Category Economic Subjects

Jul 3 2014

The ‘End’ of the dollar?


The BRICs Are Morphing Into An Anti-Dollar Alliance

Re-Post for Zerohedge by Tyler Durden on 07/02/2014 22:29 -0400

While numerous massively indebted administrations around the world hope to divert the attention of what’s left of their struggling middle class away from its daily impoverished existence and distract it with flashing lights and glitzy animations showing another all time market high on a daily basis, a significantly more important shift taking place behind the scenes is appreciated by very few: the ongoing de-dollarization of the world. For the latest example of how increasingly more countries are setting the stage for the final currency war, we go again to Russia where VOR’s  Valentin Mândr??escu explains that slowly but surely the BRICS – that proud Goldman acronym which was conceived to perpetuate the great American way of life by releasing trillions in US-denominated debt in heretofore untapped markets – are morphing into an anti-dollar alliance.

BRICS is morphing into an anti-dollar alliance, From VOR

Before the crucial visit to Beijing next week, the governor of the Russian Central Bank, Elvira Nabiullina met Vladimir Putin to report on the progress of the upcoming ruble-yuan swap deal with the People’s Bank of China and Kremlin used the meeting to let the world know about the technical details of its international anti-dollar alliance.

On June 10th, Sergey Glaziev, Putin’s economy advisor published an article outlining the need to establish an international alliance of countries willing to get rid of the dollar in international trade and refrain from using dollars in their currency reserves. The ultimate goal would be to break the Washington’s money printing machine that is feeding its military-industrial complex and giving the US ample possibilities to spread chaos across the globe, fueling the civil wars in Libya, Iraq, Syria and Ukraine. Glaziev’s critics believe that such an alliance would be difficult to establish and that creating a non-dollar-based global financial system would be extremely challenging from a technical point of view. However, in her discussion with Vladimir Putin, the head of the Russian central bank unveiled an elegant technical solution for this problem and left a clear hint regarding the members of the anti-dollar alliance that is being created by the efforts of Moscow and Beijing:

“We’ve done a lot of work on the ruble-yuan swap deal in order to facilitate trade financing. I have a meeting next week in Beijing”, she said casually and then dropped the bomb: “We are discussing with China and our BRICS parters the establishment of a system of multilateral swaps that will allow to transfer resources to one or another country, if needed. A part of the currency reserves can be directed to [the new system].” (Prime news agency)

It seems that Kremlin chose the all-in-one approach for establishing its anti-dollar alliance. Currency swaps between the BRICS central banks will facilitate trade financing while completely bypassing the dollar. At the same time, the new system will also act as a de facto replacement of the IMF, because it will allow the members of the alliance to direct resources to finance the weaker countries. As an important bonus, derived from this “quasi-IMF” system, the BRICS will use a part (most likely the “dollar part”) of their currency reserves to support it, thus drastically reducing the amount of dollar-based instruments bought by some of the biggest foreign creditors of the US.

Skeptics will surely claim that a BRICS-based anti-dollar alliance will not manage to deprive the dollar of its global reserve currency status. Instead of arguing against this line of thought, it is easier to point out that Washington is doing its best to enlarge the ranks of the enemies of the dollar. Asked by the Russia 24 channel to comment on Nabiullina statements, Sergey Kostin, the president of the state-owned VTB bank and one of the staunchest supporters of anti-dollar policies, offered an interesting perspective on the situation in Europe:

“I think the work on ruble-yuan swap line will finalized in the nearest future and the way for ruble-yuan settlement will be open. Moreover, we are not the only ones with such initiatives. We know about the statements made by Mr. Noyer, chairman of the Bank of France. As a retaliation for what Americans have done to BNP Paribas, he opined that the trade with China must be done in yuan or euro.”

If the current trend continues, soon the dollar will be abandoned by most of the significant global economies and it will be kicked out of the global trade finance. Washington’s bullying will make even former American allies choose the anti-dollar alliance instead of the existing dollar-based monetary system. The point of no return for the dollar may be much closer than it is generally thought. In fact, the greenback may have already past its point of no return on its way to irrelevance.

Jul 1 2014

The end of the current Fed Sovereign Debt Bubble is in sight


Currency changes are now in place

Re-Post from Power Line from Steven Hayward — with my comments.

Further to yesterday’s note on “Behind the Levitation” about the Federal Reserve’s easy money policy, Ron Greiss of The Chart Store kindly sent along these four graphs that display the astronomical expansion of the Fed’s balance sheet in the aftermath of the crash of 2008.  These make for sober viewing indeed.  Hard to see how this ends well. Click on Charts to enlarge.

If the current move away from the US Dollar as the only reserve currency gains steam this bubble will explode even if the FED continues to tapper off; the damage has already been done and can’t be undone.

 

Fed 1 copy

Fed 2 copy

Fed 3 copyRon Greiss notes that correlation does not equal causation, but still:

Fed 4 copy

 

Feb 3 2014

Book Review, A Monetary History of the United States, 1867-1960


A Classic in Economics

Milton Friedman along with Anna Schwartz published an almost 900 page book in 1963 titled A Monetary History of the United States, 1867-1960 which along with other works of Friedman’s got him a Nobel Prize in Economics in 1976. Friedman and Schwartz showed in Chapter 7 The Great Contraction 1929-33 (pages 299 to 419) how the Great Depression was caused by the actions, or more properly the inaction’s, of the Federal Reserve, first in allowing the credit bubble that lead to the stock market collapse in 1929 (excusable with the knowledge of the times) and then in their collapsing the U.S. banking system (not excusable under any circumstances) by not following the methods that were then known for preventing this very thing from happening. Keep in mind that preventing a monetary contraction and/or a series of banking failures was the stated main purpose for creating the Federal Reserve in 1913. This work of theirs was the first explanation of what actually caused the Great Depression and this solved the issue which had puzzled economists for almost 30 years. This work of Friedman and later works by others, as well, showed how Keynes was wrong about savings and deficit spending. This is a very critical finding as Keynes views on economics and FDR’s policies were accepted as gospel and those policies have now taken us to the very edge of word wide economic collapse.

A side note with relevance here is that when the Federal Reserve (FED) was formed by an act of congress (HR 7837) and signed into law as Pub. L. 63-43 on December 23, 1913 a banker named Benjamin Strong Jr. one of those that developed the concept of the FED was appointed as the Governor of the New York Federal Reserve bank at that time. From its inception and until his untimely death in October 1928 he ran the New York FED which had the lead in monetary policies since most major transactions especially international were conducted in New York City where all the main U.S. banks were located. According to Friedman’s work Strong did everything by the book and discounting minor ups and downs up until his death the economy ran as smoothly as could be expected as a result.

Strong besides being a very knowledgeable man had a dynamic personality and others ended up in his shadow, so after his death the FED was reorganized to prevent one person from having the power that Strong had. His successor George L. Harrison although knowledgeable did not have the personality of Strong and with the FED operating rules being changed in March 1930 he was not able to do what he knew needed to be done, so in 1930, 1931 and 1933 there were three waves of banking failures that swept across the country each worse than the preceding one. The result was the almost total destruction of the United States banking system and the Great Depression.

In Section 6 (Alternative Polices) of Chapter 7 on page 391 Friedman did more than state that as his opinion he showed in detail how the polices of the FED and the tools they had available to them were more than sufficient to accomplish the task of preventing the banking collapses which were the real cause of the Great Depression not the stock market collapse in 1929. Then in Section 7 (Why was Monetary Policy So Inept) of Chapter 7 on page 407 Friedman states that if Strong had lived only a few more years, he died at 55, and if he had done what he had been doing while he was the Governor of the New York Federal Reserve that the Great Depression and all it destroyed would probably never have happened.

But the biggest kicker was that before the FED was established to prevent banking collapses the New York banks had come up with a method to stop these contractions on their own, and that it was used on one occasion in particular a market contraction in 1907,. Although the method wasn’t handled perfectly the logic within it was sound. The creation of the FED stopped banks individually from doing what needed to be done and established the FED as the only agency responsible for preventing banking contractions. The policies that should have been used were well known and had been used before so there was really no excuse for the FED to not allow Governor Harrison to do what he wanted to do. It was only the FED boards’ members not wanting Harrison to follow in Strong’s footsteps that created the Great Depression. Sadly this is what big government always gets you ‘politics’ not what really needs to be done.

There is a lot more in this book which would take another book to describe; unfortunately it is technical and unless one had more than first year economics much of it would probably make no sense. I would however state there should be not one economist in the country that hasn’t read this book from cover to cover.

This book should be mandatory reading and maybe even a mandatory full class for any university giving degrees in economics. Sadly it isn’t so what happens is that economists today have no clue what works and what doesn’t for example.

After the 2008 election in late 2008 and early 2009 when Obama’s transition team was developing what would be the American Recovery and Reinvestment Act of 2009 (ARRA) more commonly known as the “Stimulus” they were only interested in politics not a recovery. Therefore the ARRA was a strictly partisan bill (almost no republicans voted for it) that was criticized by the democrats as being not enough, republicans by being to political and independents claiming its focus was on the wrong things. On its surface the ARRA did seem to be more a “pork” bill than one to actually help the economy. One interesting comment made by Christina Romer was that it (the ARRA) was designed to duplicate the successful programs of FDR.

Romer, whose expertise includes the Great Depression and the economic recovery that followed, is a professor of economics at the University of California, Berkeley. She is also co-director of the monetary economics program and a member of the business cycle dating committee at the National Bureau of Economic Research (NBER), the group that officially determines when U.S. recessions begin and end. Obviously she never read “The Monetary History of the United States, 1867 – 1960” by Friedman and Schwartz. She should have because as of the end of 2013 (5 full years later) the U.S. economy is still short from pre-collapse 1.49 million jobs by the BLS figures and 2.05 million jobs if we consider all jobs including self employed, agriculture & forestry and the military. This is the worst recovery ever since in addition to creating so few jobs the Federal government owes $9.28 trillion more dollars today than it did at the end of 2007. That equates to $1,278,286 borrowed and spent to create each job (there are 7.26 million more than at the bottom); but this is not a very good return on the money and we are still not back to where we were in 2007.

Feb 2 2014

Book Review, Reckless Endangerment


The Story of Affordable Housing

This book written by Gretchen Morgenson and Joshua Rosner and published in 2011 is about the housing bubble that caused the financial meltdown in the fall of 2008, how it was started and who was responsible. “The American people realize they’ve been robbed. They’re just not sure by whom,” write Gretchen Morgenson and Joshua Rosner in their superbly written book “Reckless Endangerment.”

Those that take the time to read this outstanding and well documented history of the financial crisis will understand when they are finished, exactly who created the meltdown of 2008 and how they did it. Morgenson and Rosner show us in great detail, “…what happens when Washington decides, in its infinite wisdom, that every living, breathing citizen should own a home.”

It’s now been over 5 years since the bubble burst in October 2008 and almost 3 years since this book was published so why write a review now?

The answer is simple we learned nothing from the experience and hence it likely that a similar situation will occur again, and in fact with the new financial regulations and laws made along with the Affordable Health Care act that is now being implemented there is an almost 100% certainty that a new and maybe even worse situation will occur. The reasons that I make this statement are an extrapolation from the concussions in this book and so further discussion is warranted. But the reader should definitely read this book

The story of this situation begins in the Carter administration and ends in the Obama administration a period of over 30 years and six presidents. Along the way there were multiple signs of the developing problem but no one cared neither the politicians, the financiers nor the public; since everyone was getting something out of this in essence Ponzi scheme. However since the situation started with the government the blame must be placed squarely on them for none of this would have happened if the politicians had not interfered in the housing market.

The issue to be fixed was the low home ownership rate of blacks; and it was assumed that this was the result of discrimination.  To a point it was but it wasn’t so much racially motivated as economic.  Back then it was required to have 20% down to buy a home and to be able to support the payments.  Those requirements meant you had to have saved some money or borrowed it from family (like my wife and I did) and have a steady job making enough that the banks could expect that you could make the monthly payments.  This policy did, in fact, discriminate against those that could not make these standards’ and since poor people could not and black were proportionally poorer their participation rate in home ownership was lower.

For some reason the politicians decided it would be easier to force the banks to make bad loans then get the poor people (blacks) jobs and this started the ball rolling.  Like all government programs they take time to be felt economically and the new “federal” rules on giving mortgages were no exception.  By the end of the Clinton administration all the payers were engaged and the end was inevitable.  The problem was that the banks were expected to have a certain percentage of mortgages given to blacks that were equivalent to whites and if they didn’t the federal government put pressure on them. The banks complied by lowering their standards and the government aided them by buying some of the issued mortgages in Freddy and Fanny. This relieved the banks of the potentially bad loans and now more blacks had homes.

Early in the first Bush term the congress continued to make changes to this system to make it easier and easier to get a loan.  By the start of Bush’s second term an entire industry wide system was in place to generate loans to people with no income and no down payment. How anyone in power thought this would ever work is beyond me.  The system that was developed and explained in detail in this book was that the bad loans were being generated to supply the investment banks with packages of mortgages that could be broken in to what they called tranches and sold as investment grade securities. The details can be found in the book. Now everyone was making money on giving loans that could never be paid back and the end happened in October 2008 as the investors and then the banks holding those bad securities began to fail.

All of this is well documented with names dates and places where all the bad decisions were made, no one escapes. Then after the dust settled a congressional review blamed in all on the Investment banks and proposed no stricter laws on them.  No mention was made on how this all started with affordable housing the federal governments interference in the housing market.  So the bottom line was the federal government interfered in the privet market, created a major problem, then blamed the private sector for doing this and then passed new laws that made them stop giving bad loans.

Now with the Affordable Health Care act that was sold on giving health insurance to poor people without jobs we are finding the exact same thing occurring taxes and fees and fines are in place that raise the cost to those that are paying for insurance to allow for those that can’t pay to have insurance.  Unfortunately the laws rules and regulations will do to the health care industry exactly what was done to the home mortgage market; and probably a lot quicker since this was a very comprehensive piece of legislation.

Read “Reckless Endangerment” and see what will happen to health care in a few years as the Affordable Health Care Act is implemented.

Feb 1 2014

Book Review, The Big three in Economics


An Introduction to Economic

The Big three in Economics Adam Smith, Karl Marx and John Maynard Keynes is a book written by Mark Skousen, and is an excellent primer for those interested in economic theory. Although it is economics its written such that one doesn’t need a degree in it to get the points. Unfortunately, our politicians have used our lack of understanding of economics to miss lead us for their own nefarious purposes. There will be more posted here on economics, this is just the beginning.

There is a current movement of social change that has been put into play by those politicians wishing to make changes that will give them more power.  There is no other way to say this for it is and has always been that those that rule are never happy with some power that always want more.  This need for absolute power is not related to left or right political views both of these artificial categorizations want the same things each for themselves and only with a different twist.  This has always been the case since recorded history begins and from that we can assume before that to the beginning of mans rain on earth.

This drive for power and wealth is a fundamental aspect of our very nature and it can result in both good and bad if not properly channeled.  The problem arises when we allow those with the desire for power to manipulate the education system and change the way our children are taught.  This is easy to do if the Citizens are not vigilant and we have been asleep for a half century now.

Political Correctness (PC) and multiculturalism were the tools that were used and they have erased from our history the knowledge that allows us to be free.  The promise that was instilled in the young was that with more government and less private sector that all the people would be better off and have more.  We just need the government to make things fairer by asking those with more to share what they had with the rest of us.  What could possibly be wrong with that?

This Blog is not an economics text but never-the-less the basics must be understood if we are to discus government so based on the excellent book written by Mark Skousen The Big three in Economics Adam Smith, Karl Marx and John Maynard Keynes we will quickly introduce the reader to those three plus two others who have had a big impact on the way we view our world.

Skousen, a gifted writer, takes the reader through six phases of economic development starting with the man that started it all Adam Smith and ending with Milton Freidman (my interpretation of his work).  These six phases are the first six chapters in Skousen’s book:

One, Adam Smith declares an economic revolution in 1776
Two, From Smith to Marx: the rise and fall of Classical Economics
Three, Karl Marx leads a revolt against capitalism
Four, From Marx to Keynes: Scientific economics comes to age
Five, John Maynard Keyes: Capitalism faces its greatest challenge
Six, A turning point in twentieth century economics

The first period is the world’s first formal development of economics principles by Adam Smith where he declares that we will ALL be better off if we are free to produce and sell goods and services as we see fit. That competition in the market place will lower the prices and improve the products.  And that for this to work there must be honest transactions monitored by a fair and just legal system.  This can be boiled down to two principles being “natural liberty” and “laissez-faire.”

The second period is one where questions arise over Smith’s writings that result in the basic principles being questioned.  Smith did not develop equations and formulas his work was one of logical development based on empirical evidence.   Since this was the period of rapid industrialization in Europe and America there were dislocations that were occurring that appeared to disprove what Smith had developed.

The third period was that of Karl Marx and his view that all production belonged to Labor and that land and capital should placed in the collective for all to use.  Marx believed that the workers were being oppressed and that a new system would be developed based on the principles of Hegel’s Dialectic where a thesis caused an antithesis to develop and that lead to a synthesis (a new order).  Marx’s view was that his Communism was the new order.

The Fourth period was where Smith’s views were proved correct by many others when mathematics resolved some of the problems that had developed in Smith’s principles which until now were verbal descriptions not mathematical formulations.  This period ended in the thirties with the great depression.

The Fifth period was dominated by Keynes and his theories of deficit spending, no private savings and government intervention in the market place.  Keynes developed his theories in response to the great depression that was causing much hardship in Europe and America except for Germany and Russia which had turned to a powerful central government albeit for different reasons.  This economic growth under a strong government gave credibility to Keynes views.

The Sixth period is that which we are now in.  Additional work especially by Milton Freidman shows that Keynes was not correct in his views — his work was distorted by the events of those times when he lived which lead him to make assumption that have now proved to be false.  Then there was the fall of the communist states and/or their embracing free market principles in portions of their economies has proved that Marx was wrong as well.  So with both Marx and Keynes both disproved Smith’s views of a free market and laissez-faire were now proved to be true once more.

Skousen’s book was published in 2007 before the housing bubble burst and we elected a very socialist President in 2008.  Those in Washington today believe in Keynes or at least in his big government e.g. like in China.  This view is false as over the past several decades congress has passed legislation here in the United States to the point that our market was neither free in its conduct nor in interference from the federal government.  We therefore find ourselves once again in a period where the politicians that have wrecked the economy are telling us that they need more power to fix the problems.  Since they are the very ones that created the problems this transference of power to them must be avoided at all costs.