:
Legitimacy and Efficiency:
Recommendation 1:
Reinforce the G20’s role in global economic governance
in the post-crisis world.
Recommendation 2:
Frame the agenda and institutionalize the relationship with
relevant multilateral organizations and actors in order to avoid duplication of
mandates and foster complementarities.
Recommendation 3:
Focus on its current agenda and deliver on its commitments
in order to ensure legitimacy.
Recommendation 4:
Ensure the G20s effi ciency by maintaining a manageable
size, a valuable process, a workable agenda, and adequate cost management.
Reform of Quotas at International Financial Institutions:
Recommendation 5:
Grant greater voting power to emerging economies and
developing countries in the IFIs by ending the US veto right and Europe’s
over-representation.
THE G20’S ROLE IN THE POST-CRISIS WORLD
Recommendation 6:
Consider the reform the IMF quota formula by including
other relevant indicators. To date, around 80% of this formula is based on GDP.
Other elements such as population and reserves could also be considered.
Recommendation 7:
Implement the decision to select the President of the
World Bank and the Managing Director of the IMF on the basis of merit and
regional representation.
Recommendation 8:
Address future international financial challenges, such as,
international monetary reform and the need for a global financial safety net.
Accountability Mechanisms:
Recommendation 9:
Define the role of the G20 as the premier leadership forum
that can provide political guidance on issues of concern for economic
cooperation and governance.
Recommendation 10:
Strengthen the accountability of the G20 through the
application of results measurement, commitment monitoring and mutual
assessments.
Recommendation 11: Foster transparency to enhance people’s ability to trust the quality of its decision-making.
Recommendation 12: Define and establish an outreach strategy that allows for two-way accountability with relevant institutions and non G20 countries.
Development priorities for a G-20 Agenda:
Recommendation 13:
Enhance national capacities and create an enabling
international environment for the development of sustainable global growth and
well-being. The experience of the Republic of Korea can serve as an inspiring
reference for developing countries.
Recommendation 14: Promote green and inclusive economic growth,
employment creation and investment in human capital, all principles that apply
to global efforts for development, including within G20 Members.
Recommendation 15: Take a more determined and creative stance on global
free trade. This is an opportunity for the G20 to take concrete steps to conclude
the Doha Round and fulfill the commitments of the Doha Development
Agenda.
Recommendation 16:
Address the existing contradiction between freedom in
capital movements and the still significant barriers in the movement of labor in
order to avoid asymmetric globalization
Final Report: Extracts
II. Reform of quotas at international financial institutions
Recommendation 5:
Grant greater voting power to emerging economies and
developing countries in the IFIs by ending the US veto right and Europe’s
overrepresentation.
The IMF and the World Bank must be made more legitimate, effective, and
accountable, and this must be done by granting a greater voice to the developing
world. This lack of representation is at the root of their lack of responsiveness.
Accordingly, the existing economic governance structure limits the effectiveness
of the IFIs, as they do not adequately respond to the needs of developing
countries. Priorities in the IFIs are set by boards in which developed countries
are overrepresented, causing a serious problem of accountability.
In order to properly address this issue and give more power to developing countries,
the US veto and Europe’s overrepresentation at the IMF must be unequivocally
addressed. Currently the US has the 15% of voting power and the majority rule was
established at 85%. Reducing this majority rule to 70% or 75% could resolve this
problem facilitating a more responsive decision-making process. Europe is
overrepresented within the Bretton Woods institutions and with the current crisis
some EU countries have actually become IMF borrowers, as is the case of Greece.
This might be seen as illegitimate and may lead to problems in the future.
“The balance of economic powers has changed; the distribution of fi nancial
capacities, savings and reserves is no longer what it used to be”
Lionel Jospin, Former Prime Minister of France. Member of the Club of Madrid
Recommendation 6:
Consider the reform of the IMF quota formula by including
other relevant indicators.
The current formula privileges Gross Domestic Product, which accounts for
approximately 80% of the total formula. In this sense, some of the participants
suggested the introduction of new elements in the determination of these
quotas, elements such as population, reserves and money. These proposals
whilst helping address the under-representation of Asia do not really deal with
the underrepresentation for Africa. Therefore more creative formulas are still
encouraged.
Recommendation 7:
Implement the decision to select the President of the
World Bank and the Managing Director of the IMF on the basis of merit and
regional representation.
Although this issue has already been raised in previous G20 Summits, it is an
important one to emphasize in order to ensure efforts in this direction continue.
There is criticism around the current system in which the IMF Managing Director is
European and the World Bank President is American.
In this sense, and aiming for a better global representation, it is necessary to
choose both the Heads, and all staff, on the basis of merit and contemplate
regional criteria.
Recommendation 8:
Address future international fi nancial challenges, such as
international monetary reform and the need of a global safety net.
Once the crisis has been overcome, the G20 should tackle critical matters
which some participants defi ned as the “black holes” of the system, such as
the excessive volatility of energy and commodity prices, the control of hedge
funds, fi scal paradises and speculation due to the instability of exchange rates.
The French G20 presidency will take up some of these issue in its agenda,
although proposals regarding the stability and equity of the global monetary
system have already been presented by the Chinese government and the UN
“Stiglitz Commission”.
Regarding the reform of the IFIs some scholars believe that a significant reform
of the existing IMF Council would be enough. Others think that it is necessary
to transform the IMF Council into a new International Monetary and Financial
Board, with broader decision-making powers, for instance, in the selection of
the Managing Director and strategic aspects of global surveillance. In any case,
the idea of a broader council covering all international fi nancial institutions
remains on the table. The G20 should indicate which kind of global economic
coordination council it prefers, taking into account the stability and equity of the
system that is sought.
As a result of the experience of the 2007 crisis, a number of Asian economies
have to date accumulated vast amounts of trade surpluses, which means
foreign reserves but also global imbalances that have helped them to overcome
the crisis. Based on this experience and the sovereign debts accumulated by
many to rescue banks in diffi culties, some participants suggested the
convenience of developing mechanisms to reduce vulnerabilities during future
systemic crises. In past summits, such as Toronto, the G20 recognized the
need of increasing regional and international efforts in this sense and asked
fi nance ministers and central bank governors to consider this issue in greater
depth. In Seoul a more defi ned stance on this matter is expected through the
proposal on ‘global safety nets’ which will simultaneously require the still lagging
reform of IMF’s. The G20 should seriously consider this issue, as the creation of
a ‘global safety net’ mechanism would increase protection against future
fi nancial crises and help reduce global imbalances as developing countries
would no longer be tempted to accumulate foreign reserves.
Likewise, the matter of emergency fi nancing and the recapitalization of regional
development banks came late to the agenda, so most of them were neither
ready nor useful during the crisis. The G20 should seriously rethink about new
mechanisms that could result in almost automatic recapitalization of the regional
development banks in order to increase their response capacity.
===================
Policy Briefs
The G20: Panacea or window-dressing?
By Giovanni Grevi
Senior Researcher at FRIDE.
The short answer to this question is: neither. Much ink has been spilled over the
last two years on the role and potential of the Group of 20 leading economies
meeting at leaders’ level. Since its launch, the relative success of the G20 in
fi ghting the global fi nancial crisis and averting a long economic recession has
grabbed the headlines. Unregulated markets and reckless national policies had
created unsustainable imbalances that sparked the crisis, but a new summit
prototype had been designed; able to trigger collective action, coordinate
stimulus packages and regulate fi nance. The G20 has indeed proven to be an
effective crisis-management mechanism.
One year after its launch, as danger of a global fi nancial meltdown receded and
economic recovery picked up notably in emerging markets, the G20 boldly
established itself at the 2009 Pittsburgh summit as the ‘premier forum for our
international economic cooperation’. This self-appointment simultaneously raised
expectations and scepticism regarding the ability of the new format to achieve
the tall order it had set for itself. After the Toronto summit of June 2010, the
expectations-reservations gap has narrowed: the former have fallen and the latter
have risen. The modest Summit Declaration has been treated as evidence that it
is not the G20, but its main stakeholders, that make the difference. In other
words, a crisis response committee is not necessarily fi t to steer the course of
global economic governance.
In fact, it would be inaccurate to portray the G20 as the panacea of deep-rooted
structural problems; just as it would be ill-advised to dismiss it as a window-dressing
exercise. A balanced assessment of the role of the G20 requires a distancing from
summit meetings and setting the new format in the broader, evolving framework of
global governance – the collective management of common problems.
Conclusion
Global governance is approaching a critical juncture. As the international agenda
is growing more complex and demanding; the resources of multilateral bodies
are dwindling and the redistribution of power engenders competing narratives
on respective priorities and responsibilities. And yet, the launch of the G20 and
the proliferation of other informal groupings and coalitions prove that all key
stakeholders accept the imperative of cooperation to mana ge risks and
anticipate crises. Power shifts and interdependence are arguably shaping an
interpolar system.
In this new context, there is no quick fi x for global governance. Cooperation is
– and will remain for the foreseeable future – a question of ‘learning by doing’.
The overarching purpose, however, should be to build mutual trust, bring more
coherence to what has been defi ned as ‘messy’ multilateralism and harness
the political capital and resources of major powers while doing so. The G20 has
a major role to play to this end. It is neither a panacea nor a mere windowPolicy
dressing exercise. If its members invest the necessary political will, it can
become the lynchpin of collective action on global economic issues and related
matters, in structured cooperation with multilateral bodies and networks of
non-state actors. Innovation will lie at the interface between these different
dimensions of global governance rather than in the isolated reform of any one
of them.
==============
The G20 and the global governance of development
By Nils-Sjard Schulz
Associate fellow at FRIDE
Under the Korean chairmanship, the G20 is committed to engaging in the global
development agenda, just in time for the Millennium Development Goals (MDG)
Summit in September 2010 and the High-Level Forum (HLF) on Aid Effectiveness
in 2011. But the main contents and tools still need to be designed, and strategic,
policy and practical challenges remain. This policy brief suggests ways in which
the G20 could usefully advance development debates.
[---]
What needs to be done in 2010?
The stakes for the development agenda of the G20 are high. The rather
unpredictable context for global development requires both smart and quick
decisions regarding where to engage and with which processes to connect. As
such, the G20 has at least two specifi c comparative advantages to build
upon:
It can help to bridge the gap between North and South, developed
and developing, by bringing on board the most relevant non-OECD
economies and building trust among its diverse members.
Out of necessity and conviction, the G20 should not create parallel
platforms, but rather ensure smart coordination with existing processes,
for example at the OECD, UN and the regions.
Against this background, the following steps towards building a development
agenda could be taken in 2010:
Host a forward-looking dialogue on development objectives and the
underlying rationale to achieve them, including a sound narrative on the
link between growth and MDGs based on evidence and country-level
practice. Initial ideas need to explore how to upgrade the MDGs beyond
2015, addressing critical development challenges such as climate
change, energy and food security. The perspectives of MICs need to
be integrated more consistently, hand-in-hand with the expectations
of LICs. This dialogue should be conducted in close consultation with
non-G20 developing countries. The UN conferences as well as regional
platforms can contribute essential synergies to the discussion. The G20
might need to designate its members to help mobilise the developing
countries in their corresponding regions around an open-minded
refl ection on development goals beyond 2015.
Initiate a transparent discussion on fi nancing for development, critically
reviewing the feasibility of the existing roadmaps and establishing
reasonable aims towards 2015. This debate should also explore the
role and contributions of emerging economies and MICs as partners
in the global fi ght against poverty. Probable tensions around ‘burdensharing’
should be addressed within the G20 as soon as possible.
The Monterrey spirit, with its more integrated mix of fi nancing sources,
needs to be boosted. The most obvious linkages can be found in the
area of domestic resource mobilisation and sustainable foreign debt,
in addition to ODA. While this discussion should take place in a more
protected space for negotiations, consultations and feedback should
be undertaken with the UN-ECOSOC, the G8 and donor groups such
as the EU and the Arab Coordination Group.
Strengthen the fulfi lment of and education regarding standards and
practices of effective development cooperation. With a view to the
Korean HLF, additional energy could come from a better narrative
around ODA as a trigger for pro-poor growth. The involvement of
new development actors in the standard-setting process will be key
for long-term legitimacy. South-South knowledge exchange could
become another important entry point for revising the current premises
of North-South aid, especially in the area of national capacities in the
public sector. This agenda might open interesting options for non-G20
developing countries willing to engage in this dialogue; countries which
are currently preparing strategies within the platforms such as the
OECD-DAC, the UN-DCF and the existing regional processes.
====================
The G20 and global financial governance
By José Antonio Ocampo
and Stephany Griffi th-Jones
are at the Initiative for Policy Dialogue,
Columbia University
[[Haz: See this in separate doct]]
After the 1997 Asian fi nancial crisis and its contagion through the developing
world, a major discussion on reforms of the global fi nancial architecture took
place, with rather limited success. When the global fi nancial crisis hit, fi rst
through the eruption of the subprime crisis in August 2007 and, in particular,
the global fi nancial meltdown of mid-September 2008, the world had a strong
sensation of déjà vu, not only in terms of fi nancial crises and their contagion,
but also of the inadequacy of international institutions to deal with them.
================
A Southern perspective on the reform
of international fi nancial institutions
By Peter Draper
Research Fellow, Economic Diplomacy Programme
South African Institute of International Affairs
Memory Dube
Researcher, Economic Diplomacy Programme
South African Institute of International Affairs
[[Haz: see this in a separate doct]]
Since the onset of the fi nancial crisis, the G20 has moved to centre stage
concerning global economic governance in general, and reform of international
fi nance regulation in particular. This ascendance culminated in the G20 Pittsburgh
Summit declaration to the effect that the G20 is now ‘the’ forum of choice for
international economic coordination.
What further reforms are needed?
A number of proposals have been made:
1. A redistribution of quotas in the IMF to refl ect changes in the global political
economy while maintaining the quota shares of over-represented developing
country members. This is particularly important in light of the recent increase
in voting shares to developing countries in the World Bank, which resulted
in the loss of voting shares for some developing countries such as Nigeria
and South Africa: the shares of over-represented developing countries are
the ones distributed to the countries whose shares are being increased.
Consequently, the effects of the vote reshuffl e are not that signifi cant for
developed countries. The initial voting powers and quota allocations in
these institutions were based on the fi nancial contributions of the members
as well as their economic importance. This has changed signifi cantly over
the years with developing countries contributing signifi cantly more through
their loan repayments. Also, as the primary users of IFI services, developing
countries deserve an equal voice in the institutions.
2. The IMF Board decides the priorities of the institution. As a result, equitable
representation of developing countries on the Board is needed if such
priorities are to refl ect developing country needs. This could be done by
consolidating some European chairs into a single Eurozone seat, since
Europe is overrepresented. Such changes in the Board’s structure would
need to refl ect changes in voting weights.
3. A reconfi guration of the ‘heads’ and staff selection procedures. The selection
of the head of the World Bank and the Managing Director of the IMF is
based on the voting and quota structures, and is thus based upon nationality
– either US or EU. Appointment to such positions should be made through
an open, transparent and merit-based process, without regard to nationality
or gender. To its credit, the G20 has pledged to move on this issue. Staff
selection should also be diverse and refl ective of regional representation in
the institutions. This would allow for greater accountability. This is very
important given that the make-up of the senior staff creates a structure of
accountability for the whole body of staff of each organisation, which
decides the countries that hold the institutions to account. Opening up
accountability of the senior staff to the whole membership would also
enhance developing countries’ voice in these institutions and help their
effective representation.
==============
The G20 and the multilateral trade impasse
By Diana Tussie
FLACSO. Buenos Aires, Argentina
[[See this in a separate doct]]
In many countries, the surge in national industry bailouts, stimulus packages
and subsidies contains worrying aspects of foreign commercial discrimination
to protect domestic jobs. These policies represent an emerging trade agenda
that the G20 will need to tackle, regardless of the fate of the stalled Doha round.
Nonetheless, Doha retains symbolic value in terms of providing a cooperative
climate for multilateral trade talks, precisely because of this longer term agenda
looming in the background.
===============
To get the complete doct open: http://www.clubmadrid.org/img/secciones/G20_FINAL_REPORT.pdf
[[HAZ:Disregard the previous sending. This seems to be a more reliable source]]
The G20’s Role in the Post-Crisis World. Seoul, Republic of Korea
http://www.clubmadrid.org/img/secciones/G20_FINAL_REPORT.pdf
Executive Summary
The November G20 Summit, chaired by the Republic of Korea, will be the fi rst
one overseen by a non-G8 country. This represents a unique opportunity to
enhance this leadership forum’s effectiveness and credibility and to broaden
the confi dence and momentum that the Korean Presidency has already
generated and that needs to be maintained.
The Korean Presidency should be ambitious but also pragmatic. The G20 must fi rst
show it can deliver on existing commitments. It is in delivering that the G20 will
ensure its legitimacy. The Korean Presidency needs to strike a delicate balance: it
must encourage the G20 to begin thinking and acting long-term, beyond the
exigencies of crisis management; but also make sure that such strategic foresight
does not divert efforts from short-term imperatives. The Toronto summit was billed
as a ‘post-crisis’ meeting but was forced to narrow its focus to questions of fiscal
retrenchment. Barring further instability and crisis, Seoul will provide an opportunity for the G20 finally to deliberate on its role beyond reactive crisis fire-fi ghter.
We welcome the Korean Presidency’s initiative to include development in the
agenda. There is a case for adding some new items to the agenda; but this
should be done in a way that facilitates progress on economic cooperation and
governance issues and not distract from them.
Even an eventual slowdown in global economic recovery should not shake the
political resolve of G20 leaders in the compliance of commitments and the
pursuit of their agenda.
Against this background the following recommendations were put forward for
the Seoul Summit and the G20 in the years to come:
Legitimacy and Efficiency:
Recommendation 1:
Reinforce the G20’s role in global economic governance
in the post-crisis world.
Recommendation 2:
Frame the agenda and institutionalize the relationship with
relevant multilateral organizations and actors in order to avoid duplication of
mandates and foster complementarities.
Recommendation 3:
Focus on its current agenda and deliver on its commitments
in order to ensure legitimacy.
Recommendation 4:
Ensure the G20s effi ciency by maintaining a manageable
size, a valuable process, a workable agenda, and adequate cost management.
Reform of Quotas at International Financial Institutions:
Recommendation 5:
Grant greater voting power to emerging economies and
developing countries in the IFIs by ending the US veto right and Europe’s
over-representation.
THE G20’S ROLE IN THE POST-CRISIS WORLD
Recommendation 6:
Consider the reform the IMF quota formula by including
other relevant indicators. To date, around 80% of this formula is based on GDP.
Other elements such as population and reserves could also be considered.
Recommendation 7:
Implement the decision to select the President of the
World Bank and the Managing Director of the IMF on the basis of merit and
regional representation.
Recommendation 8:
Address future international financial challenges, such as,
international monetary reform and the need for a global financial safety net.
Accountability Mechanisms:
Recommendation 9:
Define the role of the G20 as the premier leadership forum
that can provide political guidance on issues of concern for economic
cooperation and governance.
Recommendation 10:
Strengthen the accountability of the G20 through the
application of results measurement, commitment monitoring and mutual
assessments.
Recommendation 11: Foster transparency to enhance people’s ability to trust the quality of its decision-making.
Recommendation 12: Define and establish an outreach strategy that allows for two-way accountability with relevant institutions and non G20 countries.
Development priorities for a G-20 Agenda:
Recommendation 13:
Enhance national capacities and create an enabling
international environment for the development of sustainable global growth and
well-being. The experience of the Republic of Korea can serve as an inspiring
reference for developing countries.
Recommendation 14: Promote green and inclusive economic growth,
employment creation and investment in human capital, all principles that apply
to global efforts for development, including within G20 Members.
Recommendation 15: Take a more determined and creative stance on global
free trade. This is an opportunity for the G20 to take concrete steps to conclude
the Doha Round and fulfill the commitments of the Doha Development
Agenda.
Recommendation 16:
Address the existing contradiction between freedom in
capital movements and the still significant barriers in the movement of labor in
order to avoid asymmetric globalization
Final Report: Extracts
II. Reform of quotas at international financial institutions
Recommendation 5:
Grant greater voting power to emerging economies and
developing countries in the IFIs by ending the US veto right and Europe’s
overrepresentation.
The IMF and the World Bank must be made more legitimate, effective, and
accountable, and this must be done by granting a greater voice to the developing
world. This lack of representation is at the root of their lack of responsiveness.
Accordingly, the existing economic governance structure limits the effectiveness
of the IFIs, as they do not adequately respond to the needs of developing
countries. Priorities in the IFIs are set by boards in which developed countries
are overrepresented, causing a serious problem of accountability.
In order to properly address this issue and give more power to developing countries,
the US veto and Europe’s overrepresentation at the IMF must be unequivocally
addressed. Currently the US has the 15% of voting power and the majority rule was
established at 85%. Reducing this majority rule to 70% or 75% could resolve this
problem facilitating a more responsive decision-making process. Europe is
overrepresented within the Bretton Woods institutions and with the current crisis
some EU countries have actually become IMF borrowers, as is the case of Greece.
This might be seen as illegitimate and may lead to problems in the future.
“The balance of economic powers has changed; the distribution of fi nancial
capacities, savings and reserves is no longer what it used to be”
Lionel Jospin, Former Prime Minister of France. Member of the Club of Madrid
Recommendation 6:
Consider the reform of the IMF quota formula by including
other relevant indicators.
The current formula privileges Gross Domestic Product, which accounts for
approximately 80% of the total formula. In this sense, some of the participants
suggested the introduction of new elements in the determination of these
quotas, elements such as population, reserves and money. These proposals
whilst helping address the under-representation of Asia do not really deal with
the underrepresentation for Africa. Therefore more creative formulas are still
encouraged.
Recommendation 7:
Implement the decision to select the President of the
World Bank and the Managing Director of the IMF on the basis of merit and
regional representation.
Although this issue has already been raised in previous G20 Summits, it is an
important one to emphasize in order to ensure efforts in this direction continue.
There is criticism around the current system in which the IMF Managing Director is
European and the World Bank President is American.
In this sense, and aiming for a better global representation, it is necessary to
choose both the Heads, and all staff, on the basis of merit and contemplate
regional criteria.
Recommendation 8:
Address future international fi nancial challenges, such as
international monetary reform and the need of a global safety net.
Once the crisis has been overcome, the G20 should tackle critical matters
which some participants defi ned as the “black holes” of the system, such as
the excessive volatility of energy and commodity prices, the control of hedge
funds, fi scal paradises and speculation due to the instability of exchange rates.
The French G20 presidency will take up some of these issue in its agenda,
although proposals regarding the stability and equity of the global monetary
system have already been presented by the Chinese government and the UN
“Stiglitz Commission”.
Regarding the reform of the IFIs some scholars believe that a significant reform
of the existing IMF Council would be enough. Others think that it is necessary
to transform the IMF Council into a new International Monetary and Financial
Board, with broader decision-making powers, for instance, in the selection of
the Managing Director and strategic aspects of global surveillance. In any case,
the idea of a broader council covering all international fi nancial institutions
remains on the table. The G20 should indicate which kind of global economic
coordination council it prefers, taking into account the stability and equity of the
system that is sought.
As a result of the experience of the 2007 crisis, a number of Asian economies
have to date accumulated vast amounts of trade surpluses, which means
foreign reserves but also global imbalances that have helped them to overcome
the crisis. Based on this experience and the sovereign debts accumulated by
many to rescue banks in diffi culties, some participants suggested the
convenience of developing mechanisms to reduce vulnerabilities during future
systemic crises. In past summits, such as Toronto, the G20 recognized the
need of increasing regional and international efforts in this sense and asked
fi nance ministers and central bank governors to consider this issue in greater
depth. In Seoul a more defi ned stance on this matter is expected through the
proposal on ‘global safety nets’ which will simultaneously require the still lagging
reform of IMF’s. The G20 should seriously consider this issue, as the creation of
a ‘global safety net’ mechanism would increase protection against future
fi nancial crises and help reduce global imbalances as developing countries
would no longer be tempted to accumulate foreign reserves.
Likewise, the matter of emergency fi nancing and the recapitalization of regional
development banks came late to the agenda, so most of them were neither
ready nor useful during the crisis. The G20 should seriously rethink about new
mechanisms that could result in almost automatic recapitalization of the regional
development banks in order to increase their response capacity.
===================
Policy Briefs
The G20: Panacea or window-dressing?
By Giovanni Grevi
Senior Researcher at FRIDE.
The short answer to this question is: neither. Much ink has been spilled over the
last two years on the role and potential of the Group of 20 leading economies
meeting at leaders’ level. Since its launch, the relative success of the G20 in
fi ghting the global fi nancial crisis and averting a long economic recession has
grabbed the headlines. Unregulated markets and reckless national policies had
created unsustainable imbalances that sparked the crisis, but a new summit
prototype had been designed; able to trigger collective action, coordinate
stimulus packages and regulate fi nance. The G20 has indeed proven to be an
effective crisis-management mechanism.
One year after its launch, as danger of a global fi nancial meltdown receded and
economic recovery picked up notably in emerging markets, the G20 boldly
established itself at the 2009 Pittsburgh summit as the ‘premier forum for our
international economic cooperation’. This self-appointment simultaneously raised
expectations and scepticism regarding the ability of the new format to achieve
the tall order it had set for itself. After the Toronto summit of June 2010, the
expectations-reservations gap has narrowed: the former have fallen and the latter
have risen. The modest Summit Declaration has been treated as evidence that it
is not the G20, but its main stakeholders, that make the difference. In other
words, a crisis response committee is not necessarily fi t to steer the course of
global economic governance.
In fact, it would be inaccurate to portray the G20 as the panacea of deep-rooted
structural problems; just as it would be ill-advised to dismiss it as a window-dressing
exercise. A balanced assessment of the role of the G20 requires a distancing from
summit meetings and setting the new format in the broader, evolving framework of
global governance – the collective management of common problems.
Conclusion
Global governance is approaching a critical juncture. As the international agenda
is growing more complex and demanding; the resources of multilateral bodies
are dwindling and the redistribution of power engenders competing narratives
on respective priorities and responsibilities. And yet, the launch of the G20 and
the proliferation of other informal groupings and coalitions prove that all key
stakeholders accept the imperative of cooperation to mana ge risks and
anticipate crises. Power shifts and interdependence are arguably shaping an
interpolar system.
In this new context, there is no quick fi x for global governance. Cooperation is
– and will remain for the foreseeable future – a question of ‘learning by doing’.
The overarching purpose, however, should be to build mutual trust, bring more
coherence to what has been defi ned as ‘messy’ multilateralism and harness
the political capital and resources of major powers while doing so. The G20 has
a major role to play to this end. It is neither a panacea nor a mere windowPolicy
dressing exercise. If its members invest the necessary political will, it can
become the lynchpin of collective action on global economic issues and related
matters, in structured cooperation with multilateral bodies and networks of
non-state actors. Innovation will lie at the interface between these different
dimensions of global governance rather than in the isolated reform of any one
of them.
==============
The G20 and the global governance of development
By Nils-Sjard Schulz
Associate fellow at FRIDE
Under the Korean chairmanship, the G20 is committed to engaging in the global
development agenda, just in time for the Millennium Development Goals (MDG)
Summit in September 2010 and the High-Level Forum (HLF) on Aid Effectiveness
in 2011. But the main contents and tools still need to be designed, and strategic,
policy and practical challenges remain. This policy brief suggests ways in which
the G20 could usefully advance development debates.
[---]
What needs to be done in 2010?
The stakes for the development agenda of the G20 are high. The rather
unpredictable context for global development requires both smart and quick
decisions regarding where to engage and with which processes to connect. As
such, the G20 has at least two specifi c comparative advantages to build
upon:
It can help to bridge the gap between North and South, developed
and developing, by bringing on board the most relevant non-OECD
economies and building trust among its diverse members.
Out of necessity and conviction, the G20 should not create parallel
platforms, but rather ensure smart coordination with existing processes,
for example at the OECD, UN and the regions.
Against this background, the following steps towards building a development
agenda could be taken in 2010:
Host a forward-looking dialogue on development objectives and the
underlying rationale to achieve them, including a sound narrative on the
link between growth and MDGs based on evidence and country-level
practice. Initial ideas need to explore how to upgrade the MDGs beyond
2015, addressing critical development challenges such as climate
change, energy and food security. The perspectives of MICs need to
be integrated more consistently, hand-in-hand with the expectations
of LICs. This dialogue should be conducted in close consultation with
non-G20 developing countries. The UN conferences as well as regional
platforms can contribute essential synergies to the discussion. The G20
might need to designate its members to help mobilise the developing
countries in their corresponding regions around an open-minded
refl ection on development goals beyond 2015.
Initiate a transparent discussion on fi nancing for development, critically
reviewing the feasibility of the existing roadmaps and establishing
reasonable aims towards 2015. This debate should also explore the
role and contributions of emerging economies and MICs as partners
in the global fi ght against poverty. Probable tensions around ‘burdensharing’
should be addressed within the G20 as soon as possible.
The Monterrey spirit, with its more integrated mix of fi nancing sources,
needs to be boosted. The most obvious linkages can be found in the
area of domestic resource mobilisation and sustainable foreign debt,
in addition to ODA. While this discussion should take place in a more
protected space for negotiations, consultations and feedback should
be undertaken with the UN-ECOSOC, the G8 and donor groups such
as the EU and the Arab Coordination Group.
Strengthen the fulfi lment of and education regarding standards and
practices of effective development cooperation. With a view to the
Korean HLF, additional energy could come from a better narrative
around ODA as a trigger for pro-poor growth. The involvement of
new development actors in the standard-setting process will be key
for long-term legitimacy. South-South knowledge exchange could
become another important entry point for revising the current premises
of North-South aid, especially in the area of national capacities in the
public sector. This agenda might open interesting options for non-G20
developing countries willing to engage in this dialogue; countries which
are currently preparing strategies within the platforms such as the
OECD-DAC, the UN-DCF and the existing regional processes.
====================
The G20 and global financial governance
By José Antonio Ocampo
and Stephany Griffi th-Jones
are at the Initiative for Policy Dialogue,
Columbia University
[[Haz: See this in separate doct]]
After the 1997 Asian fi nancial crisis and its contagion through the developing
world, a major discussion on reforms of the global fi nancial architecture took
place, with rather limited success. When the global fi nancial crisis hit, fi rst
through the eruption of the subprime crisis in August 2007 and, in particular,
the global fi nancial meltdown of mid-September 2008, the world had a strong
sensation of déjà vu, not only in terms of fi nancial crises and their contagion,
but also of the inadequacy of international institutions to deal with them.
================
A Southern perspective on the reform
of international fi nancial institutions
By Peter Draper
Research Fellow, Economic Diplomacy Programme
South African Institute of International Affairs
Memory Dube
Researcher, Economic Diplomacy Programme
South African Institute of International Affairs
[[Haz: see this in a separate doct]]
Since the onset of the fi nancial crisis, the G20 has moved to centre stage
concerning global economic governance in general, and reform of international
fi nance regulation in particular. This ascendance culminated in the G20 Pittsburgh
Summit declaration to the effect that the G20 is now ‘the’ forum of choice for
international economic coordination.
What further reforms are needed?
A number of proposals have been made:
1. A redistribution of quotas in the IMF to refl ect changes in the global political
economy while maintaining the quota shares of over-represented developing
country members. This is particularly important in light of the recent increase
in voting shares to developing countries in the World Bank, which resulted
in the loss of voting shares for some developing countries such as Nigeria
and South Africa: the shares of over-represented developing countries are
the ones distributed to the countries whose shares are being increased.
Consequently, the effects of the vote reshuffl e are not that signifi cant for
developed countries. The initial voting powers and quota allocations in
these institutions were based on the fi nancial contributions of the members
as well as their economic importance. This has changed signifi cantly over
the years with developing countries contributing signifi cantly more through
their loan repayments. Also, as the primary users of IFI services, developing
countries deserve an equal voice in the institutions.
2. The IMF Board decides the priorities of the institution. As a result, equitable
representation of developing countries on the Board is needed if such
priorities are to refl ect developing country needs. This could be done by
consolidating some European chairs into a single Eurozone seat, since
Europe is overrepresented. Such changes in the Board’s structure would
need to refl ect changes in voting weights.
3. A reconfi guration of the ‘heads’ and staff selection procedures. The selection
of the head of the World Bank and the Managing Director of the IMF is
based on the voting and quota structures, and is thus based upon nationality
– either US or EU. Appointment to such positions should be made through
an open, transparent and merit-based process, without regard to nationality
or gender. To its credit, the G20 has pledged to move on this issue. Staff
selection should also be diverse and refl ective of regional representation in
the institutions. This would allow for greater accountability. This is very
important given that the make-up of the senior staff creates a structure of
accountability for the whole body of staff of each organisation, which
decides the countries that hold the institutions to account. Opening up
accountability of the senior staff to the whole membership would also
enhance developing countries’ voice in these institutions and help their
effective representation.
==============
The G20 and the multilateral trade impasse
By Diana Tussie
FLACSO. Buenos Aires, Argentina
[[See this in a separate doct]]
In many countries, the surge in national industry bailouts, stimulus packages
and subsidies contains worrying aspects of foreign commercial discrimination
to protect domestic jobs. These policies represent an emerging trade agenda
that the G20 will need to tackle, regardless of the fate of the stalled Doha round.
Nonetheless, Doha retains symbolic value in terms of providing a cooperative
climate for multilateral trade talks, precisely because of this longer term agenda
looming in the background.
===============
To get the complete doct open: http://www.clubmadrid.org/img/secciones/G20_FINAL_REPORT.pdf
EL G20 DE KOREA, VICTORIA PIRRICA DE OBAMA y WALL STREET
EL G20 DE KOREA, VICTORIA PIRRICA DE OBAMA y WALL STREET
Haz, noviembre 16, 2010
1 En la declaración final los países del G-20 coincidieron en la necesidad de evitar “la devaluación competitiva de las divisas” sin establecer ningún tipo de condiciones o criterios para conseguirlo.
2. el G-20 se expresó solidario en la necesidad de impedir cualquier manifestación de proteccionismo y reiteró seguir avanzando hacia la liberalización del comercio mundial fijada en la Ronda de Doha. Fuente:
http://www.argenpress.info/2010/11/la-guerra-de-divisas-ya-no-la-para.html, http://www.rebelion.org/noticia.php?id=116807
Esas fueron las dos conquistas de Obama:
1. Desarmar toda respuesta ti po Malasia a la crisis del 1997-99. Alli se indico que si EU devalue su moneda, el resto del mundo debe devaluar la propia a fin de proteger su economia. Gracias a esta politica Malasia se salvo de la crisis asiatica. Este acuerdo acepta que EU fabrique dollars de la nada y que invada con ellos el Mercado mundial.
2. Impedir el proteccionismo es tambien una medida que solo se permite a EU y no al resto.
Si estas dos cosas se acordaron en Korea, el Bric perdio y perdio el mundo emergente. Se ha decidido apotayar al imperio, avalar su impunidad y la vigencia de un dollar devaluado.
Es lo que dice el G20, pero otra cosa es lo que se practica en favor de las economias emergentes. Lo que viene es el acuerdo del Bric al respect o y el grupo de Shangai. La Guerra continua. El proteccionismo es real. El G20 no puede obligar a que EU evite la especulacion financiera con los QE que ya invaden el sur y hacen pagar los platos rotos a las econ emergentes. Pero tampoco puede obligor a que Brazil y otros paises se protejan del bandidaje judeo-americano y sus mafias en Wall Street. Los imperios del norte se dan vida a si mismos, pero su debacle es irremontable.
Lo que ocurrio en el G20 solo expresa que lo Viejo no acaba de morir y esto retrasa el parto de la Nuevo. En otras palabras, los del norte y el mundo entero no esta aun preparado para salir del dollar y de la economia neoliberal, pero tampoco no estan de acuerdo con la politica que lidera Obama. Sin embargo, es claro que el mundo apunta hacia una democracia social de Mercado con rigidos controles sobre la especulacion financiera (toward a green economy). Y eso significa salir de las trampas imperiales impuestas por los grandes financistas de EU, la UE y sus clients. Como decia Vallejo: el muerto seguira muriendo.
El G20 fue un paso atras en la perspectiva de crear un Nuevo mundo sin terrorismos financieros ni el pillaje armado en Irak, Afganistan y Palestina. Pero la correlacion de fuerzas puede alterarse en cualquier momento. Es muy possible que cambie apenas se sepa que los dollars del QE II van a ser usados para continuar el guerrerismo genocida en esos paises o en el sur latino. Cualquier indicio de ataque a Iran o Venezuela sera respondido de inmediato con el abandono del dollar y dudamos que venga un G20 a darle oxigeno a un imperio que ya languidece. Ya hizo demasiado danio, dejenlo morir sera entonces la voz –no de una G20- sino de una Asamblea Mundial de las Naciones Unidas.
La propuesta transitoria de Éric Toussaint: Usar el QE para cancelar la deuda
En la actual coyuntura socioeconómica de América Latina, este activista e investigador social recomienda a los países de la región aprovechar la presente disponibilidad de reservas para imponer fuertes medidas en la negociación de sus deudas con los acreedores.
“Es un error esperar a que las reservas se reduzcan para comenzar a negociar. Hay que organizar un frente de resistencia común antes de estar contra la pared”, explica, pues “en estos momentos, -agrega- los acreedores del Norte están sumidos en sus contradicciones internas relacionadas con el rescate de los respectivos sistemas financieros nacionales y el sistema financiero internacional. Una postura radical de los países del Sur podría desembocar en soluciones favorables a sus intereses”.
Tanto en el foro académico internacional como en la presentación de su libro sobre la crisis capitalista en la capital argentina, Toussaint hizo un completo análisis del proceso económico mundial. El Observatorio Sociopolítico Latinoamericano WWW.CRONICON.NET sintetiza a continuación los principales planteamientos del presidente del CADTM. See below: http://www.rebelion.org/noticia.php?id=116805
Me temo que Toussaint no esta informado del objetivo del QE II ni de las medidas que se estan tomando para evitar la autonomia de las economias emergentes respecto a la moneda imperial. Volveremos al punto.
Hugo Adan, Nov 16-10
=========*==========
Haz, noviembre 16, 2010
1 En la declaración final los países del G-20 coincidieron en la necesidad de evitar “la devaluación competitiva de las divisas” sin establecer ningún tipo de condiciones o criterios para conseguirlo.
2. el G-20 se expresó solidario en la necesidad de impedir cualquier manifestación de proteccionismo y reiteró seguir avanzando hacia la liberalización del comercio mundial fijada en la Ronda de Doha. Fuente:
http://www.argenpress.info/2010/11/la-guerra-de-divisas-ya-no-la-para.html, http://www.rebelion.org/noticia.php?id=116807
Esas fueron las dos conquistas de Obama:
1. Desarmar toda respuesta ti po Malasia a la crisis del 1997-99. Alli se indico que si EU devalue su moneda, el resto del mundo debe devaluar la propia a fin de proteger su economia. Gracias a esta politica Malasia se salvo de la crisis asiatica. Este acuerdo acepta que EU fabrique dollars de la nada y que invada con ellos el Mercado mundial.
2. Impedir el proteccionismo es tambien una medida que solo se permite a EU y no al resto.
Si estas dos cosas se acordaron en Korea, el Bric perdio y perdio el mundo emergente. Se ha decidido apotayar al imperio, avalar su impunidad y la vigencia de un dollar devaluado.
Es lo que dice el G20, pero otra cosa es lo que se practica en favor de las economias emergentes. Lo que viene es el acuerdo del Bric al respect o y el grupo de Shangai. La Guerra continua. El proteccionismo es real. El G20 no puede obligar a que EU evite la especulacion financiera con los QE que ya invaden el sur y hacen pagar los platos rotos a las econ emergentes. Pero tampoco puede obligor a que Brazil y otros paises se protejan del bandidaje judeo-americano y sus mafias en Wall Street. Los imperios del norte se dan vida a si mismos, pero su debacle es irremontable.
Lo que ocurrio en el G20 solo expresa que lo Viejo no acaba de morir y esto retrasa el parto de la Nuevo. En otras palabras, los del norte y el mundo entero no esta aun preparado para salir del dollar y de la economia neoliberal, pero tampoco no estan de acuerdo con la politica que lidera Obama. Sin embargo, es claro que el mundo apunta hacia una democracia social de Mercado con rigidos controles sobre la especulacion financiera (toward a green economy). Y eso significa salir de las trampas imperiales impuestas por los grandes financistas de EU, la UE y sus clients. Como decia Vallejo: el muerto seguira muriendo.
El G20 fue un paso atras en la perspectiva de crear un Nuevo mundo sin terrorismos financieros ni el pillaje armado en Irak, Afganistan y Palestina. Pero la correlacion de fuerzas puede alterarse en cualquier momento. Es muy possible que cambie apenas se sepa que los dollars del QE II van a ser usados para continuar el guerrerismo genocida en esos paises o en el sur latino. Cualquier indicio de ataque a Iran o Venezuela sera respondido de inmediato con el abandono del dollar y dudamos que venga un G20 a darle oxigeno a un imperio que ya languidece. Ya hizo demasiado danio, dejenlo morir sera entonces la voz –no de una G20- sino de una Asamblea Mundial de las Naciones Unidas.
La propuesta transitoria de Éric Toussaint: Usar el QE para cancelar la deuda
En la actual coyuntura socioeconómica de América Latina, este activista e investigador social recomienda a los países de la región aprovechar la presente disponibilidad de reservas para imponer fuertes medidas en la negociación de sus deudas con los acreedores.
“Es un error esperar a que las reservas se reduzcan para comenzar a negociar. Hay que organizar un frente de resistencia común antes de estar contra la pared”, explica, pues “en estos momentos, -agrega- los acreedores del Norte están sumidos en sus contradicciones internas relacionadas con el rescate de los respectivos sistemas financieros nacionales y el sistema financiero internacional. Una postura radical de los países del Sur podría desembocar en soluciones favorables a sus intereses”.
Tanto en el foro académico internacional como en la presentación de su libro sobre la crisis capitalista en la capital argentina, Toussaint hizo un completo análisis del proceso económico mundial. El Observatorio Sociopolítico Latinoamericano WWW.CRONICON.NET sintetiza a continuación los principales planteamientos del presidente del CADTM. See below: http://www.rebelion.org/noticia.php?id=116805
Me temo que Toussaint no esta informado del objetivo del QE II ni de las medidas que se estan tomando para evitar la autonomia de las economias emergentes respecto a la moneda imperial. Volveremos al punto.
Hugo Adan, Nov 16-10
=========*==========
domingo, 14 de noviembre de 2010
HOW TO READ THE COMPLEXITY OF THE ECONOMIC CRISIS
Unethical misuse of derivatives and market volatility around the global financial crisis
http://www.aabri.com/manuscripts/09398.pdf
[[related movie to watch: Inside Job. See the interview to the author. Video: CBS@katiecouric: Inside Job. http://www.cbsnews.com/video/watch/?id=7035809n ]]
ABSTRACT: This paper examines unethical misuse of three derivative securities of mortgage-backed securities (MBS), credit default swap (CDS), and collateralized debt obligations (CDO) to understand the cause of the global financial crisis. The authors then gauge their effects on market volatility based on how past major events affected swings in the volatility index (VIX).
Additionally, the authors examine how the unethical misuse of these securities and their effects on market volatility contributed to the global financial crisis.
INTRODUCTION
This paper examines a complex usage of derivative securities that has led to the global financial crisis, while the subprime mortgage boom certainly had a major impact. Understanding the causes of the global financial crisis is essential for all market participants. Specifically, this paper examines the causes of the current global financial crisis based upon three derivative securities of mortgage-backed securities (MBS), collateralized debt obligations (CDO), and credit default swap (CDS), and evaluates their effects on market volatility.
The root of the global financial crisis of 2008 really begins with the stock market, or dotcom bubble, and the confidence crisis resulting from the September 11, 2001 attacks on the World Trade Center, although the bursting housing bubble is a direct cause behind the crisis. In the wake of these events, Alan Greenspan, then chair of the Federal Reserve, lowered the federal funds target rate drastically. According to the Federal Reserve, the federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. Furthermore, the combination of low interest rates and easier leverage in a loose lending environment led investors to look for a new asset class through
housing market and securitization process.
Paul Krugman (2009), the recipient of the 2008 Nobel Prize in Economics, defines a bank as: “…the essential feature of banking is the way it promises ready access to cash for those who place money in its care, even while investing most of that money in assets that can’t be liquidated on a moment’s notice. Any institution or arrangement that does this is a bank, whether or not it lives in a big marble building.” This definition of a bank is crucial because hedge funds, insurance companies, and investment banks held investors’ money and returned it on demand but
were not insured by the FDIC. They are, therefore, called non-bank banks or shadow banks.
Those shadow banks use substantial derivative securities, such as mortgage-backed
securities (MBS), collateralized debt obligations (CDO), and credit default swap (CDS) that resulted in abruptly high market volatility, consequently followed by market collapse leading to global financial crisis.
MORTGAGE-BACKED SECURITIES
Structured mortgage-backed securities (MBS), such as collateralized mortgage
obligations (CMOs) interest only or principal-only STRIPs, are a type of asset-backed securities, which derive their value from an underlying pool of assets. The cash flows from those assets are allocated to render certain prepayment and maturity profiles (Jaeger, 2008). The mortgage collateral, which CMO bonds are issued against, can be agency pass-through pools, whole loans,or classes from other CMO deals (e.g. CDO squared deals in the corporate space). The majority of the collateral is mortgages on residential and commercial buildings.
The purchase and sale of home mortgages began when Federal National Mortgage
Associate (FNMA, hereafter Fannie Mae) was charted in 1938. Fannie Mae finances the
purchase of mortgages through the sale of its own short-term notes and long-term debentures, which, up until 2008, were effectively backed by the general creditworthiness and reputation of Fannie Mae. As Congress continued taking measures to increase housing opportunities, particularly for low-income families, Fannie Mae and similar government-sponsored enterprises became the primary originators of subprime mortgages, as well as the largest issuers of securities
backed by subprime mortgages. Other institutions began to mirror this activity—issuing debt to finance subprime lending and the securitization of pools of mortgages that included subprime mortgages. Because government-sponsored agencies like Fannie Mae were issuing so many homogenous mortgage-backed securities, a vast market for trading in MBS securities in the primary and secondary markets was created. Investment banks, as well as foreign banks, provided the majority of the market for mortgage-backed securities. Investment banks, for example, would underwrite these securities and sell them in the secondary market to other buyers, like hedge funds and foreign institutions. Until default rates on the underlying mortgages began increasing and the value of the securities decreased, the secondary market for mortgagebacked securities was large enough to make them highly liquid.
Economic Role in the Capital Markets:
MBS securities play an important role in the capital markets as a result of their many benefits for investors. These benefits include the diversification of idiosyncratic risk of individual mortgages. The most significant benefit of MBS securities is their role in allowing hedge fund managers, for example, to make strategic allocations that explicitly diversify across economic functions and their corresponding risk premia, which are related to various functions financial markets have in the global economy (Jaeger, 2008: 138). One of the most important economic functions for the capital markets is risk transfer for financial intermediaries, such as banks and insurance companies, which have a need to design their overall risk exposure flexibly and transfer undesired risks to other agents. This is what allowed many banks to take on more risk and make more loans, circumventing capital requirements. In addition, the use of structured derivative securities contributes to the notion of market completeness, providing hedgers and investors with specialized return profiles. For example, the market for derivative contracts
creates a wide range of risk/return profiles for investors, including nonlinear risk profiles not found elsewhere. Completing the market can be seen as a specialized form of risk transfer.
Investment Banks and Credit Rating Agencies:
Investment banks played a key role in the packaging of subprime mortgages into
securities that were subsequently sold to institutions such as hedge funds and pension funds. Problems began to surface as investment banks increased underwriting and securitizing activity for mortgage-backed securities. In this area, the bulk of sales were made to hedge funds, pension funds, and similar foreign institutions that also included foreign banks. Since the creditworthiness of the securities had not adequately been reflected by institutions like Standard and Poor’s, Moody’s and Fitch Ratings, mortgage-backed securities were sold at a premium. In fact, many investors have filed suits against those specific credit rating agencies, citing that their failure to either evaluate or accurately disclose the creditworthiness of derivative securities, such as MBS securities.
One key example is the minimum “A” rating given to Lehman Brothers Holdings Inc. by
Standard and Poor’s, Moody’s, and Fitch Rating prior to September 15, when the investment bank declared bankruptcy (Evans and Salas, 2009). In addition, regulatory commissions, such as the Securities and Exchange Commission, have subpoenaed information from such credit rating agencies. These events have brought into question the reliance of the financial system on rating agencies. State regulators depend on credit agencies when monitoring the health of $450 billion of bonds held by U.S. insurance companies, including American International Group (AIG), which has come under majority government ownership after multiple rounds of government
bailout financing. Furthermore, market participants have highlighted agency problems at rating agencies, making conflicts of interest relating to fees a focus. Since the default rates have increased and prices have slumped as these institutions sell assets to bolster capital, declining debt values have forced funds to unload securities, and tighter lending has prompted bond buyers to seek lower purchase prices (Shenn, 2008). The effects of this news caused turbulence in the financial markets, in the form of record volatility levels.
Convertible Arbitrage of Hedge Funds:
The use of derivatives for both hedging and speculation is common practice in the hedge fund industry. Many hedge funds, for example, utilize convertible arbitrage strategies, which involve taking advantage of pricing inefficiencies of convertible securities, which are the equivalent of holding a bond position and an option on some underlying stock. According to Tremont Advisors, convertible arbitrage total market value grew from $768 million in 1994 to $25.6 billion in 2002 (Hutchinson and Gallagher, 2005). The strategy involves purchasing the convertible security, while shorting the underlying shares for which the security has an option, effectively taking advantage of pricing disparities between the two. The relative price
movements occur when the credit profile of the company changes, the market changes its perception of the said credit, the market or the market premium paid for a given level of credit risk changes (Jaeger, 2008); there is a shift in the volatility of the underlying equity or the market premium paid for a given level of volatility changes; and interest rate movements change market yield requirements (Jaeger, 2008).
In many cases, hedge funds utilize quantitative models to execute “gamma trading”
strategies, which means taking a long volatility (referring to volatility of the underlying stock)exposure. In addition to equity risk, hedge fund managers executing convertible arbitrage strategies must hedge other risks, including credit risk and interest rate risk. This is done through credit derivatives (e.g. credit default swaps) and fixed income derivatives, such as interest futures and options for duration risk. This is particularly important in the case of convertible arbitrage
managers, since they often utilize substantial leverage, ranging from 1:1 to 5:1.
There is some evidence to support the success, and therefore increased use, of convertible arbitrage strategies during the turbulent markets, beginning in 2007. According to Hutchinson and Gallagher (2005), there is a negative correlation between convertible arbitrage returns and equity market returns in extreme up markets, when the equity risk premium is more than two and half standard deviations from its mean. This negative correlation is explained by the long volatility nature of convertible bond arbitrage, where in extreme up markets implied volatility
generally decreases having a negative effect on portfolio returns. Because the market went into a strong downturn and financial stress caused sizeable swings in market volatility, convertible arbitrage has seen some success in 2008. Hedge funds, like the Alexandria Global Investment Fund, have benefited from utilizing convertible arbitrage strategies, despite substantially wider credit spreads. With the growth of the hedge fund industry, as well as the convertible arbitrage
market value, and the growing body of research supporting the non-directional strategy, it can be deduced that hedge funds, especially those looking to hedge various types of risks (e.g. credit risk and interest rate) are heavy users of derivative securities, such as credit default swaps and asset-backed securities.
CREDIT DEFAULT SWAPS
Credit default swaps (CDSs) were put into place about ten years ago to give bondholders a way to protect themselves against borrower defaults. CDSs are derivative contracts between two parties in which the buyer makes periodic payments to the seller. If the underlying financial instrument—a bond or a loan—defaults, the buyer, who does not necessarily have to own the underlying credit instrument, receives a payment. Essentially, CDSs can be said to work like options; they resemble put options on the underlying bonds, and CDS terminology (buyer, seller,
writer) is very similar to that of options (Western Asset, 2009). Credit default swaps allow investors to speculate about a company’s prospects, to hedge against possible defaults by the sellers of the debt securities they own, or to transfer the risk of a company or bond default to others.
Credit default swaps are also used among Capital Structure Arbitrage (CSA) hedge funds. Examples of trades that involve CDS contracts are: (1) going short on a CDS by selling “insurance” and buying a put on the stock, and (2) buying “insurance and going long on a CDS while going short on a put on the stock. Capital Structure Arbitrage works based off a derived relationship between the issuer’s CDS rate and the volatility of the company’s equity. CSA offers inherent returns, but such returns are usually risk premia, rather than results of pricing inefficiencies (Jaeger, 2008).
Synthetic collateralized debt obligations also utilize CDSs. Instead of owning assets like bonds and loans, synthetics CDOs acquire credit exposure to such assets through CDSs (Harrington, 2008). The CDO (the credit protection seller) would receive premia in regular cash payments in exchange for assuming the risk.
Credit default swaps were used to encourage investors to put money into ventures in
emerging markets, like Latin American and Russia, because they insured the debt from those countries. In the United States during the housing boom, CDSs were taken out to insure many mortgage-backed securities (Philips, 2008).
Issues with CDS markets:
Originally intended for making the hedging of corporate bonds easier, speculators who
did not actually own bonds—in other words, speculators who had uncovered or “naked” CDS contracts—ended up dominating the market (Morgenson, 2008). As the amount of debt defaults rose, companies who issued CDS contracts, such as American Insurance Group (AIG), found themselves short on the funds necessary to pay investors back. Aggravating matters further, credit default swap markets were virtually unregulated; transactions did not have to pass through a central clearinghouse. No one could be sure of the value of a CDS contract.
Additionally, issuers of CDS contracts, such as AIG, tended to treat CDS contracts like regular insurance policies (Philips, 2008). The problem here was that regular insurance, such as car insurance, does not assume a correlation between one incident and the increased likelihood of another—one car crash does not necessarily increase the chances of the occurrence of another. With bonds, however, one default leads to nervous investors, which leads to withdrawal of investments, which then prompts market panic, and so on.
Role of credit ratings agencies and global consequences:
In order to examine how credit default swaps affected the global economy, the American insurance company American International Group (AIG) can be used as an example. AIG had businesses in over 130 countries (Karnitschnig, 2008), and in many ways functioned as a healthy company. But in September 2008, AIG was pushed to the brink of bankruptcy when it suffered a liquidity crisis after a ratings downgrade. AIG had issued a large amount of credit default swap contracts to investors; when its ratings were downgraded, AIG was required to put up additional collateral in order to satisfy margin call requirements. Lacking the cash necessary to satisfy
collateral requirements, AIG suffered a liquidity crisis. Due to the “interlocking nature” of credit default swaps, AIG’s fall made such a big impact on the national and international economy because so many banks were tied to the insurance firm.
Since CDSs are private contracts are formed between two parties and are not regulated by the government, there is currently no way of determining their value (Philips, 2008). This unregulated market grew into billions of dollars worth of transactions that made it around the world, dangerous securities in hiding. According to the Oct. 27, 2008 Business Week article “A Lethal Loophole at Europe’s Banks,” European banks were among the biggest buyers of AIG’s credit default swaps, their deals with AIG totaling $426 billion before 2008 (Henry, 2008). These
European banks used credit default swaps not only to insure against defaults, but to get around capital requirements. According to international regulations known as the Basel Accords, European lenders are required to have a certain amount of money set aside to cover potential losses. By dealing in credit default swaps, European banks were able to make it seem like they had transferred some risk over to AIG, thereby reducing the banks’ capital requirements and freeing them up to make more loans. AIG’s credit swaps, in particular, provided extra leverage; due to its high credit rating, AIG could make deals with very little collateral against losses, and
was thereby able to increase lending with little money (Henry, 2008). However, the benefit only held if AIG maintained a high credit rating. When AIG’s rating fell in September 2008 and the company needed a bailout, European banks that had dealt with AIG found themselves in the same position.
In mid-September 2008, the U.S. government made an $85 billion deal with AIG. The
government’s involvement in saving the company from bankruptcy implied how dangerous it would have been to the financial system to let the insurance giant fail. The Federal Reserve seemed to be worried that Wall Street’s financial crisis could affect even “safe” investments by small investors, like money market funds that invested in AIG debt. Globally, the deterioration of AIG could force financial institutions in Europe, the United States, and Asia to record the CDS contracts they had purchased from AIG as losses (Hilsenrath, 2008).
One month after the initial bailout, the Federal Reserve announced that it would borrow $37.8 billion of AIG securities in exchange for cash collateral. One month after that, the government began discussing possible changes to the terms of the loan to AIG, options including the lowering of interest rates or the extension of the credit term (Hilzenrath, 2008).
COLLATERALIZED DEBT OBLIGATIONS
Collateralized debt obligations (CDOs) are shares in bundles of securities. CDOs were
born out of securitization—the process of transforming financial assets, which are typically illiquid, into marketable securities to be sold in the secondary market in order to provide more liquidity for the economy. Financial assets include mortgages, car loans, credit card debt and corporate debt. Because CMOs are also discussed in this paper, the CDO segment of this paper will only focus on financial assets other than mortgages.
CDOs are created through corporate entities that hold assets (loans, credit card debt, and corporate debt) as collateral. The cash flows are then sold in packages to investors. The purpose of CDOs is to spread out risk by investing in other pools of debt. CDOs are bundled together by investment banks (such as Lehman Brothers) or subsidiaries of asset-backed securities issuers into various tranches. The tranches are ranked A through E and Equity. Higher tranches (those rated A) are protected by security structure, so they are offered lower interest rates. Lower tranches have higher interest rates because they are riskier in nature, and therefore, should return higher yields. CDOs became popular in the 2000s; it was estimated that CDOs were worth more than $2 trillion at the beginning of 2006 (Sainsbury, 2008).
What was the economic role of CDOs in the capital markets?
CDOs are important because spread out the risk of various investments by capitalizing on other pools of investment. CDOs play a big role in corporate loans. Collateralized loan obligation (CLOs) is a type of CDO that is backed by corporate loans. CLOs have not been in the market lately due to the credit crisis. Like CDOs, these corporate loans are pooled together to spread out the risk and protect against potential losses. This attracted private equity firms, pension funds and insurance companies to buy these packages, raising $100 billion in 2006 (Farzad, 2007).
Transactions became riskier as private equity firms kept bidding up prices for leveraged buyouts. In addition, companies were having trouble covering interest payments of their debt.
Furthermore, loan terms became looser. As a result of the credit crisis, buyout financing was all but disappeared, leaving nobody to buy loans at current prices. This has taken a huge toll on the corporate loans market because market confidence started to slip, putting the CDO business to a halt (Stein, 2008). Once investors stop investing in these markets, there is no longer protection against risk exposure for these financial institutions. As a result, CDOs have a very important role in protecting against risk in the capital market.
It is also possible to create CDOs from other CDOs; these are called synthetic CDOs.
Synthetic CDOs are different, in the sense that banks can pool credit default swaps into them and sell pieces of those. Essentially, investors in synthetic CDOs protect a pool of bonds against default loss (Whitehouse, 2005). However, synthetic CDOs do not actually contain the securities they sell—banks make these CDOs without having to purchase the underlying bonds. Banks create synthetic CDOs to earn more money through trading these securities. So, why do people invest in these securities if they are not actually investing in the physical asset? Synthetic CDOs have the potential of yielding high returns with just a little to invest, but are very risky in nature.
One problem with synthetic CDOs is that they allow financial institutions to write off debt by pooling their debt with other institutions. They then, bring all of those debts back to their books and call it a synthetic CDO asset, even though there is nothing to back the “asset” up. So, a potential problem would arise if people start defaulting on their payments. If payments start defaulting, the financial institutions that issue these CDO assets would have no cash flows to pay out the interests on the investment. And since a synthetic CDO is a CDO built on top of another CDO or CDS, there would be even less (if any) cash flows to pay out the interests on those secondary CDOs/CDSs. Another problem with CDOs is the fact that they are not transparent and are really hard to track because they package so many underlying securities together (Attwood, 2004). Because the nature of these securities are so complicated (they are securities on top of securities), it is very hard to determine the credit-riskiness.
Role of credit rating agencies:
Even though the value of CDOs were clearly declining, credit rating agencies were slow to downgrade the creditworthiness of these secruities. Because the rating agencies did not disclose the downgrades in time, many investors were misled to think that CDOs were still safe to invest in. But, the truth unraveled as more defaults submerged to the surface and the CDOs became practically value-less. This was especially problematic with the synthetic CDOs because they were influenced by the “primary” securities. So, even though the ones rated triple-A or double-A were expected to be paid out with the cash flows from the primary securities, it did not
happen because people started defaulting on their payments, cutting the cash flows off.
Large investment banks, including Bear Stearns, Merrill Lynch and Lehman Brothers
were impacted by the credit crisis through their CDOs. These investment firms reported a loss of $9 billion in writedown of assets during the first quarter of 2008. Lehman Brothers was the biggest marketer of CDOs. Therefore, when Lehman Brothers filed for bankruptcy in 2008, even the international market was negatively affected because everyone had invested in so many securities that the company underwrote, guided by the “safe” ratings credit rating agencies had given to CDOs.
FIGURE 1: S&P 500 FORWARD RANGE VIA VIX
CBOE Volatility Index
MARKET VOLATILITY
To measure volatility, the authors used the Chicago Board Options Exchange Volatility
index (VIX) as a reference for market volatility. The VIX index is a measure of 30-day forward volatility, based on a basket of S&P 500 options. It is representative of the market as a whole because the S&P 500 is a cap-weighted index (GSPC), covering a wide range of large capitalization American companies, across many industries. However, the VIX does understate risk since it does not take into account skewness and kurtosis. Using the VIX index, this paper predicts forward S&P 500 ranges using the following formula:
Forward GSPC Range = GSPC * (± (VIX/_(250)))
The dependence of financial institutions on structured derivative securities made their devaluation a cause for increased market volatility, especially in late 2008. Furthermore, the need for the U.S. government to step in and provide bailout funds for large financial institutions, like American International Group, has been a cause for increased volatility, as investors worried about the solvency of key financial institutions in the aftermath of the bankruptcy of Lehman Brothers Holdings Inc. For example, on September 15, 2008 Lehman Brothers filed for chapter
11 bankruptcy.
Figure 2: CBOE Volatility Index
CBOE Volatility Index
The VIX continued to show significant swings in volatility throughout the latter half of 2008, responding violently to news pertaining to structured derivative securities and companies that had used them. The week of November 3, 2008, Morgan Stanley analysts reported a prediction that leveraged loans would outperform high yield bonds. This week saw the VIX close at 56.10, -6.33% versus the previous week’s close. This translated to a 66-point S&P 500 range (898 – 964). The following week, AIG received a restructured package from the U.S. government. As a result, the VIX closed the week at 66.31, +18.20% over the previous week’s close. This translated to a 73-point S&P 500 range (837 – 910).
This news shocked the market, causing the VIX to close at 31.70, +23.54% over the
previous close. From a trader’s perspective, this translated to a 48-point S&P 500 range (1,168 – 1,216) (see Figure 1). That same week AIG got an $85 billion loan from the U.S. government.
The fall of Lehman Brothers (LEH) and the first bailout of AIG caused a jump in volatility, sending the VIX into a strong uptrend over the next two months (see Figure 2). The week of October 20 2008, AIG tapped $90 billion from its credit line with the U.S. government, causing the VIX to close the week at 79.13, +12.51% over the previous week’s close. This translated to an 88-point S&P 500 range (833 – 921). This was near the peak VIX level in 2008.
CONCLUSIONS
The turbulence and high volatility that the financial markets experienced in 2008 were the result of misuses of derivative securities, which had become popular among large investors and financial institutions for their hedging and speculative properties. In the case of shadow banks (Krugman, 2009), these securities made it possible to take on more risk unethically by transferring risk to other institutions to circumvent capital requirements. The solvency issues facing Lehman Brothers Holdings, American International Group and many other companies were the direct result of fluctuating values in structured derivative securities, like collateralized
debt obligations, mortgage-backed securities, and credit default swaps. The underlying causes of highly volatility, particularly in the latter half of 2008, are evidently the result of uncertainty in the psychology of investors, regarding the economic impact of the unethical misuses of derivative securities.
REFERENCES
OPEN THE PAGE IN THE FRONT PAGE
Related Websitehttp://www.federalreserve.gov/fomc/fundsrate.htm
http://research.stlouisfed.org/fred2/series/DFEDTAR
http://www.aabri.com/manuscripts/09398.pdf
[[related movie to watch: Inside Job. See the interview to the author. Video: CBS@katiecouric: Inside Job. http://www.cbsnews.com/video/watch/?id=7035809n ]]
ABSTRACT: This paper examines unethical misuse of three derivative securities of mortgage-backed securities (MBS), credit default swap (CDS), and collateralized debt obligations (CDO) to understand the cause of the global financial crisis. The authors then gauge their effects on market volatility based on how past major events affected swings in the volatility index (VIX).
Additionally, the authors examine how the unethical misuse of these securities and their effects on market volatility contributed to the global financial crisis.
INTRODUCTION
This paper examines a complex usage of derivative securities that has led to the global financial crisis, while the subprime mortgage boom certainly had a major impact. Understanding the causes of the global financial crisis is essential for all market participants. Specifically, this paper examines the causes of the current global financial crisis based upon three derivative securities of mortgage-backed securities (MBS), collateralized debt obligations (CDO), and credit default swap (CDS), and evaluates their effects on market volatility.
The root of the global financial crisis of 2008 really begins with the stock market, or dotcom bubble, and the confidence crisis resulting from the September 11, 2001 attacks on the World Trade Center, although the bursting housing bubble is a direct cause behind the crisis. In the wake of these events, Alan Greenspan, then chair of the Federal Reserve, lowered the federal funds target rate drastically. According to the Federal Reserve, the federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. Furthermore, the combination of low interest rates and easier leverage in a loose lending environment led investors to look for a new asset class through
housing market and securitization process.
Paul Krugman (2009), the recipient of the 2008 Nobel Prize in Economics, defines a bank as: “…the essential feature of banking is the way it promises ready access to cash for those who place money in its care, even while investing most of that money in assets that can’t be liquidated on a moment’s notice. Any institution or arrangement that does this is a bank, whether or not it lives in a big marble building.” This definition of a bank is crucial because hedge funds, insurance companies, and investment banks held investors’ money and returned it on demand but
were not insured by the FDIC. They are, therefore, called non-bank banks or shadow banks.
Those shadow banks use substantial derivative securities, such as mortgage-backed
securities (MBS), collateralized debt obligations (CDO), and credit default swap (CDS) that resulted in abruptly high market volatility, consequently followed by market collapse leading to global financial crisis.
MORTGAGE-BACKED SECURITIES
Structured mortgage-backed securities (MBS), such as collateralized mortgage
obligations (CMOs) interest only or principal-only STRIPs, are a type of asset-backed securities, which derive their value from an underlying pool of assets. The cash flows from those assets are allocated to render certain prepayment and maturity profiles (Jaeger, 2008). The mortgage collateral, which CMO bonds are issued against, can be agency pass-through pools, whole loans,or classes from other CMO deals (e.g. CDO squared deals in the corporate space). The majority of the collateral is mortgages on residential and commercial buildings.
The purchase and sale of home mortgages began when Federal National Mortgage
Associate (FNMA, hereafter Fannie Mae) was charted in 1938. Fannie Mae finances the
purchase of mortgages through the sale of its own short-term notes and long-term debentures, which, up until 2008, were effectively backed by the general creditworthiness and reputation of Fannie Mae. As Congress continued taking measures to increase housing opportunities, particularly for low-income families, Fannie Mae and similar government-sponsored enterprises became the primary originators of subprime mortgages, as well as the largest issuers of securities
backed by subprime mortgages. Other institutions began to mirror this activity—issuing debt to finance subprime lending and the securitization of pools of mortgages that included subprime mortgages. Because government-sponsored agencies like Fannie Mae were issuing so many homogenous mortgage-backed securities, a vast market for trading in MBS securities in the primary and secondary markets was created. Investment banks, as well as foreign banks, provided the majority of the market for mortgage-backed securities. Investment banks, for example, would underwrite these securities and sell them in the secondary market to other buyers, like hedge funds and foreign institutions. Until default rates on the underlying mortgages began increasing and the value of the securities decreased, the secondary market for mortgagebacked securities was large enough to make them highly liquid.
Economic Role in the Capital Markets:
MBS securities play an important role in the capital markets as a result of their many benefits for investors. These benefits include the diversification of idiosyncratic risk of individual mortgages. The most significant benefit of MBS securities is their role in allowing hedge fund managers, for example, to make strategic allocations that explicitly diversify across economic functions and their corresponding risk premia, which are related to various functions financial markets have in the global economy (Jaeger, 2008: 138). One of the most important economic functions for the capital markets is risk transfer for financial intermediaries, such as banks and insurance companies, which have a need to design their overall risk exposure flexibly and transfer undesired risks to other agents. This is what allowed many banks to take on more risk and make more loans, circumventing capital requirements. In addition, the use of structured derivative securities contributes to the notion of market completeness, providing hedgers and investors with specialized return profiles. For example, the market for derivative contracts
creates a wide range of risk/return profiles for investors, including nonlinear risk profiles not found elsewhere. Completing the market can be seen as a specialized form of risk transfer.
Investment Banks and Credit Rating Agencies:
Investment banks played a key role in the packaging of subprime mortgages into
securities that were subsequently sold to institutions such as hedge funds and pension funds. Problems began to surface as investment banks increased underwriting and securitizing activity for mortgage-backed securities. In this area, the bulk of sales were made to hedge funds, pension funds, and similar foreign institutions that also included foreign banks. Since the creditworthiness of the securities had not adequately been reflected by institutions like Standard and Poor’s, Moody’s and Fitch Ratings, mortgage-backed securities were sold at a premium. In fact, many investors have filed suits against those specific credit rating agencies, citing that their failure to either evaluate or accurately disclose the creditworthiness of derivative securities, such as MBS securities.
One key example is the minimum “A” rating given to Lehman Brothers Holdings Inc. by
Standard and Poor’s, Moody’s, and Fitch Rating prior to September 15, when the investment bank declared bankruptcy (Evans and Salas, 2009). In addition, regulatory commissions, such as the Securities and Exchange Commission, have subpoenaed information from such credit rating agencies. These events have brought into question the reliance of the financial system on rating agencies. State regulators depend on credit agencies when monitoring the health of $450 billion of bonds held by U.S. insurance companies, including American International Group (AIG), which has come under majority government ownership after multiple rounds of government
bailout financing. Furthermore, market participants have highlighted agency problems at rating agencies, making conflicts of interest relating to fees a focus. Since the default rates have increased and prices have slumped as these institutions sell assets to bolster capital, declining debt values have forced funds to unload securities, and tighter lending has prompted bond buyers to seek lower purchase prices (Shenn, 2008). The effects of this news caused turbulence in the financial markets, in the form of record volatility levels.
Convertible Arbitrage of Hedge Funds:
The use of derivatives for both hedging and speculation is common practice in the hedge fund industry. Many hedge funds, for example, utilize convertible arbitrage strategies, which involve taking advantage of pricing inefficiencies of convertible securities, which are the equivalent of holding a bond position and an option on some underlying stock. According to Tremont Advisors, convertible arbitrage total market value grew from $768 million in 1994 to $25.6 billion in 2002 (Hutchinson and Gallagher, 2005). The strategy involves purchasing the convertible security, while shorting the underlying shares for which the security has an option, effectively taking advantage of pricing disparities between the two. The relative price
movements occur when the credit profile of the company changes, the market changes its perception of the said credit, the market or the market premium paid for a given level of credit risk changes (Jaeger, 2008); there is a shift in the volatility of the underlying equity or the market premium paid for a given level of volatility changes; and interest rate movements change market yield requirements (Jaeger, 2008).
In many cases, hedge funds utilize quantitative models to execute “gamma trading”
strategies, which means taking a long volatility (referring to volatility of the underlying stock)exposure. In addition to equity risk, hedge fund managers executing convertible arbitrage strategies must hedge other risks, including credit risk and interest rate risk. This is done through credit derivatives (e.g. credit default swaps) and fixed income derivatives, such as interest futures and options for duration risk. This is particularly important in the case of convertible arbitrage
managers, since they often utilize substantial leverage, ranging from 1:1 to 5:1.
There is some evidence to support the success, and therefore increased use, of convertible arbitrage strategies during the turbulent markets, beginning in 2007. According to Hutchinson and Gallagher (2005), there is a negative correlation between convertible arbitrage returns and equity market returns in extreme up markets, when the equity risk premium is more than two and half standard deviations from its mean. This negative correlation is explained by the long volatility nature of convertible bond arbitrage, where in extreme up markets implied volatility
generally decreases having a negative effect on portfolio returns. Because the market went into a strong downturn and financial stress caused sizeable swings in market volatility, convertible arbitrage has seen some success in 2008. Hedge funds, like the Alexandria Global Investment Fund, have benefited from utilizing convertible arbitrage strategies, despite substantially wider credit spreads. With the growth of the hedge fund industry, as well as the convertible arbitrage
market value, and the growing body of research supporting the non-directional strategy, it can be deduced that hedge funds, especially those looking to hedge various types of risks (e.g. credit risk and interest rate) are heavy users of derivative securities, such as credit default swaps and asset-backed securities.
CREDIT DEFAULT SWAPS
Credit default swaps (CDSs) were put into place about ten years ago to give bondholders a way to protect themselves against borrower defaults. CDSs are derivative contracts between two parties in which the buyer makes periodic payments to the seller. If the underlying financial instrument—a bond or a loan—defaults, the buyer, who does not necessarily have to own the underlying credit instrument, receives a payment. Essentially, CDSs can be said to work like options; they resemble put options on the underlying bonds, and CDS terminology (buyer, seller,
writer) is very similar to that of options (Western Asset, 2009). Credit default swaps allow investors to speculate about a company’s prospects, to hedge against possible defaults by the sellers of the debt securities they own, or to transfer the risk of a company or bond default to others.
Credit default swaps are also used among Capital Structure Arbitrage (CSA) hedge funds. Examples of trades that involve CDS contracts are: (1) going short on a CDS by selling “insurance” and buying a put on the stock, and (2) buying “insurance and going long on a CDS while going short on a put on the stock. Capital Structure Arbitrage works based off a derived relationship between the issuer’s CDS rate and the volatility of the company’s equity. CSA offers inherent returns, but such returns are usually risk premia, rather than results of pricing inefficiencies (Jaeger, 2008).
Synthetic collateralized debt obligations also utilize CDSs. Instead of owning assets like bonds and loans, synthetics CDOs acquire credit exposure to such assets through CDSs (Harrington, 2008). The CDO (the credit protection seller) would receive premia in regular cash payments in exchange for assuming the risk.
Credit default swaps were used to encourage investors to put money into ventures in
emerging markets, like Latin American and Russia, because they insured the debt from those countries. In the United States during the housing boom, CDSs were taken out to insure many mortgage-backed securities (Philips, 2008).
Issues with CDS markets:
Originally intended for making the hedging of corporate bonds easier, speculators who
did not actually own bonds—in other words, speculators who had uncovered or “naked” CDS contracts—ended up dominating the market (Morgenson, 2008). As the amount of debt defaults rose, companies who issued CDS contracts, such as American Insurance Group (AIG), found themselves short on the funds necessary to pay investors back. Aggravating matters further, credit default swap markets were virtually unregulated; transactions did not have to pass through a central clearinghouse. No one could be sure of the value of a CDS contract.
Additionally, issuers of CDS contracts, such as AIG, tended to treat CDS contracts like regular insurance policies (Philips, 2008). The problem here was that regular insurance, such as car insurance, does not assume a correlation between one incident and the increased likelihood of another—one car crash does not necessarily increase the chances of the occurrence of another. With bonds, however, one default leads to nervous investors, which leads to withdrawal of investments, which then prompts market panic, and so on.
Role of credit ratings agencies and global consequences:
In order to examine how credit default swaps affected the global economy, the American insurance company American International Group (AIG) can be used as an example. AIG had businesses in over 130 countries (Karnitschnig, 2008), and in many ways functioned as a healthy company. But in September 2008, AIG was pushed to the brink of bankruptcy when it suffered a liquidity crisis after a ratings downgrade. AIG had issued a large amount of credit default swap contracts to investors; when its ratings were downgraded, AIG was required to put up additional collateral in order to satisfy margin call requirements. Lacking the cash necessary to satisfy
collateral requirements, AIG suffered a liquidity crisis. Due to the “interlocking nature” of credit default swaps, AIG’s fall made such a big impact on the national and international economy because so many banks were tied to the insurance firm.
Since CDSs are private contracts are formed between two parties and are not regulated by the government, there is currently no way of determining their value (Philips, 2008). This unregulated market grew into billions of dollars worth of transactions that made it around the world, dangerous securities in hiding. According to the Oct. 27, 2008 Business Week article “A Lethal Loophole at Europe’s Banks,” European banks were among the biggest buyers of AIG’s credit default swaps, their deals with AIG totaling $426 billion before 2008 (Henry, 2008). These
European banks used credit default swaps not only to insure against defaults, but to get around capital requirements. According to international regulations known as the Basel Accords, European lenders are required to have a certain amount of money set aside to cover potential losses. By dealing in credit default swaps, European banks were able to make it seem like they had transferred some risk over to AIG, thereby reducing the banks’ capital requirements and freeing them up to make more loans. AIG’s credit swaps, in particular, provided extra leverage; due to its high credit rating, AIG could make deals with very little collateral against losses, and
was thereby able to increase lending with little money (Henry, 2008). However, the benefit only held if AIG maintained a high credit rating. When AIG’s rating fell in September 2008 and the company needed a bailout, European banks that had dealt with AIG found themselves in the same position.
In mid-September 2008, the U.S. government made an $85 billion deal with AIG. The
government’s involvement in saving the company from bankruptcy implied how dangerous it would have been to the financial system to let the insurance giant fail. The Federal Reserve seemed to be worried that Wall Street’s financial crisis could affect even “safe” investments by small investors, like money market funds that invested in AIG debt. Globally, the deterioration of AIG could force financial institutions in Europe, the United States, and Asia to record the CDS contracts they had purchased from AIG as losses (Hilsenrath, 2008).
One month after the initial bailout, the Federal Reserve announced that it would borrow $37.8 billion of AIG securities in exchange for cash collateral. One month after that, the government began discussing possible changes to the terms of the loan to AIG, options including the lowering of interest rates or the extension of the credit term (Hilzenrath, 2008).
COLLATERALIZED DEBT OBLIGATIONS
Collateralized debt obligations (CDOs) are shares in bundles of securities. CDOs were
born out of securitization—the process of transforming financial assets, which are typically illiquid, into marketable securities to be sold in the secondary market in order to provide more liquidity for the economy. Financial assets include mortgages, car loans, credit card debt and corporate debt. Because CMOs are also discussed in this paper, the CDO segment of this paper will only focus on financial assets other than mortgages.
CDOs are created through corporate entities that hold assets (loans, credit card debt, and corporate debt) as collateral. The cash flows are then sold in packages to investors. The purpose of CDOs is to spread out risk by investing in other pools of debt. CDOs are bundled together by investment banks (such as Lehman Brothers) or subsidiaries of asset-backed securities issuers into various tranches. The tranches are ranked A through E and Equity. Higher tranches (those rated A) are protected by security structure, so they are offered lower interest rates. Lower tranches have higher interest rates because they are riskier in nature, and therefore, should return higher yields. CDOs became popular in the 2000s; it was estimated that CDOs were worth more than $2 trillion at the beginning of 2006 (Sainsbury, 2008).
What was the economic role of CDOs in the capital markets?
CDOs are important because spread out the risk of various investments by capitalizing on other pools of investment. CDOs play a big role in corporate loans. Collateralized loan obligation (CLOs) is a type of CDO that is backed by corporate loans. CLOs have not been in the market lately due to the credit crisis. Like CDOs, these corporate loans are pooled together to spread out the risk and protect against potential losses. This attracted private equity firms, pension funds and insurance companies to buy these packages, raising $100 billion in 2006 (Farzad, 2007).
Transactions became riskier as private equity firms kept bidding up prices for leveraged buyouts. In addition, companies were having trouble covering interest payments of their debt.
Furthermore, loan terms became looser. As a result of the credit crisis, buyout financing was all but disappeared, leaving nobody to buy loans at current prices. This has taken a huge toll on the corporate loans market because market confidence started to slip, putting the CDO business to a halt (Stein, 2008). Once investors stop investing in these markets, there is no longer protection against risk exposure for these financial institutions. As a result, CDOs have a very important role in protecting against risk in the capital market.
It is also possible to create CDOs from other CDOs; these are called synthetic CDOs.
Synthetic CDOs are different, in the sense that banks can pool credit default swaps into them and sell pieces of those. Essentially, investors in synthetic CDOs protect a pool of bonds against default loss (Whitehouse, 2005). However, synthetic CDOs do not actually contain the securities they sell—banks make these CDOs without having to purchase the underlying bonds. Banks create synthetic CDOs to earn more money through trading these securities. So, why do people invest in these securities if they are not actually investing in the physical asset? Synthetic CDOs have the potential of yielding high returns with just a little to invest, but are very risky in nature.
One problem with synthetic CDOs is that they allow financial institutions to write off debt by pooling their debt with other institutions. They then, bring all of those debts back to their books and call it a synthetic CDO asset, even though there is nothing to back the “asset” up. So, a potential problem would arise if people start defaulting on their payments. If payments start defaulting, the financial institutions that issue these CDO assets would have no cash flows to pay out the interests on the investment. And since a synthetic CDO is a CDO built on top of another CDO or CDS, there would be even less (if any) cash flows to pay out the interests on those secondary CDOs/CDSs. Another problem with CDOs is the fact that they are not transparent and are really hard to track because they package so many underlying securities together (Attwood, 2004). Because the nature of these securities are so complicated (they are securities on top of securities), it is very hard to determine the credit-riskiness.
Role of credit rating agencies:
Even though the value of CDOs were clearly declining, credit rating agencies were slow to downgrade the creditworthiness of these secruities. Because the rating agencies did not disclose the downgrades in time, many investors were misled to think that CDOs were still safe to invest in. But, the truth unraveled as more defaults submerged to the surface and the CDOs became practically value-less. This was especially problematic with the synthetic CDOs because they were influenced by the “primary” securities. So, even though the ones rated triple-A or double-A were expected to be paid out with the cash flows from the primary securities, it did not
happen because people started defaulting on their payments, cutting the cash flows off.
Large investment banks, including Bear Stearns, Merrill Lynch and Lehman Brothers
were impacted by the credit crisis through their CDOs. These investment firms reported a loss of $9 billion in writedown of assets during the first quarter of 2008. Lehman Brothers was the biggest marketer of CDOs. Therefore, when Lehman Brothers filed for bankruptcy in 2008, even the international market was negatively affected because everyone had invested in so many securities that the company underwrote, guided by the “safe” ratings credit rating agencies had given to CDOs.
FIGURE 1: S&P 500 FORWARD RANGE VIA VIX
CBOE Volatility Index
MARKET VOLATILITY
To measure volatility, the authors used the Chicago Board Options Exchange Volatility
index (VIX) as a reference for market volatility. The VIX index is a measure of 30-day forward volatility, based on a basket of S&P 500 options. It is representative of the market as a whole because the S&P 500 is a cap-weighted index (GSPC), covering a wide range of large capitalization American companies, across many industries. However, the VIX does understate risk since it does not take into account skewness and kurtosis. Using the VIX index, this paper predicts forward S&P 500 ranges using the following formula:
Forward GSPC Range = GSPC * (± (VIX/_(250)))
The dependence of financial institutions on structured derivative securities made their devaluation a cause for increased market volatility, especially in late 2008. Furthermore, the need for the U.S. government to step in and provide bailout funds for large financial institutions, like American International Group, has been a cause for increased volatility, as investors worried about the solvency of key financial institutions in the aftermath of the bankruptcy of Lehman Brothers Holdings Inc. For example, on September 15, 2008 Lehman Brothers filed for chapter
11 bankruptcy.
Figure 2: CBOE Volatility Index
CBOE Volatility Index
The VIX continued to show significant swings in volatility throughout the latter half of 2008, responding violently to news pertaining to structured derivative securities and companies that had used them. The week of November 3, 2008, Morgan Stanley analysts reported a prediction that leveraged loans would outperform high yield bonds. This week saw the VIX close at 56.10, -6.33% versus the previous week’s close. This translated to a 66-point S&P 500 range (898 – 964). The following week, AIG received a restructured package from the U.S. government. As a result, the VIX closed the week at 66.31, +18.20% over the previous week’s close. This translated to a 73-point S&P 500 range (837 – 910).
This news shocked the market, causing the VIX to close at 31.70, +23.54% over the
previous close. From a trader’s perspective, this translated to a 48-point S&P 500 range (1,168 – 1,216) (see Figure 1). That same week AIG got an $85 billion loan from the U.S. government.
The fall of Lehman Brothers (LEH) and the first bailout of AIG caused a jump in volatility, sending the VIX into a strong uptrend over the next two months (see Figure 2). The week of October 20 2008, AIG tapped $90 billion from its credit line with the U.S. government, causing the VIX to close the week at 79.13, +12.51% over the previous week’s close. This translated to an 88-point S&P 500 range (833 – 921). This was near the peak VIX level in 2008.
CONCLUSIONS
The turbulence and high volatility that the financial markets experienced in 2008 were the result of misuses of derivative securities, which had become popular among large investors and financial institutions for their hedging and speculative properties. In the case of shadow banks (Krugman, 2009), these securities made it possible to take on more risk unethically by transferring risk to other institutions to circumvent capital requirements. The solvency issues facing Lehman Brothers Holdings, American International Group and many other companies were the direct result of fluctuating values in structured derivative securities, like collateralized
debt obligations, mortgage-backed securities, and credit default swaps. The underlying causes of highly volatility, particularly in the latter half of 2008, are evidently the result of uncertainty in the psychology of investors, regarding the economic impact of the unethical misuses of derivative securities.
REFERENCES
OPEN THE PAGE IN THE FRONT PAGE
Related Websitehttp://www.federalreserve.gov/fomc/fundsrate.htm
http://research.stlouisfed.org/fred2/series/DFEDTAR
sábado, 13 de noviembre de 2010
EL 2008 y la CAIDA DEL IMPERIO. Vealo en "INSIDE JOB"
EL 2008 Y LA CAIDA DEL IMPERIO
VEALO EN LA PELICULA "INSIDE JOB"
HAZ, Noviembre 13, 2010
La caida del imperio empezo mucho mas antes del 2008 y los culpables no son “otros”, los extranjeros (China, en este caso). Los culpables del actual terrorismo financiero de Wall Street estan dentro. En otras palabras, la debacle actual del imperio fue otro INSIDE JOB, como lo fue el terrorismo de septiembre 11 del 2001.
1. OTHERNESS vs. INSIDE JOB
El “otherness” que oculta el racism y xenophobia de los caucasicos que invadieron y se apropiaron de tierras americanas, es una mentalidad deficil de erradicar, es quiza un temor profundo lo que alimenta ese estereotip, quiza un sistema del subconciente y de auto-defensa lo que esta detras del temor a la revancha por los abusos y humillacion contra los recien emigrados, o quiza el temor a ser desposeidos de lo que los blancos se apropiaron en forma ilicita en el pasado. Lo cierto es que hay un delirio de persecucion en ellos, un estado mental de paranoia cronica que se expresa en la tendencia a acusar a “otros” de los problemas que ellos crean.
2. LA 1RA DERROTA DEL OTHERNESS
Cuando cientificos Americanos exigieron –basados en estudios y evidencias irrefutables- que el terrorismo de sept 11 fue un “inside job” en el que estan envueltos agencias de estado como la CIA y el FBI en coordinacion con sus similares en paises clients o aliados, el “otherness” sufrio un serio golpe. Ver la entrevista de Alex Jones a Stanley Hilton en http://www.prisonplanet.tv/audio/091204hilton.htm, Ver tambien Big lies on sept 11 in http://guardian.ifastnet.com/ Tambien la entrevista With Dr. David Ray Griffin: http://www.informationclearinghouse.info/article24960.htm. O ver el reporte de fisicos sobre rastros de especial termite used in the implosion in www.informationclearinghouse.com. Etc.
Lo mas reciente fue la denuncia del Senador Mike Gravel. El senador fue “Former U.S. presidential candidate” y fue el quien dijo que 9/11 was an "inside job" http://futurefastforward.com/feature-articles?start=15 Pero aun asi, no se quiere dar paso a una investigacion independiente.
No se quiere tomar el toro por la astas , se prefiere agarrarlo de la colita como ocurre hoy con el intento de enjuiciar a Bush a raiz de su auto-biografia en la que admite que la destruccion y genocidio en Irak se baso en la mentira de los WMD (armas de destruccion masiva) que supuestamente Irak poseia y que apuntaban contra el aliado Israel. Bush admitio tambien que el avalo las torturas mas horribles que se cometieron contra los musulmanes acusados de delitos de terrorismo. En buena hora si se procede al juicio, pero decir esto en el actual contexto huele solo a “buenas intenciones” electoreras.
3. LA 2ND DERROTA DEL OTHERNESS
Esta vez el otro terrorismo, el financiero de Wall sStreet si llego al cine y lleva el mismo nombre “Inside Job”. La pelicula circulo en Octubre y la prensa y TV no pudieron detener su difusion. Aqui se acusa a ambos, al partido democrata y republicano de estar coludidos en el fraude mas grande de la historia mundial. El terrorismo financiero es mas letal que el de sept 11, pues no esta sacrificando vidas de Americanos (me refiero a las consecuencias la crisis economica en el desempleo y destruccion de la familia Americana como resultado de la crisis economica) lo peor es que estos efectos estan siendo trasladados a nivel mundial y a paises emergentes. Este terrorismo es el que se denuncia en la pelicula INSIDE JOB.
El “otherness” esta siendo sacudido por 2da vez, y ya muchos Americanos se sienten culpables de haber dejado sin castigo a quienes causaron este horrible crimen (los especuladores de Wall Street) y a quien los encubre: Obama. El pueblo castigo a Obama en las elecciones reciente del 4 de noviembre. Si el sigue dejando impune a las mafias de Wall Street, el pueblo no votara por el en las elecciones que vienen. Alguien dijo que –en parte- el voto contra Obama fue resultado del impacto de esta pelicula INSIDE JOB.
4. algunas sugerencias
Vea la pelicula INSIDE JOB si ya es possible en espaniol y si entiende ingles le recomiendo escuchar la entrevista de CBS@katiecouric al autor de la pelicula.
Si tiene tiempo extra dele una lectura a los reviews de esta pelicula. Le sugiero: 1. REVIEW ON FERGUSON DOCT BY: Marshall Fine. http://hollywoodandfine.com/reviews/?p=2886, October 6, 2010 y lea la critica que sigue a este review.
Y si le queda un tiempito mas le sugiero abrir un glosario economico donde se defina derivatives, cds and subprime morgages. Le sugiero abrir: http://www.isda.org/c_and_a/oper_commit-dcg-glossary.html.
Y si quiere ir mas a fondo en el tema abra la pagina: “Unethical misuse of derivatives and market volatility” en http://www.aabri.com/manuscripts/09398.pdf
Buena suerte y goce y difunda esta pelicula.
Lo Saluda, con mi aprecio de siempre, Hugo Adan Zegarra (haz)
VEALO EN LA PELICULA "INSIDE JOB"
HAZ, Noviembre 13, 2010
La caida del imperio empezo mucho mas antes del 2008 y los culpables no son “otros”, los extranjeros (China, en este caso). Los culpables del actual terrorismo financiero de Wall Street estan dentro. En otras palabras, la debacle actual del imperio fue otro INSIDE JOB, como lo fue el terrorismo de septiembre 11 del 2001.
1. OTHERNESS vs. INSIDE JOB
El “otherness” que oculta el racism y xenophobia de los caucasicos que invadieron y se apropiaron de tierras americanas, es una mentalidad deficil de erradicar, es quiza un temor profundo lo que alimenta ese estereotip, quiza un sistema del subconciente y de auto-defensa lo que esta detras del temor a la revancha por los abusos y humillacion contra los recien emigrados, o quiza el temor a ser desposeidos de lo que los blancos se apropiaron en forma ilicita en el pasado. Lo cierto es que hay un delirio de persecucion en ellos, un estado mental de paranoia cronica que se expresa en la tendencia a acusar a “otros” de los problemas que ellos crean.
2. LA 1RA DERROTA DEL OTHERNESS
Cuando cientificos Americanos exigieron –basados en estudios y evidencias irrefutables- que el terrorismo de sept 11 fue un “inside job” en el que estan envueltos agencias de estado como la CIA y el FBI en coordinacion con sus similares en paises clients o aliados, el “otherness” sufrio un serio golpe. Ver la entrevista de Alex Jones a Stanley Hilton en http://www.prisonplanet.tv/audio/091204hilton.htm, Ver tambien Big lies on sept 11 in http://guardian.ifastnet.com/ Tambien la entrevista With Dr. David Ray Griffin: http://www.informationclearinghouse.info/article24960.htm. O ver el reporte de fisicos sobre rastros de especial termite used in the implosion in www.informationclearinghouse.com. Etc.
Lo mas reciente fue la denuncia del Senador Mike Gravel. El senador fue “Former U.S. presidential candidate” y fue el quien dijo que 9/11 was an "inside job" http://futurefastforward.com/feature-articles?start=15 Pero aun asi, no se quiere dar paso a una investigacion independiente.
No se quiere tomar el toro por la astas , se prefiere agarrarlo de la colita como ocurre hoy con el intento de enjuiciar a Bush a raiz de su auto-biografia en la que admite que la destruccion y genocidio en Irak se baso en la mentira de los WMD (armas de destruccion masiva) que supuestamente Irak poseia y que apuntaban contra el aliado Israel. Bush admitio tambien que el avalo las torturas mas horribles que se cometieron contra los musulmanes acusados de delitos de terrorismo. En buena hora si se procede al juicio, pero decir esto en el actual contexto huele solo a “buenas intenciones” electoreras.
3. LA 2ND DERROTA DEL OTHERNESS
Esta vez el otro terrorismo, el financiero de Wall sStreet si llego al cine y lleva el mismo nombre “Inside Job”. La pelicula circulo en Octubre y la prensa y TV no pudieron detener su difusion. Aqui se acusa a ambos, al partido democrata y republicano de estar coludidos en el fraude mas grande de la historia mundial. El terrorismo financiero es mas letal que el de sept 11, pues no esta sacrificando vidas de Americanos (me refiero a las consecuencias la crisis economica en el desempleo y destruccion de la familia Americana como resultado de la crisis economica) lo peor es que estos efectos estan siendo trasladados a nivel mundial y a paises emergentes. Este terrorismo es el que se denuncia en la pelicula INSIDE JOB.
El “otherness” esta siendo sacudido por 2da vez, y ya muchos Americanos se sienten culpables de haber dejado sin castigo a quienes causaron este horrible crimen (los especuladores de Wall Street) y a quien los encubre: Obama. El pueblo castigo a Obama en las elecciones reciente del 4 de noviembre. Si el sigue dejando impune a las mafias de Wall Street, el pueblo no votara por el en las elecciones que vienen. Alguien dijo que –en parte- el voto contra Obama fue resultado del impacto de esta pelicula INSIDE JOB.
4. algunas sugerencias
Vea la pelicula INSIDE JOB si ya es possible en espaniol y si entiende ingles le recomiendo escuchar la entrevista de CBS@katiecouric al autor de la pelicula.
Si tiene tiempo extra dele una lectura a los reviews de esta pelicula. Le sugiero: 1. REVIEW ON FERGUSON DOCT BY: Marshall Fine. http://hollywoodandfine.com/reviews/?p=2886, October 6, 2010 y lea la critica que sigue a este review.
Y si le queda un tiempito mas le sugiero abrir un glosario economico donde se defina derivatives, cds and subprime morgages. Le sugiero abrir: http://www.isda.org/c_and_a/oper_commit-dcg-glossary.html.
Y si quiere ir mas a fondo en el tema abra la pagina: “Unethical misuse of derivatives and market volatility” en http://www.aabri.com/manuscripts/09398.pdf
Buena suerte y goce y difunda esta pelicula.
Lo Saluda, con mi aprecio de siempre, Hugo Adan Zegarra (haz)
jueves, 11 de noviembre de 2010
Hacia la segunda gran depression mundial. Del QE II al GD II
Hacia la segunda gran depression mundial. Del QE II al GD II
Vivimos ya el colapso mundial del sistema capitalista
By Haz. Octubre 30, 2010
1. La globalizacion del caos. El rey moribundo quiere lo entierren con sus concubinas
La globalizacion supone un proceso de integracion mundial a diferentes niveles. Destacan dos niveles que estan intimamente vinculados pero a la vez muy contradictorios, 1ro el scientifico-tecnologico y 2do, el economico (produccion y consumo). En el 1ro, la ciencia y tecnologia crea y recrea productos cada vez mas sofisticados los que –en terminos relativos- son cada vez mas baratos, pero que no pueden ser consumidos por vastos sectores de la creciente poblacion mundial. El gran capital impulsa este desarrollo pero no en la perspectiva de satisfacer “reales” necesidades humanas, sino sobre todo necesidades “inventadas” , esto es, las que generan mayores utilidades o dividendos al capital.
Y que pasa cuando ni eso genera las ganancias esperadas? Pues que se globalizen las perdidas, es su respuesta. Que se cargue todo el peso de la debacle sobre las espaldas de la economias emergentes. Esto es: Que maten a mis concubinas, es lo que dice el rey del sistema moribundo. Y en esto estamos.
La economia neoliberal sirve a los especuladores y empobrece a los trabajadores
En el 2do nivel, tenemos la contradiccion capital-trabajo y la forma como este se desplaza hacia la explotacion de recursos cada vez mas exiguos (algunos de ellos altamente contaminantes y destructivos, es el caso de la energia petrolera, el gas natural y la fabricacion de basura belica). Se diria que la economia mundial gira aun en torno a la produccion de toxicos y otros contaminantes y auto-destructivos de la sociedad y naturaleza. Del mito "trabajo como fuente de toda riqueza" se paso al mito "especulacion financiera como fuente de toda riqueza" y esto se convirtio en el gran fraude neoliberal en el que estamos envueltos. Vea Ud hacia donde se orienta la inversion del gran capital y donde obtiene mayores beneficios y nos dara la razon.
Hoy el trabajo mas rentable y por cierto mas inestable y auto-destructivo es el que sirve al gran capital que controla el sector publico y privado. Donde dominan las grandes corporaciones, el derecho a justa compensacion salarial y los beneficios laborales conquistados durante la epoca del welfare state estan siendo eliminados dia a dia. Del trabajo independiente del capital, tambien es rentable pero inestable el que se orienta a apoyar la especulacion financiera (vease lo ocurrido en el sector inmobiliario). El resto de trabajos independientes son de auto-subsistencia y tan precario y decadentes como todo servicio en el sector publico y privado.
En general, el salario minimo ha permanecido estancado por decadas en los EU, en otros paises la inflacion los ha devaluado. En EU hay un estado, creo fue Arizona, que redujo el salario minimo en el afan de atraer al trabajo precario a americanos pobres y apoyar asi la expulsion de nuevos inmigrantes de Mexico. No funciono.
El trabajo precario y mal pagado (part time) es funcional sistema. De el descuentan casi un tercio para pagar guerras de despojo y genocidio abroad. Con el mismo objetivo se pretendio privatizar el seguro social y como no funciono optaron por alargar el derecho a jubilacion hasta los 69 anios. Y es que los dineros del seguro social han sido ya expropiados. Un trabajador americano lo dijo claro en TV: que sentido tiene trabajar en el sector privado o publico, si el Federal lo va a asaltar al ciudadano. Preferibe sobrevivir con empleos que rindan cash y no pagar impuestos, decia. En otras palabras: en buena hora si muere el rey y sus concubinas, y tambien sus carniceros, los de Wall Street. Es el sentir de muchos americanos hoy.
Que objeto tiene vivir en una casa sin techo?
El gran problema y la gran contradiccion del modelo economico es que la casa ha sido construida con suelo de barro, los minimos salariales por hora son eso, lo que no garantiza solido ingreso diario sino solo mas trabajos precarios y abandono o destruccion de la familia. Lo grave es que se trata de una casa sin techo, pues no hay topes a los altos ingresos ni a las evasiones fiscales de los ricos. Se vive por tanto a la interperie y si llueve o hay tempestad, unos tienen umbrella y los mas no. Esto puede generar conflictos de clase que aun no son visibles pero que pronto van a generar inestabilidad politico-social. Este pais sin duda esta caminando hacia un 2do social rights movement que amenaza ser mucho mas conflictivo que el de los 60 en el siglo pasado. Se huele el ascenso de la violencia social tanto como la polucion diaria.
Que vivan los otros sepultureros del sistema
Marx vio en el obrero la tumba del capitalismo, eso no es cierto hoy, ahora es el consumista Americano quien esta lapidando el sistema. Si tiene dinero, consume, si no lo tiene, se lo "presta" del vecino y si tiene algo para el fin de semana, va a un mall, compra, usa y luego devuelve el producto antes de los 3 meses, asi la empresa no se va en quiebra –bruscamente al menos- y nadie pierde su trabajo, de la noche a la maniana al menos. Asi todos podran celebrar navidad y sentirte felices de ser Americanos de “clase media”, pues aqui no existen proletarios ni nadie quiere ser socialista. O mejor, ellos no quieren que los trabajadores sean socialistas (que el Estado sirva a su pueblo), solo los ricos quieren ser socialistas, pero a su manera, que el Estado los ayude a socializar sus perdidas (bailouts) mientras evaden impuestos y se comen mas del 90% del cake, esto es, se embolsillan las super-ganancias ocasionales del sistema.
Ni crecimiento ni desarrollo
Sin duda la mayor contradiccion del sistema es que la ciencia y tecnologia –y el gran capital que orienta su destino- ha creado muchos productos y son cada vez menos los que pueden consumirlos. Para que cresca la economia –ojo que no hablamos de desarollo pues esto supone incremento sostenido, lo opuesto al rolling coaster de los crecimientos economicos- se necesita consumir lo que produce el capital. El capitalismo es bello si las tiendas estan llenas de cualquier cosa como en hallowing y aun mas bello cuando todos se disfrazan para mentir, el llamado “trick or treat”, me truqueas con tu disfraz y te doy algunos caramelos.
En una economia hollowing como la que tenemos, los fabricantes de candies y de basura belica estan felicies cuando alguien compra sus productos. Al parecer pronto se les ira la felicidad pues el consumidor inteligente ya no quiere el azucar nocivo de los candies para sus hijos, ni las naciones inteligentes quieren que su pais compre basura belica. Quienes trabajan en esas fabricas perderan su empleo, si avanza el pacifismo y el respeto a los DDHH.
Para obtener mas ganancias el capital tiene que irse fuera donde el labor sea mas barato, eso genera mas desempleo en casa. Las metropolis imperiales estan condenadas a cargar el peso de dos ejercitos necesarios al sistema, el de los desempleados y el de los militares. Sin ellos no pueden presionar hacia abajo el salario ni saquear o extorcionar la periferia. En una economia neoliberal en quiebra la poblacion esta condenada al desempleo cada vez mayor y al consumismo artificial de los credit cards y el sistema a caminar de una trampa a otra, de la deflacion a la inflacion, hasta que llegue la gran depresion, el sentanazo final. Es lo que ya empezamos a sufrir.
Si el trabajo productivo y bien pagado escasea pues tambien escasean los impuestos y si no hay impuestos, tenemos una economia en deficit (con muchas deudas y poca produccion) y no nos queda otro recurso que prestarnos de quienes si producen, de los chinos y de otros paises, y cuando no podemos pagar las deudas contraidas recurrimos a fabricar dollars al por mayor. Eso equivale a cavar la tumba pues se sacrifica el dollar como moneda de intercambio y atesoramiento mundial. Aqui estamos
Del QE II a la 2da Gran depresion mundial
Ya no se pudo posponer mas la caida. La escalera usada devino muy corta y el techo-deudas cada vez mas alto. Hasta aqui llego la crisis economica. Desde los QE II para adelante, debemos hablar en serio: estamos en los inicios de la 2da gran depresion mundial. Si no preparamos la gente para ello, la debacle social sera mas grave. Somos una nacion insolvente y jamas podremos pagar la deuda a otras naciones que compartieron nuestros afanes de conquista del sur. Fabricar dollars de la nada, no servira de nada. Al contrario, lo que estamos produciendo con ello es inflacion. Lo mas grave es que estamos destruyendo la fe en los milagros del dollar como moneda universal del comercio y de reserva. La lampara de aladino que nos dio muchos privilegios mal habidos esta siendo destruido. Estamos matando la gallina de los huevos de oro, el dollar ni siquiera servira como toilet paper. Estamos ya en la 2da gran depression mundial.
No queda otra que abandonar la economia liberal secuestrada por el capital corporativo especulador y orientarnos hacia una economia social de Mercado con fuerte control estatal y con Estados controlados por sus ciudadanos en forma directa. Si este Estado no impone un tipo de impuesto Tobin a toda transaction financiera no eco-productiva, empezando por gravar fuerte a los especuladores de Wall Street, el infierno de Dante nos espera. Y si Dante rehusa aceptarnos por temor a nuestras armas nucleares, pues empecemos por desactivar todo signo de guerrerismo conducente al hollocausto nuclear.
Empecemos por aqui, reduciendo a zero el gasto militar y repatriando a nuestros soldados. Entonces Habra dinero para iniciar una real reconstruccion de nuestra economia. Lo demas es blef, farza, mentira cinica.
==============
So sorry, todo lo dicho fue un brain storm. En tiempos de simulacro la verdad no existe, la globalizacion como proceso de integracion, tampoco. Menos aun existe la crisis economica mundial ni sus bubbles. Crisis es sinonimo de concentracion de capital o grandes negocios. Los bubbles son eso, el unico bubble nocivo es el del oro, un metal que de precioso no tiene nada pues causa la muerte lenta de quienes lo extraen de la tierra. Hoy ese metal no sirve para nada, solo tuvo valor cuando dio respaldo o tuvo equivalente en dollars, pero el precio que hoy tiene es artificial, inflado, no tiene ninguna razon de ser. Para que el dollar vuelva a convertirse en respetable moneda universal, hay que reventar esa burbuja y regresar a su precio original en los 70 del siglo pasado. Solo entonces tendremos la reconversion dollar-oro y esta moneda podra reconquistar el puesto que hoy pierde rapidamente. Tampoco existe la crisis del dollar, ni la deuda exterior americana. El dollar no necesita ya ser fabricado en masa, ni ser lavado en bancos de "paraisos fiscales". Hoy se esta reciclando esa basura con los QE. Con el se fabrica dollares falsos en forma oficial, con el se compra deuda interna y se reduce a la nada la externa y tambien se puede comprar/vendr treasury bonds que aparentemente valen millones o billones de dollars (fabricados con una computadora) y luego venderlos a los ingenuos del mundo y hasta comprar con esa basura valores reales y riquezas nacionales de paises extranjeros que tienen sus depositos y/o deudas en dollars, solo que alli el dollar esta respaldado en la real produccion y el trade. El QE II inicia un proceso de saqueo de las riquezas del sur en escala mundial jamas vista hasta ahora. Lo que antes se hizo con ejercitos y militares super armados, hoy se hace con un computer.
----------------------
So sorry again, otro brain storm. Todo lo dicho hasta aqui fue pura ficcion tipo OB-BB. Esto si va en serio: por favor hagan caso a Obama y Bernanke. Hagan patria y vayan a una tienda, y compren lo mejor de los productos chinos en existencia pues pronto subiran sus precios. Empiece comprando dos cosas y ya, saque sus ahorros hoy, inviertalos y compre al cash. 1ro, si sus ahorros son modestos compren una maquina de limpiar nieve de veredas o algo similar para ofrecer servicio al vecindario, y 2do, compren una nevera grande y llenela de alimentos con fecha de expiracion el 2015 pues la 2da gran depression esta ya en camino. Y relajese, vaya al cine y evite cualquier documentary de BB, el inventor del “new horror-ficcion" llamado "economic recovery”. No se atreva a ver la pelicula "Inside Job", puede provocarle stroke o un paro cardiaco.
================&================
Vivimos ya el colapso mundial del sistema capitalista
By Haz. Octubre 30, 2010
1. La globalizacion del caos. El rey moribundo quiere lo entierren con sus concubinas
La globalizacion supone un proceso de integracion mundial a diferentes niveles. Destacan dos niveles que estan intimamente vinculados pero a la vez muy contradictorios, 1ro el scientifico-tecnologico y 2do, el economico (produccion y consumo). En el 1ro, la ciencia y tecnologia crea y recrea productos cada vez mas sofisticados los que –en terminos relativos- son cada vez mas baratos, pero que no pueden ser consumidos por vastos sectores de la creciente poblacion mundial. El gran capital impulsa este desarrollo pero no en la perspectiva de satisfacer “reales” necesidades humanas, sino sobre todo necesidades “inventadas” , esto es, las que generan mayores utilidades o dividendos al capital.
Y que pasa cuando ni eso genera las ganancias esperadas? Pues que se globalizen las perdidas, es su respuesta. Que se cargue todo el peso de la debacle sobre las espaldas de la economias emergentes. Esto es: Que maten a mis concubinas, es lo que dice el rey del sistema moribundo. Y en esto estamos.
La economia neoliberal sirve a los especuladores y empobrece a los trabajadores
En el 2do nivel, tenemos la contradiccion capital-trabajo y la forma como este se desplaza hacia la explotacion de recursos cada vez mas exiguos (algunos de ellos altamente contaminantes y destructivos, es el caso de la energia petrolera, el gas natural y la fabricacion de basura belica). Se diria que la economia mundial gira aun en torno a la produccion de toxicos y otros contaminantes y auto-destructivos de la sociedad y naturaleza. Del mito "trabajo como fuente de toda riqueza" se paso al mito "especulacion financiera como fuente de toda riqueza" y esto se convirtio en el gran fraude neoliberal en el que estamos envueltos. Vea Ud hacia donde se orienta la inversion del gran capital y donde obtiene mayores beneficios y nos dara la razon.
Hoy el trabajo mas rentable y por cierto mas inestable y auto-destructivo es el que sirve al gran capital que controla el sector publico y privado. Donde dominan las grandes corporaciones, el derecho a justa compensacion salarial y los beneficios laborales conquistados durante la epoca del welfare state estan siendo eliminados dia a dia. Del trabajo independiente del capital, tambien es rentable pero inestable el que se orienta a apoyar la especulacion financiera (vease lo ocurrido en el sector inmobiliario). El resto de trabajos independientes son de auto-subsistencia y tan precario y decadentes como todo servicio en el sector publico y privado.
En general, el salario minimo ha permanecido estancado por decadas en los EU, en otros paises la inflacion los ha devaluado. En EU hay un estado, creo fue Arizona, que redujo el salario minimo en el afan de atraer al trabajo precario a americanos pobres y apoyar asi la expulsion de nuevos inmigrantes de Mexico. No funciono.
El trabajo precario y mal pagado (part time) es funcional sistema. De el descuentan casi un tercio para pagar guerras de despojo y genocidio abroad. Con el mismo objetivo se pretendio privatizar el seguro social y como no funciono optaron por alargar el derecho a jubilacion hasta los 69 anios. Y es que los dineros del seguro social han sido ya expropiados. Un trabajador americano lo dijo claro en TV: que sentido tiene trabajar en el sector privado o publico, si el Federal lo va a asaltar al ciudadano. Preferibe sobrevivir con empleos que rindan cash y no pagar impuestos, decia. En otras palabras: en buena hora si muere el rey y sus concubinas, y tambien sus carniceros, los de Wall Street. Es el sentir de muchos americanos hoy.
Que objeto tiene vivir en una casa sin techo?
El gran problema y la gran contradiccion del modelo economico es que la casa ha sido construida con suelo de barro, los minimos salariales por hora son eso, lo que no garantiza solido ingreso diario sino solo mas trabajos precarios y abandono o destruccion de la familia. Lo grave es que se trata de una casa sin techo, pues no hay topes a los altos ingresos ni a las evasiones fiscales de los ricos. Se vive por tanto a la interperie y si llueve o hay tempestad, unos tienen umbrella y los mas no. Esto puede generar conflictos de clase que aun no son visibles pero que pronto van a generar inestabilidad politico-social. Este pais sin duda esta caminando hacia un 2do social rights movement que amenaza ser mucho mas conflictivo que el de los 60 en el siglo pasado. Se huele el ascenso de la violencia social tanto como la polucion diaria.
Que vivan los otros sepultureros del sistema
Marx vio en el obrero la tumba del capitalismo, eso no es cierto hoy, ahora es el consumista Americano quien esta lapidando el sistema. Si tiene dinero, consume, si no lo tiene, se lo "presta" del vecino y si tiene algo para el fin de semana, va a un mall, compra, usa y luego devuelve el producto antes de los 3 meses, asi la empresa no se va en quiebra –bruscamente al menos- y nadie pierde su trabajo, de la noche a la maniana al menos. Asi todos podran celebrar navidad y sentirte felices de ser Americanos de “clase media”, pues aqui no existen proletarios ni nadie quiere ser socialista. O mejor, ellos no quieren que los trabajadores sean socialistas (que el Estado sirva a su pueblo), solo los ricos quieren ser socialistas, pero a su manera, que el Estado los ayude a socializar sus perdidas (bailouts) mientras evaden impuestos y se comen mas del 90% del cake, esto es, se embolsillan las super-ganancias ocasionales del sistema.
Ni crecimiento ni desarrollo
Sin duda la mayor contradiccion del sistema es que la ciencia y tecnologia –y el gran capital que orienta su destino- ha creado muchos productos y son cada vez menos los que pueden consumirlos. Para que cresca la economia –ojo que no hablamos de desarollo pues esto supone incremento sostenido, lo opuesto al rolling coaster de los crecimientos economicos- se necesita consumir lo que produce el capital. El capitalismo es bello si las tiendas estan llenas de cualquier cosa como en hallowing y aun mas bello cuando todos se disfrazan para mentir, el llamado “trick or treat”, me truqueas con tu disfraz y te doy algunos caramelos.
En una economia hollowing como la que tenemos, los fabricantes de candies y de basura belica estan felicies cuando alguien compra sus productos. Al parecer pronto se les ira la felicidad pues el consumidor inteligente ya no quiere el azucar nocivo de los candies para sus hijos, ni las naciones inteligentes quieren que su pais compre basura belica. Quienes trabajan en esas fabricas perderan su empleo, si avanza el pacifismo y el respeto a los DDHH.
Para obtener mas ganancias el capital tiene que irse fuera donde el labor sea mas barato, eso genera mas desempleo en casa. Las metropolis imperiales estan condenadas a cargar el peso de dos ejercitos necesarios al sistema, el de los desempleados y el de los militares. Sin ellos no pueden presionar hacia abajo el salario ni saquear o extorcionar la periferia. En una economia neoliberal en quiebra la poblacion esta condenada al desempleo cada vez mayor y al consumismo artificial de los credit cards y el sistema a caminar de una trampa a otra, de la deflacion a la inflacion, hasta que llegue la gran depresion, el sentanazo final. Es lo que ya empezamos a sufrir.
Si el trabajo productivo y bien pagado escasea pues tambien escasean los impuestos y si no hay impuestos, tenemos una economia en deficit (con muchas deudas y poca produccion) y no nos queda otro recurso que prestarnos de quienes si producen, de los chinos y de otros paises, y cuando no podemos pagar las deudas contraidas recurrimos a fabricar dollars al por mayor. Eso equivale a cavar la tumba pues se sacrifica el dollar como moneda de intercambio y atesoramiento mundial. Aqui estamos
Del QE II a la 2da Gran depresion mundial
Ya no se pudo posponer mas la caida. La escalera usada devino muy corta y el techo-deudas cada vez mas alto. Hasta aqui llego la crisis economica. Desde los QE II para adelante, debemos hablar en serio: estamos en los inicios de la 2da gran depresion mundial. Si no preparamos la gente para ello, la debacle social sera mas grave. Somos una nacion insolvente y jamas podremos pagar la deuda a otras naciones que compartieron nuestros afanes de conquista del sur. Fabricar dollars de la nada, no servira de nada. Al contrario, lo que estamos produciendo con ello es inflacion. Lo mas grave es que estamos destruyendo la fe en los milagros del dollar como moneda universal del comercio y de reserva. La lampara de aladino que nos dio muchos privilegios mal habidos esta siendo destruido. Estamos matando la gallina de los huevos de oro, el dollar ni siquiera servira como toilet paper. Estamos ya en la 2da gran depression mundial.
No queda otra que abandonar la economia liberal secuestrada por el capital corporativo especulador y orientarnos hacia una economia social de Mercado con fuerte control estatal y con Estados controlados por sus ciudadanos en forma directa. Si este Estado no impone un tipo de impuesto Tobin a toda transaction financiera no eco-productiva, empezando por gravar fuerte a los especuladores de Wall Street, el infierno de Dante nos espera. Y si Dante rehusa aceptarnos por temor a nuestras armas nucleares, pues empecemos por desactivar todo signo de guerrerismo conducente al hollocausto nuclear.
Empecemos por aqui, reduciendo a zero el gasto militar y repatriando a nuestros soldados. Entonces Habra dinero para iniciar una real reconstruccion de nuestra economia. Lo demas es blef, farza, mentira cinica.
==============
So sorry, todo lo dicho fue un brain storm. En tiempos de simulacro la verdad no existe, la globalizacion como proceso de integracion, tampoco. Menos aun existe la crisis economica mundial ni sus bubbles. Crisis es sinonimo de concentracion de capital o grandes negocios. Los bubbles son eso, el unico bubble nocivo es el del oro, un metal que de precioso no tiene nada pues causa la muerte lenta de quienes lo extraen de la tierra. Hoy ese metal no sirve para nada, solo tuvo valor cuando dio respaldo o tuvo equivalente en dollars, pero el precio que hoy tiene es artificial, inflado, no tiene ninguna razon de ser. Para que el dollar vuelva a convertirse en respetable moneda universal, hay que reventar esa burbuja y regresar a su precio original en los 70 del siglo pasado. Solo entonces tendremos la reconversion dollar-oro y esta moneda podra reconquistar el puesto que hoy pierde rapidamente. Tampoco existe la crisis del dollar, ni la deuda exterior americana. El dollar no necesita ya ser fabricado en masa, ni ser lavado en bancos de "paraisos fiscales". Hoy se esta reciclando esa basura con los QE. Con el se fabrica dollares falsos en forma oficial, con el se compra deuda interna y se reduce a la nada la externa y tambien se puede comprar/vendr treasury bonds que aparentemente valen millones o billones de dollars (fabricados con una computadora) y luego venderlos a los ingenuos del mundo y hasta comprar con esa basura valores reales y riquezas nacionales de paises extranjeros que tienen sus depositos y/o deudas en dollars, solo que alli el dollar esta respaldado en la real produccion y el trade. El QE II inicia un proceso de saqueo de las riquezas del sur en escala mundial jamas vista hasta ahora. Lo que antes se hizo con ejercitos y militares super armados, hoy se hace con un computer.
----------------------
So sorry again, otro brain storm. Todo lo dicho hasta aqui fue pura ficcion tipo OB-BB. Esto si va en serio: por favor hagan caso a Obama y Bernanke. Hagan patria y vayan a una tienda, y compren lo mejor de los productos chinos en existencia pues pronto subiran sus precios. Empiece comprando dos cosas y ya, saque sus ahorros hoy, inviertalos y compre al cash. 1ro, si sus ahorros son modestos compren una maquina de limpiar nieve de veredas o algo similar para ofrecer servicio al vecindario, y 2do, compren una nevera grande y llenela de alimentos con fecha de expiracion el 2015 pues la 2da gran depression esta ya en camino. Y relajese, vaya al cine y evite cualquier documentary de BB, el inventor del “new horror-ficcion" llamado "economic recovery”. No se atreva a ver la pelicula "Inside Job", puede provocarle stroke o un paro cardiaco.
================&================
lunes, 8 de noviembre de 2010
Radical Difference Between Monetization 1 and QE2
Radical Difference Between Monetization 1 and QE2
By Daniel R. Amerman http://futurefastforward.com/images/stories/featurearticles/RadicalDifferenceBetweenMonetization1AndQE2.pdf
[[ This is one of the best articles on the dangers facing the US economy following Bernanake’s QEII. Make sure you read it and spread it far and wide. If you don’t understand the problem, you will not have the right solution. Before going to the art of Amerman check this video: MUST-WATCH VIDEO: QE2 - The Last Gasp of a Monetary System: A Message to the World. By
The National Inflation Association, Monday, 08 November 2010
OPEN: http://futurefastforward.com/feature-articles America is printing money just to survive, a currency collapse could be imminent.]]
Daniel R. Amerman: Overview
It's official: the Federal Reserve announced on November 3rd that it will create approximately $600 billion of new money to fund US Treasury bond purchases, and will also utilize another $250-$300 billion of money that had been previously created (also out of the nothingness). The usual term in the media for these planned purchases is "QE2", as in the second round of quantitative easing.
The "2" in "QE2" implies that this is something that has been done before. This implication is dead wrong.
"QE2" is radically different – and radically more dangerous – than the risky games that were played with earlier "quantitative easings". The Fed's current actions are all too likely to go down into financial infamy, and this brief article is intended to warn readers about some of the key differences this time around.
The most significant difference is that this time there appears to be no references to "sterilization" of the newly created money. It's likely good old-fashioned monetization in other words, with potentially quick and dire results.
It is also essential to note that the Fed won't be directly buying Treasury bonds from the US Treasury, but will instead be intervening in the Treasury bond markets. In other words, the Fed will be creating an artificial Treasury bond market, where it uses an unlimited amount of newly created public money to buy from private investment banks.
No Apparent "Sterilization"
As I wrote about extensively earlier this year, the previous "quantitative easing" (which means exactly the same thing as directly creating vast sums of money out of thin air, but sounds more responsible) has been done by the Federal Reserve and European Central Bank in a manner which economists refer to as "sterilized". This concept is confusing to most people, and I do my best to explain the process in understandable terms in the three articles linked below.
The Federal Reserve directly creates money in whatever volume it feels like - no need for borrowing despite the common myth - through creating "excess reserve balances" and using that new money to pay banks for securities purchases, as explained in "Creating A Trillion From Thin Air." http://danielamerman.com/articles/Trillions.htm
However, while a (desperate) central bank wants to be able to spend money without limits, letting that new money escape into the general money supply can lead to major inflation in a hurry. So with the previous rounds, the Fed and ECB each used their "sterilization" powers to essentially put a corral up around the new money, and keep it from escaping out into the economy, as described in my article "Containing Inflation Via Unlimited Monetary Creation".
http://danielamerman.com/articles/Containment.htm
This "magic" process of "painlessly" creating trillions of dollars to bail politically connected banks out of their mistakes is far from free, and besides the enormous risks to the general population and to the value of their savings, has the nasty side effect of effectively "hollowing out" the real economic basis underlying the banking system. This is because the banks can't really spend their "sterilized" money, but must have an ever larger share of their balance sheet assets consist of those economically meaningless excess reserve balances, as described in my article "The Fed's Hollowing Out Of US Banks". http://danielamerman.com/articles/Hollow.htm
Now, when central banks create vast new sums of "sterilized" money, they are usually very, very careful to emphasize that the new money can't escape into general circulation. They do this to reassure the markets and their trading partners that their currency isn't (they hope) about to implode in value in an inflationary meltdown.
I've carefully studied the Federal Reserve statement of November 3 that described the Treasury bond purchase program. I studied Bernanke's detailed October 15 speech about the upcoming "nonconventional" steps which the Fed would be taking. I read Bernanke's simplistic public explanation of the actions in yesterday's Washington Post. There were a number of phrases that could be interpreted in different ways – but there was no direct reference to the sterilization of these funds. There were no promises that the funds would be kept out of the money supply. I'm profoundly skeptical that this lack of direct mention was some sort of omission.
Instead, it is a powerful offensive weapon in a currency war. Keep in mind, that this has always been a monetization designed to meet multiple purposes. As covered in my article of two weeks ago, "Falling Dollar Means Rising Consumer Price Inflation", in an effort to revive the failing US economy, the US is attempting to slash the value of the dollar compared to other world currencies. If this can be done without setting off a wide scale currency war, then US jobs are helped in two ways, as the weaker dollar means that US exported goods become relatively cheaper and thus win more business overseas, even as the weaker dollar removes the artificial advantage that China and other nations have had in exporting their goods into the US.
As Chinese and other imported goods rise in price, they would lose market share, with the sales going to US based companies. The eventual goal would be for US workers producing US goods to fill the shelves of Wal-Mart rather than China doing so (which also necessarily means these goods cost more than they do today).
The threat that has successfully driven down the value of the US dollar since September is now being used in practice. Despite the doublespeak official announcements that you may read in the papers, this is a communication between central banks, and everyone involved knows what's going on. The US is threatening inflation that will drive down the value of its currency, making other nations unwilling to hold dollars, and the lack of demand drops the value of the dollar relative to those nations' currencies, with benefits passing through to US companies that then hopefully revive the US economy - albeit at a terrible cost to US savers, and older Americans in general.
Spending Real Money
In evaluating why this so-called "QE2" is so different from the first rounds of quantitative easing, we need to understand that the use of the funds is quite different. In the autumn of 2008 the Federal Reserve used the original round of money to create artificial liabilities when there were no lenders, thereby keeping the highly leveraged banking system from collapsing. The money wasn't actually being spent on anything you could reach out and touch; this was more about balance sheets and accounting manipulations on a massive scale.
During 2009 and early 2010, for the true second round of quantitative easing (which involved rolling the new dollars over from the first round of bank loans and creating substantially more new dollars), the Federal Reserve created an artificial mortgage market, so that mortgage interest rates would be lower than what a free market would've allowed, and thereby would hopefully help slow down or avert a collapse in the housing market. The new money was used to acquire financial instruments (mortgage securities), but "sterilization" meant that the newly created money would not be allowed to escape from the Federal Reserve's and banks' balance sheets. So again, the new money wasn't being used to buy or create anything you could actually reach out and touch. The mortgage money had already been lent by the bank, so the newly created Fed money didn't go to the home purchasers.
What makes this current round night-and-day different is that the new money is being created to pay real people for real jobs and real tangible goods. The United States government budget deficit is not about market values of financial instruments, but rather about paying workers on a massive scale for "stimulus" projects. It's about massive road reconstruction projects and expensive high-speed rail lines – with the money being given to workers to go out and spend, in return for their labor. It's about paying a vast army of federal workers - who spend their paychecks. The federal budget deficit is about massive transfers and redistributions of wealth within the US, including Social Security and Medicare, low income housing and many other purposes. All of which require real money that really gets spent by real people.
This is about "stimulating" the economy, not sterilizing the hidden bailout funds. "Stimulating" means the money reaches the economy.
In other words, this money goes directly into the general money supply at a rate of about $110 billion per month through at least June, (the money is the sum of the to-be-created $600 billion, and the cash flow from the Fed's mortgage security portfolio that was purchased with created money). This adds up to lots more newly created government dollars chasing the same goods and services, and competing with savings earned over a lifetime.
There are about 111 million US households, so $110 billion per month in government spending funded by direct monetary creation is equal to about $1,000 a month per household in new money that is competing with our salaries and savings. And add another $1,000 in government money the next month. And so forth.
Another way of looking at this is that with an annual economy of a little over $14 trillion, total private and government spending runs about $1.2 trillion per month. Creating $110 billion a month in new money for the government to spend, means that about 9% of the economy will be purchased by newly created dollars. So 9% of purchases in this new economy would be made by brand new dollars, competing with and just as good as yours and mine, being spent for whatever purposes the government desires.
Some commentators are already noting that the Fed's plan would buy about the same amount of US Treasury bonds as net new Federal borrowing, meaning the entire US government budget deficit is being covered by the Federal Reserve's manufacturing new money, month by month. That is an interesting coincidence, isn't it? However, there is a much more fundamental "coincidence" at play here. The graph below is from my article "Soaring Government Spending 'Crowds Out' Private Investment Returns": http://danielamerman.com/articles/Crowding.htm
Understand the graphs above and below, and you will see the heart of what is happening. Even using (suspect) official government statistics, the damage to the private sector has been catastrophic. The private sector shrank by $1.3 trillion between 2007 and 2009. But the economy "only" shrank by $300 billion. The difference was "covered" by an explosive growth in government spending, with federal, state and local government spending rising by $1 trillion per year - at a time when tax revenues were falling.
This is no mere recession, and it is only massive government growth that has kept the plausible deniability in place. In two years, the government's share of the economy grew by 8%, from 35% to 43%. Without this fundamental change in the economy - which destroys the very basis of conventional stock market investing, as explained in the linked article - the US economy is in a collapse scenario.
What the Federal Reserve is doing is directly creating money equal to 9% of the economy, to artificially increase the government's share of the economy by 9%. It is artificial money for an artificial economy to avert collapse. With again, the night and day difference between this monetization and previous "quantitative easing" being that this new money is going directly into the economy, and competing with your money and your savings.
The only way out, as the government may be belatedly realizing, is to grow the real US economy. But you can't grow the real economy when the dollar is too high, because of currency manipulations by other countries. US goods become too expensive to export, even as domestic US industries are destroyed by subsidized foreign competition.
To grow the real economy - the value of the dollar must be slashed. Which, very conveniently, can be done through open monetization. So, you create vast sums of money out of thin air to artificially fund the economy, hoping to string things out as long as possible. Simultaneously, this very public monetization slashes the value of your currency, thereby stimulating real economic growth, which if you get really, really lucky, might grow the real economy fast enough to recover to a healthy level, and allow you to find an exit strategy from the insanely dangerous monetization policy before the value of the currency is annihilated. That's the theory, anyway.
Not Direct Purchases, But Open Manipulation
There is something else essential for investors and savers to understand about the process which the Federal Reserve has just outlined. The Federal Reserve is not directly purchasing treasury bonds from the US government. Instead, US banks are purchasing the bonds from the US Treasury to fund the deficit, and then selling an equal amount of other bonds (likely at a nice profit) to the Federal Reserve. It would be reasonable to get annoyed at what appears to be the Fed's paying banks additional money to do effectively nothing, but to do so would be to miss the real point of this arrangement and the real danger.
To understand, let's explore what would happen if the Federal Reserve directly bought bonds from the Treasury (with appropriate legal changes if needed), but did not intervene in the Treasury bond markets. If there were a free bond market that was controlled by the self-interested investment decisions of private US investors (the foreign central banks and investors having fled because of Federal Reserve actions), then these investors might look at the Fed directly monetizing and say "I don't think I am being adequately compensated for my risk." And next thing you know, Treasury bonds might be going for 10% yields, or 15%+ yields. With ripple effects almost instantly going out into all interest rates throughout the US economy.
That's not what's going to happen (or apparently not yet, anyway).
Instead, the Federal Reserve, with effectively unlimited money at its disposal (targets can always be changed), can intervene at any time it wishes, in whatever volume it wishes, to make sure that Treasury bond and bill prices and yields are exactly what the Fed wants them to be. The US Treasury bond market then becomes an artificial market, much like the US mortgage market, with no connection to objective reality, and no discipline when it comes to the relationship between irresponsible government behavior and interest rates.
The private investors in the market play along, and maybe even increase their investments, because they understand that their "counterparty" can create money at will, and therefore (from a short term and terribly flawed perspective) it may look like risk-free profits. So long as they play along with the Fed.
If bond traders go the other direction, and speculate against the Fed - the Fed crushes them with its control of the market. In an openly and massively manipulated market, the governing factor is not theoretical fundamentals, but playing ball with the manipulator, and cooperating for your share of the rigged "profits".
What this means – for so long as this farce can hold together – is that there are no checks and balances on government spending, or on the share of the US economy that is controlled by the US government.
Even over the medium term this is a disaster scenario. But over the short term, it holds the game together for an increasingly desperate Federal Reserve and US government. Treasury yields ripple throughout all borrowings, and it is this absolute control of treasury yields that allows the Federal Reserve to keep interest rates low regardless of real inflation levels, even as stimulus funds continue to flow in unlimited volume, and regardless of what is happening with real wealth in the real US economy.
If you are a native-born US citizen – there's nothing "2" about this.
We've never seen anything like this in our lifetimes.
Similar things have happened in the world enough times before, however, even if the words "quantitative easing" were never used.
Many nations have been here before – and watched the value of their currencies collapse. The creation of "free" money that is so attractive to politicians for a brief period of time, becomes the most expensive possible way of funding government expenditures. Particularly for the savers, and especially the older savers, who see their life savings wiped out as a result of these grossly irresponsible actions.
What If The New Cash Is Sterilized?
The Fed has been deliberately vague about how exactly it will handle this program, which leaves open the possibility that the Fed could "sterilize" the new cash, or partially sterilize, or sterilize future purchases for future months.
The problem with this approach is that it effectively leads to the rapid systemic destruction of the economic basis of the US banking system, and also worsens the situation in the private sector of the economy. As covered in my "Hollowing Out" article linked above, by the end of the Federal Reserve's mortgage security purchase program (the previous "quantitative easing"), about 10% of the approximately $12 trillion in US banking system assets consisted of sterilized money held at the Federal Reserve. The Federal Reserve is committed as a matter of policy to keeping this money from escaping into general circulation – effectively preventing the bank from actually lending it out to a company for instance.
New monetary creation at a rate of approximately $110 billion per month is equal to a monthly volume of about 1% of total banking assets. The announced program, if "sterilized", would mean that by June, about 16% of total US bank assets would consist of "sterilized money", i.e. balances at the Federal Reserve that can't be used anywhere else.
Another way of phrasing this is that the US government budget deficit would be funded by essentially "taking" 1% of the assets of the US banking system every month, and using that to cover the excess US government spending. How this works is that in the first month, the primary dealer banks would purchase $110 billion in newly issued Treasury bonds, and would sell $110 billion in already existing Treasury bonds to the Federal Reserve. The Fed would pay for the bonds with money newly created on the spot – but because the money has been "sterilized", the $110 billion in sale proceeds isn't really spendable by the selling bank. The actual Treasury bonds bought and sold are different. It would be pure coincidence if the sector of the bond market whose prices and yields the Fed was most interested in manipulating that month were to match what the Treasury department was selling (and there is no need for dates or dollar amounts to precisely match up).
The following month, when the primary dealers purchase another $110 billion of newly issued Treasury securities to fund the Federal budget deficit, they don't have access to the $110 billion from the previous month (*), so they have to take a new $110 billion out of their other assets to purchase the new bonds. They also make the sale of $110 billion of whatever already outstanding Treasury bonds the Fed is most interested in manipulating the price of that month, and the Fed pays them a nice price, but they have to leave the second $110 billion in sale proceeds at the Fed too (it's not technically mandatory, but Bernanke is proud of the tools he uses to sterilize the cash, as covered in my "Containing Inflation Via Unlimited Money Creation" article). (*) If they did use the previous month's Fed payment to buy new Treasury bonds, then it is a direct monetization scenario, not a sterilization scenario.
So now the banking system is out $220 billion in terms of accessible cash, and when the third month's $110 billion of Treasury bonds needs to be bought, that can't come from the newly created Fed money either. Which means another $110 billion has to come out of other assets of the US banking system.
This rapid hollowing out of the US banking system to fund a voracious and apparently never-ending federal deficit, where every month a greater share of banking assets becomes the debt of a bankrupt government, is obviously a dangerous strategy that grows more likely to blow up each month it is employed. It also means that with each month, there are less banking assets available to be lent to businesses and consumers, which then makes economic recovery that much less likely. In other words it would be an insane strategy for a government that is desperately trying to revive the private sector economy, which is one of the reasons I find further sterilization to be unlikely.
With the much more likely monetization scenario, the Fed purchases from the primary dealers $110 billion in whatever Treasury bonds it is most interested in manipulating the price of, in order to control interest rates. The primary dealer banks take the $110 billion, which is non-restricted (as it isn't sterilized) and buy $110 billion of that month's new Treasury bond issuance. Because the bank cash flow between buying and selling is a wash (except for their profits on each side), from a cash flow perspective this is the same as the Federal Reserve directly creating money to buy all newly issued Treasury bonds. However, the advantage to doing it this way, as previously discussed, is that the Fed not only directly funds the deficit, but it takes direct control of the Treasury market, which more or less translates to direct control over most US interest rates.
As for what the Fed is doing – Bernanke is effectively mumbling when it comes to the explanations. He's being careful not to be clear, so he can claim to have his cake and eat it too (maintaining even a semblance of plausible deniability is also very important in the diplomatic maneuverings accompanying the nascent currency war). As explained above, when the central bank creates vast sums of new money – and doesn't explicitly say it is "sterilizing" – the odds are quite high that in fact, it is not sterilizing. But even if it is sterilizing, the results of this unprecedented monetary creation still lead to another disaster scenario. Further sterilization accelerates the collapse of the private sector and banking system in real terms, which must then be covered by still more monetization.
It has to be one or the other: either newly created money is going directly into the economy in straight up monetization, or the assets of the US banking system are being sucked out by the voracious Federal Government deficit at a very fast rate, leaving a hollow shell. What the Fed is doing to the banks with sterilization is much like a spider consuming an insect: punching a hole in the exoskeleton with its fangs and sucking the innards out, while the exoskeleton remains an intact but hollow shell. (For those who would say the Fed would never do that to the banks that run it - the Fed has already been doing it, and don't forget the crucial distinction between the interests of the banks and the personal financial interests of the senior executives who run the banks.)
Either about $1,000 a month per US household is being created and spent in the economy in direct monetization, competing with your dollars and savings - or about $1,000 a month per US household will be sucked out of the banking system by the government through sterilization, meaning less money for business and consumer lending, and an acceleration in the decline of the real economy. The former in my opinion is the much more likely route, and represents a radical change, but either way, there is no such thing as "free money", and the piper will be paid. By all of us.
Finding Refuge
We have a good idea of the path ahead - which is the destruction of the value of the currency, as well as the impoverishment of a good part of the population. By far, the heaviest punishment will fall on the older members of the population whose savings are destroyed, and who do not have the remaining years to recapture what they have lost.
There are solutions, however, and not everyone will see their savings destroyed. By taking the right series of steps, assets can be preserved – or even expanded, even in after-inflation and after-tax terms. The difference between being destroyed, and saving your assets, quite simply comes down to a matter of making informed decisions. It is a matter of education, in other words.
A good starting step is to read and understand the three articles linked earlier in this article which cover the essentials of direct monetary creation, sterilization, and hollowing out the banking system. I've done my very best to make these articles understandable, and from the feedback which I received at the time they were published, these articles provide valuable new insights into what is really happening and what the central banks have really been doing.
When it comes time for action, the simple and increasingly popular solution is to pull all you can out of paper investments and symbolic currencies, put them in gold, and hunker down to survive the storm that is building in strength by the week.
Unfortunately, however, we live in a complex and deeply unfair world, that makes mincemeat of emotional reactions and simple solutions. As illustrated in step-by-step, easy to understand – but irrefutable – detail in the article "Hidden Gold Taxes: The Secret Weapon Of Bankrupt Governments" (linked below), a simple solution of just buying gold leaves you handing a good chunk, or perhaps most of your starting net worth, over to the government by the time all is said and done. The way the government – under existing laws – effectively confiscates the wealth of gold investors in a highly inflationary environment is little understood by most gold investors, but should form the central point for their investment strategies. http://danielamerman.com/articles/GoldTaxes1.htm
Let me suggest an alternative approach, which is to study, learn and reposition. To have a chance, you must learn not just how wealth will redistribute, but how unfair government tax policies (that can be relied upon to increase in unfairness) will cripple most simple methods of attempting to survive inflation.
Then, yes – buying gold (and perhaps a lot of it) can be one key component of a portfolio approach, as discussed in my Gold Out-Of-The-Box DVD set. Use multiple components, each doing what they do best, shift the components in a dynamic strategy over time, and position yourself so that wealth will be redistributed to you in a manner that reverses the effects of government tax policy. So that instead of paying real taxes on illusionary income, you're paying illusory taxes on real income. And the higher the rate of inflation and the more outrageous the government actions – the more your after-inflation and after-tax net worth grows.
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QE2 Risks Currency Wars And The End Of Dollar Hegemony - By Ambrose Evans-Pritchard (3/11/10)
Ambrose Evans-Pritchard, Wednesday, 03 November 2010
The Telegraph, UK http://futurefastforward.com/feature-articles/4430-qe2-risks-currency-wars-and-the-end-of-dollar-hegemony-by-ambrose-evans-pritchard-31110
As the US Federal Reserve meets today to decide whether its next blast of quantitative easing should be $1 trillion or a more cautious $500bn, it does so knowing that China and the emerging world view the policy as an attempt to drive down the dollar.
The Fed's "QE2" risks accelerating the demise of the dollar-based currency system, perhaps leading to an unstable tripod with the euro and yuan, or a hybrid gold standard, or a multi-metal "bancor" along lines proposed by John Maynard Keynes in the 1940s.
China's commerce ministry fired an irate broadside against Washington on Monday. "The continued and drastic US dollar depreciation recently has led countries including Japan, South Korea, and Thailand to intervene in the currency market, intensifying a 'currency war'. In the mid-term, the US dollar will continue to weaken and gaming between major currencies will escalate," it said.
David Bloom, currency chief at HSBC, said the root problem is lack of underlying demand in the global economy, leaving Western economies trapped near stalling speed. "There are no policy levers left. Countries are having to tighten fiscal policy, and interest rates are already near zero. The last resort is a weaker currency, so everybody is trying to do it," he said.
Pious words from G20 summit of finance ministers last month calling for the world to "refrain" from pursuing trade advantage through devaluation seem most honoured in the breach.
Taiwan intervened on Monday to cap the rise of its currency, while Korea's central bank chief said his country is eyeing capital controls as part of its "toolkit" to stem the flood of Fed-created money leaking out of the US and sloshing into Asia. Brazil has just imposed a 2pc tax on inflows into both bonds and equities – understandably, since the real has risen by 35pc against the dollar this year and the country has a current account deficit.
"It is becoming harder to mop up the liquidity flowing into these countries," said Neil Mellor, of the Bank of New York Mellon. "We fully expect more central banks to impose capital controls over the next couple of months. That is the world we live in," he said. Globalisation is unravelling before our eyes.
Each case is different. For the 40-odd countries pegged to the dollar or closely linked by a "dirty float", the Fed's lax policy is causing havoc. They are importing a monetary policy that is far too loose for the needs of fast-growing economies. What was intended to be an anchor of stability has become a danger.
Hong Kong's dollar peg, dating back to the 1960s, makes it almost impossible to check a wild credit boom. House prices have risen 50pc since January 2009, despite draconian curbs on mortgages. Barclays Capital said Hong Kong may switch to a yuan peg within two years.
Mr Bloom said these countries are under mounting pressure to break free from the dollar. "They are all asking themselves whether these pegs are a relic of the past," he said.
China faces a variant of the problem with its mixed currency basket, a sort of "crawling peg". Commerce minister Chen Deming said last week that US dollar issuance is "out of control". It is causing a surge of imported inflation in China.
Critics in the US Congress say China could solve that particular problem very quickly by letting the yuan rise enough to bring the country's $180bn trade surplus into balance.
They say the strategy of holding down the yuan to underpin China's export-led model is the real source of galloping wage and price inflation on China's eastern seaboard. The central bank has accumulated $2.5 trillion of foreign bonds but lacks the sophisticated instruments to "sterilise" these purchases and stem inflationary "blow-back".
But whatever the rights and wrongs of the argument, the reality is that a chorus of Chinese officials and advisers is demanding that China switch reserves into gold or forms of oil. As this anti-dollar revolt gathers momentum worldwide, the US risks losing its "exorbitant privilege" of currency hegemony – to use the term of Charles de Gaulle.
The innocent bystanders caught in the crossfire of Fed policy are poor countries such as India, where primary goods make up 60pc of the price index and food inflation is now running at 14pc. It is hard to gauge the impact of a falling dollar on commodities, but the pattern in mid-2008 was that it led to oil, metal, and grain price rises with multiple leverage. The core victims were the poorest food-importing countries in Africa and South Asia. Tell them that QE2 brings good news.
So the question that Ben Bernanke and his colleagues should ask themselves is whether they have thought through the global ramifications of their actions, and how the strategic consequences might rebound against America itself.
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By Daniel R. Amerman http://futurefastforward.com/images/stories/featurearticles/RadicalDifferenceBetweenMonetization1AndQE2.pdf
[[ This is one of the best articles on the dangers facing the US economy following Bernanake’s QEII. Make sure you read it and spread it far and wide. If you don’t understand the problem, you will not have the right solution. Before going to the art of Amerman check this video: MUST-WATCH VIDEO: QE2 - The Last Gasp of a Monetary System: A Message to the World. By
The National Inflation Association, Monday, 08 November 2010
OPEN: http://futurefastforward.com/feature-articles America is printing money just to survive, a currency collapse could be imminent.]]
Daniel R. Amerman: Overview
It's official: the Federal Reserve announced on November 3rd that it will create approximately $600 billion of new money to fund US Treasury bond purchases, and will also utilize another $250-$300 billion of money that had been previously created (also out of the nothingness). The usual term in the media for these planned purchases is "QE2", as in the second round of quantitative easing.
The "2" in "QE2" implies that this is something that has been done before. This implication is dead wrong.
"QE2" is radically different – and radically more dangerous – than the risky games that were played with earlier "quantitative easings". The Fed's current actions are all too likely to go down into financial infamy, and this brief article is intended to warn readers about some of the key differences this time around.
The most significant difference is that this time there appears to be no references to "sterilization" of the newly created money. It's likely good old-fashioned monetization in other words, with potentially quick and dire results.
It is also essential to note that the Fed won't be directly buying Treasury bonds from the US Treasury, but will instead be intervening in the Treasury bond markets. In other words, the Fed will be creating an artificial Treasury bond market, where it uses an unlimited amount of newly created public money to buy from private investment banks.
No Apparent "Sterilization"
As I wrote about extensively earlier this year, the previous "quantitative easing" (which means exactly the same thing as directly creating vast sums of money out of thin air, but sounds more responsible) has been done by the Federal Reserve and European Central Bank in a manner which economists refer to as "sterilized". This concept is confusing to most people, and I do my best to explain the process in understandable terms in the three articles linked below.
The Federal Reserve directly creates money in whatever volume it feels like - no need for borrowing despite the common myth - through creating "excess reserve balances" and using that new money to pay banks for securities purchases, as explained in "Creating A Trillion From Thin Air." http://danielamerman.com/articles/Trillions.htm
However, while a (desperate) central bank wants to be able to spend money without limits, letting that new money escape into the general money supply can lead to major inflation in a hurry. So with the previous rounds, the Fed and ECB each used their "sterilization" powers to essentially put a corral up around the new money, and keep it from escaping out into the economy, as described in my article "Containing Inflation Via Unlimited Monetary Creation".
http://danielamerman.com/articles/Containment.htm
This "magic" process of "painlessly" creating trillions of dollars to bail politically connected banks out of their mistakes is far from free, and besides the enormous risks to the general population and to the value of their savings, has the nasty side effect of effectively "hollowing out" the real economic basis underlying the banking system. This is because the banks can't really spend their "sterilized" money, but must have an ever larger share of their balance sheet assets consist of those economically meaningless excess reserve balances, as described in my article "The Fed's Hollowing Out Of US Banks". http://danielamerman.com/articles/Hollow.htm
Now, when central banks create vast new sums of "sterilized" money, they are usually very, very careful to emphasize that the new money can't escape into general circulation. They do this to reassure the markets and their trading partners that their currency isn't (they hope) about to implode in value in an inflationary meltdown.
I've carefully studied the Federal Reserve statement of November 3 that described the Treasury bond purchase program. I studied Bernanke's detailed October 15 speech about the upcoming "nonconventional" steps which the Fed would be taking. I read Bernanke's simplistic public explanation of the actions in yesterday's Washington Post. There were a number of phrases that could be interpreted in different ways – but there was no direct reference to the sterilization of these funds. There were no promises that the funds would be kept out of the money supply. I'm profoundly skeptical that this lack of direct mention was some sort of omission.
Instead, it is a powerful offensive weapon in a currency war. Keep in mind, that this has always been a monetization designed to meet multiple purposes. As covered in my article of two weeks ago, "Falling Dollar Means Rising Consumer Price Inflation", in an effort to revive the failing US economy, the US is attempting to slash the value of the dollar compared to other world currencies. If this can be done without setting off a wide scale currency war, then US jobs are helped in two ways, as the weaker dollar means that US exported goods become relatively cheaper and thus win more business overseas, even as the weaker dollar removes the artificial advantage that China and other nations have had in exporting their goods into the US.
As Chinese and other imported goods rise in price, they would lose market share, with the sales going to US based companies. The eventual goal would be for US workers producing US goods to fill the shelves of Wal-Mart rather than China doing so (which also necessarily means these goods cost more than they do today).
The threat that has successfully driven down the value of the US dollar since September is now being used in practice. Despite the doublespeak official announcements that you may read in the papers, this is a communication between central banks, and everyone involved knows what's going on. The US is threatening inflation that will drive down the value of its currency, making other nations unwilling to hold dollars, and the lack of demand drops the value of the dollar relative to those nations' currencies, with benefits passing through to US companies that then hopefully revive the US economy - albeit at a terrible cost to US savers, and older Americans in general.
Spending Real Money
In evaluating why this so-called "QE2" is so different from the first rounds of quantitative easing, we need to understand that the use of the funds is quite different. In the autumn of 2008 the Federal Reserve used the original round of money to create artificial liabilities when there were no lenders, thereby keeping the highly leveraged banking system from collapsing. The money wasn't actually being spent on anything you could reach out and touch; this was more about balance sheets and accounting manipulations on a massive scale.
During 2009 and early 2010, for the true second round of quantitative easing (which involved rolling the new dollars over from the first round of bank loans and creating substantially more new dollars), the Federal Reserve created an artificial mortgage market, so that mortgage interest rates would be lower than what a free market would've allowed, and thereby would hopefully help slow down or avert a collapse in the housing market. The new money was used to acquire financial instruments (mortgage securities), but "sterilization" meant that the newly created money would not be allowed to escape from the Federal Reserve's and banks' balance sheets. So again, the new money wasn't being used to buy or create anything you could actually reach out and touch. The mortgage money had already been lent by the bank, so the newly created Fed money didn't go to the home purchasers.
What makes this current round night-and-day different is that the new money is being created to pay real people for real jobs and real tangible goods. The United States government budget deficit is not about market values of financial instruments, but rather about paying workers on a massive scale for "stimulus" projects. It's about massive road reconstruction projects and expensive high-speed rail lines – with the money being given to workers to go out and spend, in return for their labor. It's about paying a vast army of federal workers - who spend their paychecks. The federal budget deficit is about massive transfers and redistributions of wealth within the US, including Social Security and Medicare, low income housing and many other purposes. All of which require real money that really gets spent by real people.
This is about "stimulating" the economy, not sterilizing the hidden bailout funds. "Stimulating" means the money reaches the economy.
In other words, this money goes directly into the general money supply at a rate of about $110 billion per month through at least June, (the money is the sum of the to-be-created $600 billion, and the cash flow from the Fed's mortgage security portfolio that was purchased with created money). This adds up to lots more newly created government dollars chasing the same goods and services, and competing with savings earned over a lifetime.
There are about 111 million US households, so $110 billion per month in government spending funded by direct monetary creation is equal to about $1,000 a month per household in new money that is competing with our salaries and savings. And add another $1,000 in government money the next month. And so forth.
Another way of looking at this is that with an annual economy of a little over $14 trillion, total private and government spending runs about $1.2 trillion per month. Creating $110 billion a month in new money for the government to spend, means that about 9% of the economy will be purchased by newly created dollars. So 9% of purchases in this new economy would be made by brand new dollars, competing with and just as good as yours and mine, being spent for whatever purposes the government desires.
Some commentators are already noting that the Fed's plan would buy about the same amount of US Treasury bonds as net new Federal borrowing, meaning the entire US government budget deficit is being covered by the Federal Reserve's manufacturing new money, month by month. That is an interesting coincidence, isn't it? However, there is a much more fundamental "coincidence" at play here. The graph below is from my article "Soaring Government Spending 'Crowds Out' Private Investment Returns": http://danielamerman.com/articles/Crowding.htm
Understand the graphs above and below, and you will see the heart of what is happening. Even using (suspect) official government statistics, the damage to the private sector has been catastrophic. The private sector shrank by $1.3 trillion between 2007 and 2009. But the economy "only" shrank by $300 billion. The difference was "covered" by an explosive growth in government spending, with federal, state and local government spending rising by $1 trillion per year - at a time when tax revenues were falling.
This is no mere recession, and it is only massive government growth that has kept the plausible deniability in place. In two years, the government's share of the economy grew by 8%, from 35% to 43%. Without this fundamental change in the economy - which destroys the very basis of conventional stock market investing, as explained in the linked article - the US economy is in a collapse scenario.
What the Federal Reserve is doing is directly creating money equal to 9% of the economy, to artificially increase the government's share of the economy by 9%. It is artificial money for an artificial economy to avert collapse. With again, the night and day difference between this monetization and previous "quantitative easing" being that this new money is going directly into the economy, and competing with your money and your savings.
The only way out, as the government may be belatedly realizing, is to grow the real US economy. But you can't grow the real economy when the dollar is too high, because of currency manipulations by other countries. US goods become too expensive to export, even as domestic US industries are destroyed by subsidized foreign competition.
To grow the real economy - the value of the dollar must be slashed. Which, very conveniently, can be done through open monetization. So, you create vast sums of money out of thin air to artificially fund the economy, hoping to string things out as long as possible. Simultaneously, this very public monetization slashes the value of your currency, thereby stimulating real economic growth, which if you get really, really lucky, might grow the real economy fast enough to recover to a healthy level, and allow you to find an exit strategy from the insanely dangerous monetization policy before the value of the currency is annihilated. That's the theory, anyway.
Not Direct Purchases, But Open Manipulation
There is something else essential for investors and savers to understand about the process which the Federal Reserve has just outlined. The Federal Reserve is not directly purchasing treasury bonds from the US government. Instead, US banks are purchasing the bonds from the US Treasury to fund the deficit, and then selling an equal amount of other bonds (likely at a nice profit) to the Federal Reserve. It would be reasonable to get annoyed at what appears to be the Fed's paying banks additional money to do effectively nothing, but to do so would be to miss the real point of this arrangement and the real danger.
To understand, let's explore what would happen if the Federal Reserve directly bought bonds from the Treasury (with appropriate legal changes if needed), but did not intervene in the Treasury bond markets. If there were a free bond market that was controlled by the self-interested investment decisions of private US investors (the foreign central banks and investors having fled because of Federal Reserve actions), then these investors might look at the Fed directly monetizing and say "I don't think I am being adequately compensated for my risk." And next thing you know, Treasury bonds might be going for 10% yields, or 15%+ yields. With ripple effects almost instantly going out into all interest rates throughout the US economy.
That's not what's going to happen (or apparently not yet, anyway).
Instead, the Federal Reserve, with effectively unlimited money at its disposal (targets can always be changed), can intervene at any time it wishes, in whatever volume it wishes, to make sure that Treasury bond and bill prices and yields are exactly what the Fed wants them to be. The US Treasury bond market then becomes an artificial market, much like the US mortgage market, with no connection to objective reality, and no discipline when it comes to the relationship between irresponsible government behavior and interest rates.
The private investors in the market play along, and maybe even increase their investments, because they understand that their "counterparty" can create money at will, and therefore (from a short term and terribly flawed perspective) it may look like risk-free profits. So long as they play along with the Fed.
If bond traders go the other direction, and speculate against the Fed - the Fed crushes them with its control of the market. In an openly and massively manipulated market, the governing factor is not theoretical fundamentals, but playing ball with the manipulator, and cooperating for your share of the rigged "profits".
What this means – for so long as this farce can hold together – is that there are no checks and balances on government spending, or on the share of the US economy that is controlled by the US government.
Even over the medium term this is a disaster scenario. But over the short term, it holds the game together for an increasingly desperate Federal Reserve and US government. Treasury yields ripple throughout all borrowings, and it is this absolute control of treasury yields that allows the Federal Reserve to keep interest rates low regardless of real inflation levels, even as stimulus funds continue to flow in unlimited volume, and regardless of what is happening with real wealth in the real US economy.
If you are a native-born US citizen – there's nothing "2" about this.
We've never seen anything like this in our lifetimes.
Similar things have happened in the world enough times before, however, even if the words "quantitative easing" were never used.
Many nations have been here before – and watched the value of their currencies collapse. The creation of "free" money that is so attractive to politicians for a brief period of time, becomes the most expensive possible way of funding government expenditures. Particularly for the savers, and especially the older savers, who see their life savings wiped out as a result of these grossly irresponsible actions.
What If The New Cash Is Sterilized?
The Fed has been deliberately vague about how exactly it will handle this program, which leaves open the possibility that the Fed could "sterilize" the new cash, or partially sterilize, or sterilize future purchases for future months.
The problem with this approach is that it effectively leads to the rapid systemic destruction of the economic basis of the US banking system, and also worsens the situation in the private sector of the economy. As covered in my "Hollowing Out" article linked above, by the end of the Federal Reserve's mortgage security purchase program (the previous "quantitative easing"), about 10% of the approximately $12 trillion in US banking system assets consisted of sterilized money held at the Federal Reserve. The Federal Reserve is committed as a matter of policy to keeping this money from escaping into general circulation – effectively preventing the bank from actually lending it out to a company for instance.
New monetary creation at a rate of approximately $110 billion per month is equal to a monthly volume of about 1% of total banking assets. The announced program, if "sterilized", would mean that by June, about 16% of total US bank assets would consist of "sterilized money", i.e. balances at the Federal Reserve that can't be used anywhere else.
Another way of phrasing this is that the US government budget deficit would be funded by essentially "taking" 1% of the assets of the US banking system every month, and using that to cover the excess US government spending. How this works is that in the first month, the primary dealer banks would purchase $110 billion in newly issued Treasury bonds, and would sell $110 billion in already existing Treasury bonds to the Federal Reserve. The Fed would pay for the bonds with money newly created on the spot – but because the money has been "sterilized", the $110 billion in sale proceeds isn't really spendable by the selling bank. The actual Treasury bonds bought and sold are different. It would be pure coincidence if the sector of the bond market whose prices and yields the Fed was most interested in manipulating that month were to match what the Treasury department was selling (and there is no need for dates or dollar amounts to precisely match up).
The following month, when the primary dealers purchase another $110 billion of newly issued Treasury securities to fund the Federal budget deficit, they don't have access to the $110 billion from the previous month (*), so they have to take a new $110 billion out of their other assets to purchase the new bonds. They also make the sale of $110 billion of whatever already outstanding Treasury bonds the Fed is most interested in manipulating the price of that month, and the Fed pays them a nice price, but they have to leave the second $110 billion in sale proceeds at the Fed too (it's not technically mandatory, but Bernanke is proud of the tools he uses to sterilize the cash, as covered in my "Containing Inflation Via Unlimited Money Creation" article). (*) If they did use the previous month's Fed payment to buy new Treasury bonds, then it is a direct monetization scenario, not a sterilization scenario.
So now the banking system is out $220 billion in terms of accessible cash, and when the third month's $110 billion of Treasury bonds needs to be bought, that can't come from the newly created Fed money either. Which means another $110 billion has to come out of other assets of the US banking system.
This rapid hollowing out of the US banking system to fund a voracious and apparently never-ending federal deficit, where every month a greater share of banking assets becomes the debt of a bankrupt government, is obviously a dangerous strategy that grows more likely to blow up each month it is employed. It also means that with each month, there are less banking assets available to be lent to businesses and consumers, which then makes economic recovery that much less likely. In other words it would be an insane strategy for a government that is desperately trying to revive the private sector economy, which is one of the reasons I find further sterilization to be unlikely.
With the much more likely monetization scenario, the Fed purchases from the primary dealers $110 billion in whatever Treasury bonds it is most interested in manipulating the price of, in order to control interest rates. The primary dealer banks take the $110 billion, which is non-restricted (as it isn't sterilized) and buy $110 billion of that month's new Treasury bond issuance. Because the bank cash flow between buying and selling is a wash (except for their profits on each side), from a cash flow perspective this is the same as the Federal Reserve directly creating money to buy all newly issued Treasury bonds. However, the advantage to doing it this way, as previously discussed, is that the Fed not only directly funds the deficit, but it takes direct control of the Treasury market, which more or less translates to direct control over most US interest rates.
As for what the Fed is doing – Bernanke is effectively mumbling when it comes to the explanations. He's being careful not to be clear, so he can claim to have his cake and eat it too (maintaining even a semblance of plausible deniability is also very important in the diplomatic maneuverings accompanying the nascent currency war). As explained above, when the central bank creates vast sums of new money – and doesn't explicitly say it is "sterilizing" – the odds are quite high that in fact, it is not sterilizing. But even if it is sterilizing, the results of this unprecedented monetary creation still lead to another disaster scenario. Further sterilization accelerates the collapse of the private sector and banking system in real terms, which must then be covered by still more monetization.
It has to be one or the other: either newly created money is going directly into the economy in straight up monetization, or the assets of the US banking system are being sucked out by the voracious Federal Government deficit at a very fast rate, leaving a hollow shell. What the Fed is doing to the banks with sterilization is much like a spider consuming an insect: punching a hole in the exoskeleton with its fangs and sucking the innards out, while the exoskeleton remains an intact but hollow shell. (For those who would say the Fed would never do that to the banks that run it - the Fed has already been doing it, and don't forget the crucial distinction between the interests of the banks and the personal financial interests of the senior executives who run the banks.)
Either about $1,000 a month per US household is being created and spent in the economy in direct monetization, competing with your dollars and savings - or about $1,000 a month per US household will be sucked out of the banking system by the government through sterilization, meaning less money for business and consumer lending, and an acceleration in the decline of the real economy. The former in my opinion is the much more likely route, and represents a radical change, but either way, there is no such thing as "free money", and the piper will be paid. By all of us.
Finding Refuge
We have a good idea of the path ahead - which is the destruction of the value of the currency, as well as the impoverishment of a good part of the population. By far, the heaviest punishment will fall on the older members of the population whose savings are destroyed, and who do not have the remaining years to recapture what they have lost.
There are solutions, however, and not everyone will see their savings destroyed. By taking the right series of steps, assets can be preserved – or even expanded, even in after-inflation and after-tax terms. The difference between being destroyed, and saving your assets, quite simply comes down to a matter of making informed decisions. It is a matter of education, in other words.
A good starting step is to read and understand the three articles linked earlier in this article which cover the essentials of direct monetary creation, sterilization, and hollowing out the banking system. I've done my very best to make these articles understandable, and from the feedback which I received at the time they were published, these articles provide valuable new insights into what is really happening and what the central banks have really been doing.
When it comes time for action, the simple and increasingly popular solution is to pull all you can out of paper investments and symbolic currencies, put them in gold, and hunker down to survive the storm that is building in strength by the week.
Unfortunately, however, we live in a complex and deeply unfair world, that makes mincemeat of emotional reactions and simple solutions. As illustrated in step-by-step, easy to understand – but irrefutable – detail in the article "Hidden Gold Taxes: The Secret Weapon Of Bankrupt Governments" (linked below), a simple solution of just buying gold leaves you handing a good chunk, or perhaps most of your starting net worth, over to the government by the time all is said and done. The way the government – under existing laws – effectively confiscates the wealth of gold investors in a highly inflationary environment is little understood by most gold investors, but should form the central point for their investment strategies. http://danielamerman.com/articles/GoldTaxes1.htm
Let me suggest an alternative approach, which is to study, learn and reposition. To have a chance, you must learn not just how wealth will redistribute, but how unfair government tax policies (that can be relied upon to increase in unfairness) will cripple most simple methods of attempting to survive inflation.
Then, yes – buying gold (and perhaps a lot of it) can be one key component of a portfolio approach, as discussed in my Gold Out-Of-The-Box DVD set. Use multiple components, each doing what they do best, shift the components in a dynamic strategy over time, and position yourself so that wealth will be redistributed to you in a manner that reverses the effects of government tax policy. So that instead of paying real taxes on illusionary income, you're paying illusory taxes on real income. And the higher the rate of inflation and the more outrageous the government actions – the more your after-inflation and after-tax net worth grows.
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QE2 Risks Currency Wars And The End Of Dollar Hegemony - By Ambrose Evans-Pritchard (3/11/10)
Ambrose Evans-Pritchard, Wednesday, 03 November 2010
The Telegraph, UK http://futurefastforward.com/feature-articles/4430-qe2-risks-currency-wars-and-the-end-of-dollar-hegemony-by-ambrose-evans-pritchard-31110
As the US Federal Reserve meets today to decide whether its next blast of quantitative easing should be $1 trillion or a more cautious $500bn, it does so knowing that China and the emerging world view the policy as an attempt to drive down the dollar.
The Fed's "QE2" risks accelerating the demise of the dollar-based currency system, perhaps leading to an unstable tripod with the euro and yuan, or a hybrid gold standard, or a multi-metal "bancor" along lines proposed by John Maynard Keynes in the 1940s.
China's commerce ministry fired an irate broadside against Washington on Monday. "The continued and drastic US dollar depreciation recently has led countries including Japan, South Korea, and Thailand to intervene in the currency market, intensifying a 'currency war'. In the mid-term, the US dollar will continue to weaken and gaming between major currencies will escalate," it said.
David Bloom, currency chief at HSBC, said the root problem is lack of underlying demand in the global economy, leaving Western economies trapped near stalling speed. "There are no policy levers left. Countries are having to tighten fiscal policy, and interest rates are already near zero. The last resort is a weaker currency, so everybody is trying to do it," he said.
Pious words from G20 summit of finance ministers last month calling for the world to "refrain" from pursuing trade advantage through devaluation seem most honoured in the breach.
Taiwan intervened on Monday to cap the rise of its currency, while Korea's central bank chief said his country is eyeing capital controls as part of its "toolkit" to stem the flood of Fed-created money leaking out of the US and sloshing into Asia. Brazil has just imposed a 2pc tax on inflows into both bonds and equities – understandably, since the real has risen by 35pc against the dollar this year and the country has a current account deficit.
"It is becoming harder to mop up the liquidity flowing into these countries," said Neil Mellor, of the Bank of New York Mellon. "We fully expect more central banks to impose capital controls over the next couple of months. That is the world we live in," he said. Globalisation is unravelling before our eyes.
Each case is different. For the 40-odd countries pegged to the dollar or closely linked by a "dirty float", the Fed's lax policy is causing havoc. They are importing a monetary policy that is far too loose for the needs of fast-growing economies. What was intended to be an anchor of stability has become a danger.
Hong Kong's dollar peg, dating back to the 1960s, makes it almost impossible to check a wild credit boom. House prices have risen 50pc since January 2009, despite draconian curbs on mortgages. Barclays Capital said Hong Kong may switch to a yuan peg within two years.
Mr Bloom said these countries are under mounting pressure to break free from the dollar. "They are all asking themselves whether these pegs are a relic of the past," he said.
China faces a variant of the problem with its mixed currency basket, a sort of "crawling peg". Commerce minister Chen Deming said last week that US dollar issuance is "out of control". It is causing a surge of imported inflation in China.
Critics in the US Congress say China could solve that particular problem very quickly by letting the yuan rise enough to bring the country's $180bn trade surplus into balance.
They say the strategy of holding down the yuan to underpin China's export-led model is the real source of galloping wage and price inflation on China's eastern seaboard. The central bank has accumulated $2.5 trillion of foreign bonds but lacks the sophisticated instruments to "sterilise" these purchases and stem inflationary "blow-back".
But whatever the rights and wrongs of the argument, the reality is that a chorus of Chinese officials and advisers is demanding that China switch reserves into gold or forms of oil. As this anti-dollar revolt gathers momentum worldwide, the US risks losing its "exorbitant privilege" of currency hegemony – to use the term of Charles de Gaulle.
The innocent bystanders caught in the crossfire of Fed policy are poor countries such as India, where primary goods make up 60pc of the price index and food inflation is now running at 14pc. It is hard to gauge the impact of a falling dollar on commodities, but the pattern in mid-2008 was that it led to oil, metal, and grain price rises with multiple leverage. The core victims were the poorest food-importing countries in Africa and South Asia. Tell them that QE2 brings good news.
So the question that Ben Bernanke and his colleagues should ask themselves is whether they have thought through the global ramifications of their actions, and how the strategic consequences might rebound against America itself.
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