September 2008 the US came to a fork in the road. The Public Policy
decision to not seize the banks, to not place them in bankruptcy court
with the government acting as the Debtor-in-Possession (DIP), to not split
them up by selling off the assets to successful and solvent entities, set
the world on the path to global currency wars.
By lowering interest rates and effectively guaranteeing a weak dollar, the
US ignited an almost riskless global US$ Carry Trade and triggered an
uncontrolled Currency War with the mercantilist, export driven Asian
economies. We are now debasing the US dollar with reckless spending and
money printing with the policies of Quantitative Easing (QE) I and the
expectations of QE II. Both are nothing more than effectively defaulting
on our obligations to sound money policy and a “strong US$”. Meanwhile
with a straight face we deny that this is our intention.
Though prior to the 2008 financial crisis our largest banks had become
casino like speculators with public money lacking in fiduciary
responsibility, our elected officials bailed them out. Our leadership
placed America and the world unknowingly (knowingly?) on a preordained
destructive path because it was politically expedient and the easiest way
out of a difficult predicament. By kicking the can down the road our
political leadership, like the banks, avoided their fiduciary
responsibility. Similar to a parent wanting to be liked and a friend to
their children they avoided the difficult discipline that is required at
certain critical moments in life. The discipline to make America swallow a
needed pill. The discipline to ask Americans to accept a period of intense
adjustment. A period that by now would be starting to show signs of
success versus the abyss we now find ourselves staring into. A future
that is now massively worse and with potentially fatal pain still to come.
critical issues in America stem from minimally a blatantly ineffective
public policy, but overridingly a failed and destructive Economic
Policy. These policy errors are directly responsible for the opening
salvos of the Currency War clouds now looming overhead.
Don’t be fooled for a minute. The issue of Yuan devaluation is a political
distraction from the real issue – a failure
of US policy leadership. In my
opinion the US Fiscal and Monetary policies are misguided. They are wrong!
I wrote a 66 page thesis paper entitled “Extend
& Pretend” in the fall of 2009 detailing why the proposed Keynesian
policy direction was flawed and why it would fail. I additionally authored
full series of articles from January through August in a broadly
published series entitled “Extend & Pretend” detailing the predicted
failures as they unfolded. Don’t let anyone tell you that what has
happened was not fully predictable!
Now after the charade of Extend & Pretend has run out of momentum and more
money printing is again required through Quantitative Easing (we predicted
QE II was inevitable in
March), the responsible US politicos have cleverly ignited the markets
with QE II money printing euphoria in the run-up to the mid-term
elections. Craftily they are taking political camouflage behind an
“undervalued Yuan” as the culprit for US problems. Remember, patriotism is
the last bastion of scoundres
IMF’s devastating Article IV report states that the
(Spanish) government’s “gross financing needs” for 2011
will be €226bn, or 21pc of GDP. “Spain’s financing
requirements are large and, retaining market confidence
will be critical. Spain has exhausted its fiscal space.
Targets should be made more credible.”
Madrid must attract €226bn of good money from Spanish
savers, German pension funds, French banks, Japanese life
insurers, and China’s central bank, so that an incompetent
government (this one happens to be socialist, but the
Greek conservatives were worse) can continue to run budget
deficits of 7pc to 8pc of GDP in 2011. Why should they
lend a single pfennig, having already been told by EU
leaders that they will face scalping if Spain ever needs a
“The economy is highly indebted and has one of the most
negative international investment positions (IIP) among
advanced countries,” said the IMF. Its external accounts
are under water by 80pc of GDP.
Furthermore, Spanish banks will need to roll over
€220bn in 2011 and 2012, according to Enrique Goñi, head
of Banca Cívica. “We’re in the antechamber of a new
liquidity crisis. We’re living through a financial
pre-collapse,” he said.
Germany must contemplate doing for Euroland what it
has done for its own Volk in the East over the last 20
years – pay big transfers – or watch its strategic
investment in the post-War order of Europe collapse with a
bang, and in hideous acrimony.
The escalating debt crisis on the eurozone periphery
is starting to contaminate the creditworthiness of Germany
and the core states of monetary union.
Europe's fate may be decided soon
by the German constitutional court as it rules on a clutch
of cases challenging the legality of the Greek bail-out,
the EFSF machinery, and ECB bond purchases.
"There has been a clear violation
of the law and no judge can ignore that," said Prof
Hankel, a co-author of one of the complaints. "I am
convinced the court will forbid future payments."
If he is right – we may learn
in February – the EU debt crisis will take a dramatic new
"Italy is in a lot of pain," said Stefano di Domizio,
from Lombard Street Research. "Bond yields have been going
up 10 basis points a day and spreads are now the highest
since the launch of EMU. We're talking about €2 trillion
of debt so Rome has to tap the market often, and that is
U.S investors have been pouring additional money into bond
funds, each and every week, ever since December 2008. This
historic streak for bond fund inflows has been an enduring sign of
post-crisis sentiment, but last week it finally came to an end.
"Bond funds suffered outflows of $4.33 billion, the first week
of outflows since December 17th, 2008," according to Citi's Tobias
Levkovich in a recent note.
Meanwhile, the outflow of money from equity funds is slowing,
but yes, remains an outflow.
Citi's Tobias Levkovich:
According to ICI, investors withdrew $1.16 billion to total
equity funds for the week-ending November 17.
Domestic funds experienced outflows of $2.80 billion while
foreign funds posted inflows of $1.63 billion.
For overall equity funds, the four-week moving average
dropped to an outflow of $302 million from the prior week’s inflow
of $507 million.
Thus there's still a long way for sentiment trends to reverse
in favor of stocks and against bonds, and what happened last week
could be the key inflection point ahead of a new trend. If you
look at equity fund flows since the crisis in 2008, it's clear
there's a lot of room for fund flows to come back to stocks.
Trying to buy the 364 items repeated in all the song's verses - from
12 drummers drumming to a partridge in a pear tree - would cost $96,824,
an increase of 10.8 percent over last year, according to the annual
Christmas Price Index compiled by PNC Wealth Management
To Duncan, Bernanke’s acknowledgement that the Dollar Standard
is flawed signals the direction of US economic policy going
forward. “They’re going to take steps to correct this flow, either
through international cooperation or through unilateral action”
—such as imposing trade tariffs on imports, principally from
In an interview to DNA from Bangkok, Duncan explains
the implications of US efforts to remedy trade imbalances, and why
China — being the foremost trade surplus country — would be
“massacred’ in the event of a “trade war”. But Duncan isn’t just a
bearer of grim tidings: as he did in his second book, The
Corruption of Capitalism: A strategy To Rebalance The Global
Economy and Restore Sustainable Growth, he outlines a
scenario in which the crisis could have a “happy ending”: the
redistribution of wealth and purchasing power — through higher
wages globally — towards the ‘bottom of the pyramid’ as a way to
remedy the demand-supply imbalances.
“Income redistribution may sound ‘Marxist’ and alarming,” he
notes, “but I’m not coming at it from that angle: it would be good
for billionaires and for poor people. Billionaires could be even
richer five years from now if they play along; but if they don’t,
they’re going to be worse off.” Excerpts from the
You’ve called Fed chairman Ben Bernanke’s speech last
week his most important speech since his 2002 ‘helicopter money’
speech. What makes it so special? The ‘helicopter
money’ speech was important because it outlined what the Fed
policy would be in the future when the property bubble popped. In
that speech, Bernanke said the Fed would create dollars and buy up
Treasury bonds and monetise the government debt — and that’s the
most effective way to stimulate the economy. And that’s exactly
what the Fed did.
In his speech last week, Bernanke came out and said that the
international monetary system has a flaw. This is extraordinarily
important. For the Fed to say that the international monetary
system — which is the Dollar Standard —has a flaw is shocking.
Never before has a senior US government official even suggested
that there was a flaw in the Dollar Standard.
The mantra has always been that the US is for a strong dollar
policy. To have a strong dollar means to continue to have larger
and larger trade deficits and more and more global imbalances that
ultimately blow up into greater and greater crises. Bernanke’s
speech represents a complete about-face in terms of US economic
policy and an acknowledgement that the current arrangement is to
blame. That was the subject of my first book The Dollar
What does it mean for the Fed to acknowledge that the
Dollar Standard is flawed — and what are the alternatives?
For them to acknowledge that it’s flawed suggests that they now
realise that the flaw must be fixed. Otherwise, there’s no need to
discuss it. And it should also be seen as a complementary speech
to US Treasury secretary Timothy Geithner’s position that the
current account deficits and surpluses of countries should be
capped at 4%. That was the goal of the US Treasury Department at
the G20 meeting in Seoul recently.
But that didn’t fly at the G20 meeting, did it?
The other countries would not agree. But, following up on that,
you have not only the Treasury Department stating that, you now
have the Fed too stating a similar position: that the monetary
system is flawed because it doesn’t prevent imbalances. The
implication is that something must be done to correct this flaw
and the imbalances. And that, I think, represents the direction of
US economic policy going forward: they’re going to take steps to
correct this flaw. Either there’s going to be international
cooperation —or unilateral action.
Specifically, what kind of policy action options does
the US have: tariff barriers? Yes, tariff barriers.
That’s really the only effective one.
"Germany cannot keep paying for bail-outs without going
bankrupt itself. This is frightening people. You cannot find a
bank safe deposit box in Germany because every single one has
already been taken and stuffed with gold and silver. It is like an
underground Switzerland within our borders. People have terrible
memories of 1948 and 1923 when they lost their savings."
Gordon T Long is not a registered advisor and
does not give investment advice. His comments are an expression of opinion
only and should not be construed in any manner whatsoever as
recommendations to buy or sell a stock, option, future, bond, commodity or
any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a
qualified investment advisor, one licensed by appropriate regulatory
agencies in your legal jurisdiction, before making any investment
decisions, and barring that, we encourage you confirm the facts on your
own before making important investment commitments.ont>
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Gordon T Long
is not a registered advisor and does not give investment advice. His comments
are an expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, we recommend that you consult with a qualified
investment advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and barring that,
we encourage you confirm the facts on your own before making important