Perspectives on the global economic meltdown- (Nov 28 2010)

[ramana]

in India Brittania Biscuits were including a gold coin in a random packet of their biscuits as a promotion campaign.

[Satya_anveshi]

Just so folks know there are a couple updates from Latin America on inflation front. IMO, this is bound to spread everywhere including Asia (and India):

1. Big Supermarkets Freeze Prices For Two Months in Argentina

2. Venezuela Devalues Currency by a Third Amid Shortages and Inflation

[Christopher Sidor]

Calls for Cheap Euro: ECB Caught in Currency-War Crossfire --- Der Spiegel Dated 11-Feb-2013

Some have said that we are in the era of currency wars. Probably the first salvo of the latest currency war was fired by the Japanese, who saw their currency appreciate drastically, thus practically undoing all the rebuilding after Fukushima disaster. This lead to tensions rising in East Asia, with Korea and Taiwan particularly concerned. Worried about the Swiss Franc's growing strength, the ever pragmatic Swiss central bank effectively adaopted a peg, on the lines of the yuan-to-dollar peg adopted by PRC's PCB. Though the swiss peg was unfortunately more rigid.

And now we have some countries calling on the ECB to weaken the EURO. Euro has strengthened, though not to a level seen in the early years of the financial crisis. The problem is that if ECB weakens the currency, inflation will shoot up in Germany and other AAA rated countries of Euro Zone. Due to very low inflation in Germany and other AAA rated countries, wages in Germany for the blue color workers has not gone up by much. Since inflation is very low, workers do not grumble much and the Teutonic manufacturing juggernaut marches on.

And if this is not enough it turns out that it is not Greece which is poster boy for what is wrong with Euro. That dubious honour belongs to another country, Cyprus

Merkel Opponent Sets Conditions for Cyprus Aid --- Der Spiegel Dated 4-Feb-2013

Basically what the SPD, the main oppositon party in Germany wants is

• Cyprus takes steps to ends its reputation as a tax haven or tax evasion land or money laundering land. Take any of the 3 mentioned as your pick.
• Cyprus implements the financial transaction tax.
• A few financial institutions or Cyprus are allowed to fail. Think Lehman all over again

The last condition might just be a ploy to extract more concessions from the ruling party of Germany or from the Cypriots themselves. The reason why Cyprus is becoming such a big toothache, is the unresolved question, what happens if Cyprus says it wants to exit the Euro? You see the ECB's presidents statement that it will do whatever is required to prevent a euro demise, is based on an implicit premise. The country is question has to remain a member of the EURO zone.

"One shouldn't frivolously speculate about (an exit)," he (i.e. Peer Steinbrück, the SPD candidate for the Chancellery in this year's election) said. "European Central Bank head Mario Draghi and European leaders have clearly signalled to the markets that the currency union will stay together. If someone now gives the impression that … it is possible for a country to leave the euro, then a fundamental message will have been contradicted."
Steinbrück was critical of Merkel for what he indicated was a lack of honesty in the euro crisis. He said that Berlin must finally tell German voters that the euro crisis is ultimately going to cost Germany money. "Angela Merkel, who at the beginning didn't want to give Greece a single cent, must finally tell people the truth," he said.

[ramana]

anybody any thoughts on nassem taleb's new book antifragile?

fragile - things that break under duress
robust - things that remain unchanged under duress
antifragile - things that grow under duress, infact grow because of it.

fragile systems see duress as problematic and isolate it.
antifragile systems see duress as unisolatable and incorporate it.

much of current effort is aimed at shielding systems from duress. this make them fragile. NT lays the blame for this on "Soviet-Harvard" top-down intellectuals. He rails against them a lot.

I think he missed a trick by not seeing the "Soviet-Harvard"-walas as a system by themselves. Are they fragile,robust, or antifragile?

I think they have frail egos.

Taleb's Home page:

http://www.fooledbyrandomness.com/

[pentaiah]

ramana ji >>

notice how this currency devaluation spree was predicted by....
the relative devaluation will occur because no one wants to lose the cheap currency vs Dollar (the defacto imposed cheapened currency), and how this in turn will increase internal inflation in all countries and especially commodity prices....

this is moving as predicted towards hyper inflation gradually....

[ramana]

Yeah John Snow was very wise. I went thru the 100 pages of the old thread to get that n steps cycle but no luck.

[vic]

I was just talking to my dad that my family earns 30 times more than what it did 30 years ago but the property prices in Delhi have gone up by 100 times+ in that time. So as a middle class person it is more difficult for me to buy a house than was for my father.

The worlds financial system is taking away all wealth accumulated by middle class in last 50 years and transferring it to uberclass. After every financial crisis, the wealth is transferred by inflation from middle class to uber rich class. But now we are seeing massive indications of uber depression even in Delhi. We have huge swats of sub urban areas lying vacant with high prices at which the consumer is unable to buy. That means so much wealth has now gone into hands of uber rich class that middle class has nothing left.

Taxation, with Massive inflation works when middle class is left with something to be indirectly taxed. With high consumer debts and even reverse mortgages coming into vogue, we are slowly going back into middle ages as new royalty will emerge. There will be royalty and serfs with nothing in middle. Waiting for serfs to revolt...........

[SriKumar]

ramana ji >>

notice how this currency devaluation spree was predicted by....
the relative devaluation will occur because no one wants to lose the cheap currency vs Dollar (the defacto imposed cheapened currency), and how this in turn will increase internal inflation in all countries and especially commodity prices....

this is moving as predicted towards hyper inflation gradually....

pentaiah, I had read that post. The prediction was much more precipitous, catastrophic and on MUCH shorter timeframe. Can you explain why things have been OK (relatively speaking) from 2009 through 2012? In other words, how come we dont already have it, (which was the expectation)?

[svinayak]

Money printing has reduced the pain and the impact quite a bit. But it has postponed the inevitable
It would be the most gu wrenching changes to bring the balance in the currency worldwide

[RoyG]

ramana ji >>

notice how this currency devaluation spree was predicted by....
the relative devaluation will occur because no one wants to lose the cheap currency vs Dollar (the defacto imposed cheapened currency), and how this in turn will increase internal inflation in all countries and especially commodity prices....

this is moving as predicted towards hyper inflation gradually....

pentaiah, I had read that post. The prediction was much more precipitous, catastrophic and on MUCH shorter timeframe. Can you explain why things have been OK (relatively speaking) from 2009 through 2012? In other words, how come we dont already have it, (which was the expectation)?

Two reasons:

1) Like Acharya said, money printing and also fiscal responsibility being imposed on the EU by Germany.
2) OPEC trading oil in dollar has allowed the US to absorb the shock for a few more years.

However, as dollar trade continues to decline at 1% a year, money printing continues, and states begin to cut back on public spending (which is a good thing) the the catastrophic shock to the system will happen. Central banks around the world are accumulating gold so when the reset button is pushed as there is no other possible peg for major currencies outside the dollar.

[SriKumar]

^^^ thanks to both for the responses. Couple of follow-up questions, if you will indulge:
1. How would money-printing postpone the shock? Introducing huge quantities of money (700 billion USD in QE1 and another similar amount in QE2) should cause inflation would it not? But this did not happen. So, perhaps most of this money was used only to bring the balances in the accounting books of insurance companies (e.g AIG) in the black, and never entered circulation? And therefore the inflation was limited?

2. OPEC trading in dollars: Help me understand how this works in favor of the US. First, is it correct to assume that when OPEC is trading in USD, it means that it will *sell* (not just quote the price, but sell) the oil only to those who pay in USD ? So if Saudi Arabia wants to sell oil to a country, say, Hogmania; Hogmania would have to pay Saudi Arabia in US dollars? Assuming this is correct, how does this help the US? The Hogmanians would need a stockpile of USD to pay Saudi Arabs for their oil, and the only way Hogmanians can do this is to sell something to USA, either directly or indirectly. Not sure how this helps the US but I can imagine that if the Hogmanians are really in need of USD, they'll be willing to sell their product at cheap prices to US to get a stockpile of USD. Plus any country that wants to buy oil would absolutely need to trade with the US (directly or indirectly). This is a bare-bones description but is this basically correct, or is there another level to this?

[shyam]

The real hyper inflation will come when trillions of dollar bond holders like China and Japan start dumping US bonds. When will that happen? That will happen when bond market starts crashing. At that point these countries will realize that the assets they are holding are losing value of the order 20% or more (i.e. of the order of $200+ billions). At that point they would prefer to sell those bonds and US will buy that using freshly printed dollar. This will flood the market with dollars which was earlier sucked out using treasury bonds. Realizing that these dollars are just papers, these countries will try to buy assets using those dollar. So you will have both rapid increase in money supply and price rise. Peter Schiff calls this inflation that US exported to the world coming back home.

By printing dollars, they created a bond bubble and nobody felt like dumping them now.

You still have time to buy gold.

[Christopher Sidor]

^^^
thanks to both for the responses. Couple of follow-up questions, if you will indulge:
1. How would money-printing postpone the shock? Introducing huge quantities of money (700 billion USD in QE1 and another similar amount in QE2) should cause inflation would it not? But this did not happen. So, perhaps most of this money was used only to bring the balances in the accounting books of insurance companies (e.g AIG) in the black, and never entered circulation? And therefore the inflation was limited?

Inflation has not gone up by that much in USA yes. But that does not mean that inflation has not gone up for the rest of the world, especially the Asian land mass. And yes most of the money has been used to tidy up the balance sheets of major financial institutions of the world. Consider this, despite all the twist, QE, asset buying program, lending has not gone up that much in USA. In fact credit to the end consumers and small/medium scale industries is being reduced.

2. OPEC trading in dollars: Help me understand how this works in favor of the US. First, is it correct to assume that when OPEC is trading in USD, it means that it will *sell* (not just quote the price, but sell) the oil only to those who pay in USD ? So if Saudi Arabia wants to sell oil to a country, say, Hogmania; Hogmania would have to pay Saudi Arabia in US dollars? Assuming this is correct, how does this help the US? The Hogmanians would need a stockpile of USD to pay Saudi Arabs for their oil, and the only way Hogmanians can do this is to sell something to USA, either directly or indirectly. Not sure how this helps the US but I can imagine that if the Hogmanians are really in need of USD, they'll be willing to sell their product at cheap prices to US to get a stockpile of USD. Plus any country that wants to buy oil would absolutely need to trade with the US (directly or indirectly). This is a bare-bones description but is this basically correct, or is there another level to this?

Oil+Gas is traded in dollar. In terms of volume and transacted values, this is one of the biggest trade that happens in the world. If one commodity, is traded predominantly in one currency, then a majority of the countries have to have a way to earn in Dollars. Thus these countries seek out trade in dollars. And only one country has control on the amount of dollars printed and in circulation.

That does not mean that dominance of Dollar is a bad thing. It does bestow upon USA some undeserved privileges. Consider the recent example of US and EU sanctions targeted against Iran. But it makes life easier too. Imagine if we had to pay for Iranian and Chinese imports in Rials or Yuans only. Now we do not export so much to these countries so as to earn significant amount of rials and yuans. Take it on a global scale and the task of managing the exchange rate and payments would become horrendous. But if we trade in a single currency, say dollar, then we can get dollars from US or EU or BRICS nations and then pay Iran, Saudi Arabia, etc in dollars. This makes our life easy and less complicated.
That does not mean we cannot have payments in individual currencies. Provided that full capital convertibility was there, we could trade in Yen, euros or other currencies. But most of the countries, including India, do not have full capital convertibility.

[pankajs]

Let me try to answer that to the best of my understanding.

^^^ thanks to both for the responses. Couple of follow-up questions, if you will indulge:
1. How would money-printing postpone the shock? Introducing huge quantities of money (700 billion USD in QE1 and another similar amount in QE2) should cause inflation would it not? But this did not happen. So, perhaps most of this money was used only to bring the balances in the accounting books of insurance companies (e.g AIG) in the black, and never entered circulation? And therefore the inflation was limited?

Inflation did not happen is US because it got exported to the rest of the world. We all are paying the price for the Feds dollar printing.
The Latest American Export: Inflation - WSJ

What do the years 1971, 2003 and 2010 have in common? In each year, low U.S. interest rates and the expectation of dollar depreciation led to massive "hot" money outflows from the U.S. and world-wide inflation. And in all three cases, foreign central banks intervened heavily to buy dollars to prevent their currencies from appreciating.

When central banks issue base money to buy dollars, domestic interest rates are forced down and domestic inflationary pressure is generated. Primary commodity prices go up quickly because speculators can easily bid for long positions in organized commodity futures markets when interest rates are low.

Up to the point the world is willing to accept dollars, the feds can continue printing even while maintaining low inflation and low interest rate in the US. Only when the world as a whole starts moving away from the dollar, the consequences of such action will visit the US. That is one of the reasons the US has maintained such a tight control on the petro-dollar trade. You will see how that gives them a free pass to continue printing.

2. OPEC trading in dollars: Help me understand how this works in favor of the US. First, is it correct to assume that when OPEC is trading in USD, it means that it will *sell* (not just quote the price, but sell) the oil only to those who pay in USD ? So if Saudi Arabia wants to sell oil to a country, say, Hogmania; Hogmania would have to pay Saudi Arabia in US dollars? Assuming this is correct, how does this help the US? The Hogmanians would need a stockpile of USD to pay Saudi Arabs for their oil, and the only way Hogmanians can do this is to sell something to USA, either directly or indirectly. Not sure how this helps the US but I can imagine that if the Hogmanians are really in need of USD, they'll be willing to sell their product at cheap prices to US to get a stockpile of USD. Plus any country that wants to buy oil would absolutely need to trade with the US (directly or indirectly). This is a bare-bones description but is this basically correct, or is there another level to this?

With the oil trade tightly coupled to the dollar, anyone who desires oil will have to fork out dollars. You will need to generate dollars and stockpile dollars. So rest of the world is dependent on the dollar for this vital commodity and as a consequence it has become central to world trade. Up to this point we simply see it as a medium of exchange.

Now let us understand its far reaching political and economic consequences. If you want to buy or sell oil you will do so in dollars. For such vast sums of dollar trade, you will at some level, interface with an US controlled entity (Bank, etc). If you ever run foul to the US interests, they have the perfect lever to choke you. See the case of Iran.

Now let us say you are Iran and you cannot trade in USD. What are the other options available to you have? Perhaps use Iranian currency but who is going to accept that? Perhaps use the counter-party currency but will the Iranians, in normal course of business, accept Indian Rupee (Perhaps if the the trade between the entities is balanced and nets out to zero at the end of the year, period or cycle). What then are the other options for the country? Iran was trading Oil for gold with Turkey but if the recent reports to be believed that option too is finished. See how the petro-dollar helps the US hegemony and the US will just about do anything to maintain it.

Politics is only a means to an end, the end is economic hegemony. Even the British occupation of India was primarily about free or cheap resources. The moment the rest of the world accept the primacy of the dollar in trade, the US can print and spend any amount of money to better its populace and further its geopolitical and economic goals. The rest of us will finance such extravagance and absorb the consequences. Low inflation and low interest in US, High inflation and high interest for the rest of the world. The petro-dollar gives the US an almost (Some day it will come back to haunt) free ride at our cost. Btw, we are not only financing the outsized American Homes but NASA, the pentagon, all their weapons research, etc.

A couple of other notes on the petro-dollar maya jaal
1. There were talks of a BRICS bank or something of that sort. Not that it will work out, but why are BRICS nation even thinking of such a setup?
2. Imagine you are holding 2T dollar reserves in dollar and the US keeps printing money. What will happen to the real value of your holdings?
3. Note the initial euphoria in a certain country about having the US by their tails in 2008-09. Not long ago, I believe I read a report where there were lot of concerns in this particular country about the impending QE3 and all the initial chest thumping amongst its elites has given way to concern. Why?
4. All this from memory, I haven't really followed the news for much of last year.

Added later : A little cleanup above and additional food for thought below

If it is still not apparent, ask yourselves, were it not for the petro-dollar settelement system, would the sanctions on Iran work? It would work as much as Indian sanction on Pakistan. In our case, just by denying us access to the petro-dollar settlement system, the US will have us by the b@lls. Nothing more is required to wreck our economy, no sanction, no invasion, no war just deny access to the settlement system. The petro-dollar gives them a stranglehold on the world economy. It is their tool for Economic dominance nay terrorism.

[anmol]

Wal-Mart Executives Sweat Slow February Start in E-Mails
By Renee Dudley
February 15, 2013 4:51 PM EST



Wal-Mart Stores Inc. had the worst sales start to a month in seven years as payroll-tax increases hit shoppers already battling a slow economy, according to internal e-mails obtained by Bloomberg News.

“In case you haven’t seen a sales report these days, February MTD sales are a total disaster,” Jerry Murray, Wal- Mart’s vice president of finance and logistics, said in a Feb. 12 e-mail to other executives, referring to month-to-date sales. “The worst start to a month I have seen in my ~7 years with the company.”

Wal-Mart and discounters such as Family Dollar Stores Inc. are bracing for a rise in the payroll tax to take a bigger bite from the paychecks of shoppers already dealing with elevated unemployment. The world’s largest retailer’s struggles come after executives expected a strong start to February because of the Super Bowl, milder weather and paycheck cycles, according to the minutes of a Feb. 1 officers meeting Bloomberg obtained.

Murray’s comments about February sales follow disappointing results from January, a month that Cameron Geiger, senior vice president of Wal-Mart U.S. Replenishment, said he was relieved to see end, according to a separate internal e-mail obtained by Bloomberg News.

“Have you ever had one of those weeks where your best- prepared plans weren’t good enough to accomplish everything you set out to do?” Geiger asked in a Feb. 1 e-mail to executives. “Well, we just had one of those weeks here at Walmart U.S. Where are all the customers? And where’s their money?”

Wal-Mart fell 2.1 percent to $69.30 at the close in New York for the biggest decline since Dec. 12. The shares rose 14 percent in the 12 months through yesterday, compared with an 8.5 percent gain for the Dow Jones Industrial Average.

“As with any organization, we often see internal communications that are not entirely accurate, that lack the proper context and represent individual opinions,” David Tovar, a Wal-Mart spokesman, said in an interview, adding that the company will report fourth-quarter earnings on Feb. 21. Wal- Mart’s fourth quarter ends in January.

Murray declined to comment and Geiger didn’t return telephone and e-mail messages seeking comment.

Both executives attributed the performance to increased payroll taxes and delayed tax returns, which Geiger called “a potent one-two punch,” according to the e-mails.

About $19.7 billion more in tax refunds had been delivered to shoppers by this time last year, according to an analysis prepared by Wal-Mart’s Global Customer Insights & Analytics division that was attached to Murray’s e-mail on Feb. 12. The retailer expected returns to be delayed by three to four weeks because of the late release of tax forms and additional, federally mandated tax-fraud scrutiny.

When a payroll-tax break expired Dec. 31, Americans began paying 2 percentage points more in Social Security taxes on their first $113,700 in wages. For a person making $40,000 a year, that is about $15 a week.

The extra tax bite is about equal to a year of car insurance for a family making $30,000 or a basket of groceries per month for a family making $50,000, according to Wal-Mart’s analysis.

Other retailers who court low-income Americans also are bracing for the rising taxes.

Higher payroll taxes “go against our customers’ wallet,” Family Dollar Chief Executive Officer Howard Levine said on a Jan. 3 conference call. “Clearly, they do not have as much for discretionary purchases than they did.”

Wal-Mart’s Geiger in his e-mail urged employees to improve business by “fixing something that could really make a difference to our performance.” He quoted Tim Yatsko, the company’s executive vice president of global sourcing, saying: “We need to ‘stop the stupid.’”

Wal-Mart U.S. CEO Bill Simon said during a Feb. 1 officers meeting, the minutes of which were attached to Geiger’s e-mail, that the troubled economy leaves little room for internal errors.

“In an environment like this, we can’t afford to hurt ourselves,” Simon said, according to the minutes. “Self- inflicted wounds are our biggest risk and our toughest enemy.”

Simon cited negative economic growth, declining consumer confidence and rising unemployment as challenges facing the company. The U.S. economy shrank at a 0.1 percent annual rate in the fourth quarter, and the unemployment rate rose 0.1 percentage point to 7.9 percent in January. The Conference Board’s measure of consumer confidence declined last month to the lowest since November 2011.

Even with a slow January, Wal-Mart is gaining market share steadily, Simon said.

“That points to our competitive landscape, which means everyone is suffering and probably worse than we are,” Simon said, according to the minutes.

The company must focus on process and execution, he said.

“We have to fight against the tougher economic environment to earn a bigger share of a smaller consumer spending pie,” Simon said, according to the minutes.

To contact the reporter on this story: Renee Dudley in New York at [email protected]

To contact the editor responsible for this story: Robin Ajello at [email protected]

[pankajs]

Follow up on my previous post - Why Iran's current tussle with the US is important for the World

Some commentators have pegged this confrontation between Iran and US as having huge significance for American especially and the world as a whole. And no the context is not the Iranian nuclear program or the Sunni-Shia or the Arab-Persian or the Iranian-Israeli tussle. They are talking about Iran's desire to move away from dollar denominated oil payment and the US bid to foil such a plan. The current tussle between US and the Iran is about oil payment and all the other reasons are covers.

If Iran is able to bypass and survive the US financial system choke-hold, it will have enormous repercussions for the global financial system as a whole and the petro-dollar and America in particular. If the Iranians are able to break the stranglehold of the dollar on oil trading, it will herald the demise of the petro-dollar that has been the foundation of US dominance of the global trading/financial system. It will prove to others that the US built and controlled financial system can be bypassed and will tempt others at the very least diversify, may even tempt some to opt out of this system. (The BRICS bank initiative is one such effort to build a parallel trade settlement system, though it may not work out because of internal contradictions).

It will deprive the dollar of much of its power and transform it into just another normal currency with enormous consequences for the US. The day this happens the US will start showing the after effects of the massive currency infusion and debt. Inflation and interest rates will start rising in acknowledgement of this fact.

Some people have speculated that the process of change to the global financial system has started irrevocably and Iran's case is just an outward sign of the ongoing process. From here on it will only accelerate irrespective of what happens between the Iranians and the US. They point to the statements and actions of some of the large oil exporters (Russia & Venezuela) and importers (China, India and some others in Asia).

[SriKumar]

That does not mean we cannot have payments in individual currencies. Provided that full capital convertibility was there, we could trade in Yen, euros or other currencies. But most of the countries, including India, do not have full capital convertibility.

thanks for the input. About oil trade, I had heard that it was in USD but it was never clear to me why that would prevent some specific countries from using other means of payment (local currency or barter) if they absolutely need it. However, your explanations of the convenience arising from using one currency for oil trade is clear.

The earlier comment (by RoyG) was that the world oil trade had somehow helped US stave off heavy inflation potentially arising from QE1/2 etc.- the mechanism for that was not clear to me. Perhaps the US inflation was actually mitigated by 'exporting inflation to the world', and if so, the big question is, is it all done or is there more to come (need to understand the mechanism for this in the US or outside).

[SriKumar]

.... They point to the statements and actions of some of the large oil exporters (Russia & Venezuela) and importers (China, India and some others in Asia).

appreciate the detailed response. The link to WSJ article requires a subscription (moola), but atleast I can follow up on the idea how QE1/2-based inflation helped keep local inflation low. The economic and regulatory consequences of doing oil trade in USD.....yes, I think there is awareness about that. Without doubt, the entity that controls the creation of USD will have control over the trade and beyond that.

[Christopher Sidor]

Wal-Mart Executives Sweat Slow February Start in E-Mails
By Renee Dudley
February 15, 2013 4:51 PM EST
....
....
“We have to fight against the tougher economic environment to earn a bigger share of a smaller consumer spending pie,” Simon said, according to the minutes.

Are the exporting countries paying attention? It is possible that this might be a blip, a small decrease before the north Atlantic economies are completely repaired and growing back excess of 2%. This is also one more sign to the people in US Congress about the impact of austerity. In abnormal times when the consumers and private sector are not spending or trying to repair their balance sheets then it is the government/public sector which has to pick up the slack. This was true in Japan after the 1990s crash and it is true now.

China on the other hand has avoided a hard landing by allowing construction to pick up the slack. This is not the accepted view but the view of some specific individuals

China Misses ‘Hard Landing’ as Government Spends, Li Daokui Says ---- Bloomberg Dated 17-Feb-2013

From the above mentioned article, Li Daokui, an economist at Tsinghua University who was an adviser to the People’s Bank of China from 2010 to 2012, said the following

“A hard landing has been already avoided. I’ve been talking about this for the past two years -- maybe two and a half years -- that is the growth rate will slow down a little bit and then pick up.”
China’s gross domestic product grew by 7.9 percent in the final three months of the year, halting a seven-quarter deceleration. Growth was fueled by government efforts that drove a rebound in industrial output, retail sales and the housing market.

[arnab]

The real hyper inflation will come when trillions of dollar bond holders like China and Japan start dumping US bonds. When will that happen? That will happen when bond market starts crashing. At that point these countries will realize that the assets they are holding are losing value of the order 20% or more (i.e. of the order of $200+ billions). At that point they would prefer to sell those bonds and US will buy that using freshly printed dollar. This will flood the market with dollars which was earlier sucked out using treasury bonds. Realizing that these dollars are just papers, these countries will try to buy assets using those dollar. So you will have both rapid increase in money supply and price rise. Peter Schiff calls this inflation that US exported to the world coming back home.

By printing dollars, they created a bond bubble and nobody felt like dumping them now.

You still have time to buy gold.

Just curious - why will this happen? As in why will bond markets start crashing? And why will the large players like Japan and China precipitate this crash by dumping bonds, which will drive their bond prices even lower?
Second - I can't understand why this will cause hyperinflation? If one is 'dumping' (selling) bonds - one is presumably drying up liquidity - shouldn't that reduce the quantity of money slushing around and thereby reducing inflation?

So apart from the inflation/hyperinflation which never happenned (albeit being predicted here since 2008), what we see is that some states are practicing fiscal irreponsibility (US, India printing money) and some states practicing austerity (EU, UK etc) - So what else is new?

Finally - does this gold buying advice mean to suggest that gold will become the 'reserve currency' of the future (for all trading etc)? If not, I would like to understand the mechanism - how will the quantity of physical gold reconcile with the volume of trade that is going on in the world today?

Added later: I like that comment about people realising that USD is 'just paper' What if people also realise that gold is..well...'just gold'? In the end it is all about a belief system isn't it? And gold failed a long time back to meet the requirements of modern economies.

[svinayak]

Magic of Gold!

[ramana]

pankajs,

before 1965 the Gulf Rupee issued by RBI was the legal tender in Gulf countries:

http://en.wikipedia.org/wiki/Gulf_rupee

And something simialr to what you were saying about petro-dollar:

http://en.wikipedia.org/wiki/Iranian_oil_bourse#Opening

....
January 2012: India has held talks in Tehran to discuss alternate payment methods in the wake of US sanctions against Iranian oil exports, these are thought to include using Gold or Yen to continue purchasing oil. Mr Reddy, India’s Oil Minister, told reporters: “We will scrupulously adhere to the sanctions imposed by the UN. No less, no more. We will continue to explore various options of payment to Iran. As of now, supplies are on and Iran has been very positive and we are still optimistic.” India annually imports $12bn of crude oil from Iran[42]

March 20, 2012: The Iranian oil bourse will no longer trade oil in the dollar but start trading oil in other currencies like the euro, yen, yuan, rupee or a basket of currencies.[43]

....

[akashganga]

https://www.youtube.com/watch?v=odgRzGDN5gY
Ron Paul On Fox News ~ We're Seeing A Shift From A Financial Crisis To A Currency Crisis

[Prem]

No End In Sight For Global Currency Wars

On January 16th, Russia's central banker Alexei Ulyukayev issued a stern warning that was expected to set the stage for a nasty confrontation between the Emerging bloc of Brazil, China, Korea and Russia, and the world's largest debtor nations, Japan and the United States. "The world is on the brink of a fresh "currency war." We're on a threshold of very serious and confrontational actions," Ulyukayev warned. "Japan is weakening the yen and other countries may follow. If Japan continues to pursue a very protectionist monetary policy through a sharp depreciation of the yen, reciprocal devaluations would hurt the global economy. Other colleagues from respected central banks and governments already pursue this policy. This is not a path towards global coordination but rather a separation," Ulyukayev said.
Guido Mantega, Brazil's finance minister, quickly chimed in, warning that the Federal Reserve's "protectionist" gambit to roll out more quantitative easing (QE) would reignite "currency wars" with drastic consequences for the rest of the world. "It has to be understood that there are consequences. The Fed's QE-program ($85-billion per month of money printing) will "only have a marginal benefit in the US as there is already no lack of liquidity. And that liquidity is not going into production. Furthermore, Japan's decision to expand its own QE, coming on the heels of the Fed's decision (to expand QE to $85-billion per month), is evidence of growing global tensions. That's a currency war," he declared.

http://seekingalpha.com/article/1204581 ... rency-wars

[ramana]

So under MMS, India is out of BRIC and South Korea is in?

[svinayak]

India is not a player in global currency market

[TSJones]

The real hyper inflation will come when trillions of dollar bond holders like China and Japan start dumping US bonds. When will that happen? That will happen when bond market starts crashing. At that point these countries will realize that the assets they are holding are losing value of the order 20% or more (i.e. of the order of $200+ billions). At that point they would prefer to sell those bonds and US will buy that using freshly printed dollar. This will flood the market with dollars which was earlier sucked out using treasury bonds. Realizing that these dollars are just papers, these countries will try to buy assets using those dollar. So you will have both rapid increase in money supply and price rise. Peter Schiff calls this inflation that US exported to the world coming back home.

By printing dollars, they created a bond bubble and nobody felt like dumping them now.

You still have time to buy gold.

Just curious - why will this happen? As in why will bond markets start crashing? And why will the large players like Japan and China precipitate this crash by dumping bonds, which will drive their bond prices even lower?
Second - I can't understand why this will cause hyperinflation? If one is 'dumping' (selling) bonds - one is presumably drying up liquidity - shouldn't that reduce the quantity of money slushing around and thereby reducing inflation?

So apart from the inflation/hyperinflation which never happenned (albeit being predicted here since 2008), what we see is that some states are practicing fiscal irreponsibility (US, India printing money) and some states practicing austerity (EU, UK etc) - So what else is new?

Finally - does this gold buying advice mean to suggest that gold will become the 'reserve currency' of the future (for all trading etc)? If not, I would like to understand the mechanism - how will the quantity of physical gold reconcile with the volume of trade that is going on in the world today?

Added later: I like that comment about people realising that USD is 'just paper' What if people also realise that gold is..well...'just gold'? In the end it is all about a belief system isn't it? And gold failed a long time back to meet the requirements of modern economies.

If the US government sequestration occurs there will be a reduction in the issuance of US treasury bonds. Of course the sequestration is a lot of hot air and won't happen ....but... there is talk of meaningfull cuts in the US budget. If they can merely come up with another 1.2 trillion(?) in cuts over the next 10 years they will have reduced the debt from 99% of the GDP to 70% of the GDP if the US can maintain a 1 to 2 percent growth per year for the next 10 years. Unlike the sequestration, that is doable. So hedge funs are are dropping gold out of their portfolios. Why. because the US dollar will be able to buy more gold per ounce. IOWs, gold will become cheaper for the US dollar. US T bonds will become scarcer relative to the size of the US economy. Will any of this work? Who knows? But its better than complete austerity the way the Euros did it.

If sequestration hits March 1 as threatened there will be a number of sorry, sorry politicians. Demand will be fall and the US economy (and the world eventually) will see more deflation. But it won't happen...........will it?

[SaiK]

naah! they will settle it.. just like the fiscal cliff.

[pankajs]

India is not a player in global currency market

Does not matter. In response to the QE and the Japanese devaluation, you either allow your currency to rise vs the dollar/Yen and hurt your export prospects or you print extra rupee to sterilize the extra dollar/Yen flowing in and fuel inflation at home.

So what impacts Russian and Brazil also impacts India wrt the US and the Japanese action. Russian statement may indicate the countries that are trying to coordinate their response. India's omission for that list of countries may point to our position not being in sync with the Russians on the currency question.

[pankajs]

A fuller account of what is happening on the currency front.
World economies divided on Japan yen devaluation

Finance ministers and central bankers were flying to Moscow for the first big meeting of Russia’s annual turn as G20 chair amid disarray among advanced economies over how to address the policies of Japan’s new government which have driven the yen down.

The G7 issued a joint statement on Tuesday reaffirming a “longstanding commitment to market-determined exchange rates,” but the show of unity was quickly undermined by off-the-record briefings critical of Tokyo.

Russia said that the emerging market economies that make up the rest of the G20 — who together account for 90 percent of the world economy — will back the G7’s core message. However, the final text may diverge.

“The language may differ [from the G7], but the intent will remain the same,” Russian Finance Minister Anton Siluanov told reporters before the talks yesterday and today.

Addressing the attempt by Japan’s new government to reflate its economy, which has cause the yen to weaken, Siluanov said: “There should be competition between economies, not currencies.”

When the G20 last met in November last year, its statement contained a call to “refrain from competitive devaluation of currencies” that was not referenced by the G7 this week in what Tokyo took to mean its policies had won a free pass.

Seeking to break out of two decades of deflation and stagnation, Japanese Prime Minister Shinzo Abe has embarked on a huge round of fiscal and monetary expansion aimed at raising the inflation rate to 2 percent.

The yen has fallen by around 20 percent since November last year, triggering a major rally in Japanese stocks that, the government hopes, will kick-start growth by encouraging savers to consume and companies to invest.

With the US, Britain and the eurozone all running ultra-loose monetary policies, some emerging market exporters have sounded the alarm over “currency wars” that they say will devalue their foreign reserves and hit their competitiveness.

However, not all: Mexico’s central bank Governor Austin Carstens said that, while he backed the G7’s commitment to market driven exchange rates, it was also important to refrain from rash rhetoric.

“If we enter into a real currency war what will end up happening is adding a lot of volatility to markets, pushing up risk premiums and no one would end up winning,” Carstens said in Mexico City. “It ends up generating net costs for all countries and not net gains.”

Russian officials have been careful to note that Japan has not intervened on currency markets to weaken the yen, suggesting that Tokyo would not come under major pressure in Moscow.

Before flying to Moscow, Bank of Japan (BOJ) Governor Masaaki Shirakawa defended his central bank’s aggressive monetary expansion, saying it was aimed at reviving the economy not at weakening the yen.

His comments came after data showed Japan’s economy unexpectedly contracted in the fourth quarter, failing to escape a mild recession, bolstering the government’s demand for more radical stimulus measures that could cause the currency to weaken further.

Shirakawa said he would make that point clear to his G20 counterparts at this weekend’s meeting in Russia, where Japan may face heat from some countries unhappy with the yen’s recent steep falls, such as export competitor South Korea.

“The BOJ is conducting monetary policy to achieve stability in Japan’s economy. It will continue to do so,” he told a Tokyo news conference before departing for Moscow.

[pankajs]

And something simialr to what you were saying about petro-dollar:

http://en.wikipedia.org/wiki/Iranian_oil_bourse#Opening

....
January 2012: India has held talks in Tehran to discuss alternate payment methods in the wake of US sanctions against Iranian oil exports, these are thought to include using Gold or Yen to continue purchasing oil. Mr Reddy, India’s Oil Minister, told reporters: “We will scrupulously adhere to the sanctions imposed by the UN. No less, no more. We will continue to explore various options of payment to Iran. As of now, supplies are on and Iran has been very positive and we are still optimistic.” India annually imports $12bn of crude oil from Iran[42]

March 20, 2012: The Iranian oil bourse will no longer trade oil in the dollar but start trading oil in other currencies like the euro, yen, yuan, rupee or a basket of currencies.[43]

....

Here is the latest on this
Indian pays for Iran oil in rupees, Turkey route halted: sources

India is now paying Iran only in rupees for its oil after it lost another payment route in euros due to tougher sanctions from February 6, sources at local refiners said, leaving Tehran struggling to use the tightly-restricted Indian currency.

The rupee is only partly convertible, limiting its international acceptability, although Iran can use the currency to buy non-sanctioned goods and services from India.

Turkey's Halkbank had been handling payments for Iranian oil in euros from India since July 2011 after other conduits were choked by earlier sanctions, but the latest U.S. measures effectively prevent this, bankers said.

India is Iran's second-biggest client after China but, the world's fourth-largest oil importer India has been reducing imports and so secured a waiver from earlier sanctions that would have impeded its access to global banking networks.

India had been paying through Halkbank for about 45 percent of its massive Iranian oil bill since April 2012 with the rest in rupees. The two nations had been trying to find goods for Iran to buy from India, to smooth a huge trade imbalance.

[RoyG]

^^^ thanks to both for the responses. Couple of follow-up questions, if you will indulge:
1. How would money-printing postpone the shock? Introducing huge quantities of money (700 billion USD in QE1 and another similar amount in QE2) should cause inflation would it not? But this did not happen. So, perhaps most of this money was used only to bring the balances in the accounting books of insurance companies (e.g AIG) in the black, and never entered circulation? And therefore the inflation was limited?

2. OPEC trading in dollars: Help me understand how this works in favor of the US. First, is it correct to assume that when OPEC is trading in USD, it means that it will *sell* (not just quote the price, but sell) the oil only to those who pay in USD ? So if Saudi Arabia wants to sell oil to a country, say, Hogmania; Hogmania would have to pay Saudi Arabia in US dollars? Assuming this is correct, how does this help the US? The Hogmanians would need a stockpile of USD to pay Saudi Arabs for their oil, and the only way Hogmanians can do this is to sell something to USA, either directly or indirectly. Not sure how this helps the US but I can imagine that if the Hogmanians are really in need of USD, they'll be willing to sell their product at cheap prices to US to get a stockpile of USD. Plus any country that wants to buy oil would absolutely need to trade with the US (directly or indirectly). This is a bare-bones description but is this basically correct, or is there another level to this?

Money printing postpones the shock by temporarily increasing spending. Think of it this way. A cocaine user continues to shoot up and get a mind-blowing high. Initially he has a lot of energy, can have sex for hours, etc. However, over time he needs more coke to get the same high. His health starts to deteriorate, he begins to take out loans, lethargic, loses his house, etc and gradually cant achieve the same high either anymore. In other words, the foundations of a long, happy, and prosperous life come from sustainable growth and hard work. Economies that rely on injections of money for long term growth never succeed because heavy consumption and the stock market are just illusions. Had it been as easy as injecting money into the economy to avert the economic crisis, the problem would've been solved long ago and empires and civilizations all around the world wouldn't have collapsed. We are in a period where deflation and inflation are occurring at the same time. Deflation is primarily confined to the housing market because over supply and lack of demand while, oil, food, gold, etc which are critical for long term savings and staying alive are going through inflation. Just look at any historical price chart for valued commodities.

The only two places you can go to trade oil are at NYC NYMEX and London IPE. What you have said is entirely logical and forms the foundation of dollar hegemony along with military supremacy. If you corner the worlds largest hydrocarbon reserves and force others to trade in your currency they will have to engage in competitive devaluation in order to export to the US and buildup a dollar reserve to buy the oil. Then the Saudis with a chunk of their dollar holdings purchase US government securities which essentially creates a souped up credit card for the US. This is how they've been able to keep their spending and deficits so high. Unfortunately, for the US they're accumulating debt faster than the cycle can handle and BRIC are gradually unhooking themselves from the dollar by trading in their own currencies. They have already agreed to setup a BRIC bank and Iran and Russia trading oil in non US dollar currencies are serving as a catalyst for the declining dollar trade.

[pankajs]

UK, China central banks to discuss currency swap line

(Reuters) - The Bank of England said on Friday it would discuss setting up a reciprocal three-year yuan-sterling swap line with the People's Bank of China to finance bilateral trade and investment.

The latest step builds on the BoE's statement last month that it was ready "in principle" to adopt a currency swap line with its Chinese counterpart, as the yuan or the renminbi starts to emerge as a world reserve currency.

The BoE said on Friday the arrangement would be used to finance trade and direct investment between the two countries and to support domestic financial stability if needed.

This would be the latest in a string of bilateral currency agreements that China has signed in the past three years to promote use of the yuan in trade and investment.

Britain, always anxious to bolster London's status as Europe's biggest financial centre, launched an offshore yuan currency and bond market to great fanfare last year, and a swap deal would cement its role as the leading centre in the Group of Seven industrialized nations for offshore yuan trade.

Perhaps this should also go into the geopolitical thread for it is indicative of emerging world order.

[shyam]

One person from Morgan Stanley and another from Deutsche Bank simulated monetary policy, and two interesting graphs are shown below.

America's Tragic Future In One Parabolic Chart





What would bond holders do when they see it really happening?

[shyam]

Just curious - why will this happen? As in why will bond markets start crashing? And why will the large players like Japan and China precipitate this crash by dumping bonds, which will drive their bond prices even lower?

Simple reason, every bubble eventually crashes badly, and the people holding those bubble assets will dump them.

So apart from the inflation/hyperinflation which never happenned (albeit being predicted here since 2008), what we see is that some states are practicing fiscal irreponsibility (US, India printing money) and some states practicing austerity (EU, UK etc) - So what else is new?

Through bond bubble, they just delayed the eventual crisis.

how will the quantity of physical gold reconcile with the volume of trade that is going on in the world today?

Either global trade will see a massive decline or gold price will go through the roof, or a combination of both. If the former happens, everybody in the world will suffer. If the latter happens, we will see a rare phenomena in which many of the rich societies suddenly becoming poor and the so called poor societies suddenly becoming rich, because they never trusted their government printing money and kept physical gold in whatever quantity they could.

Added later: I like that comment about people realising that USD is 'just paper' What if people also realise that gold is..well...'just gold'? In the end it is all about a belief system isn't it? And gold failed a long time back to meet the requirements of modern economies.

Gold was the money for last 5000 years. Paper money is just a recent phenomenon, which became a global standard due to colonialism, arguing that it is backed by gold. By removing that backing they signed its death warrant.

[arnab]

Simple reason, every bubble eventually crashes badly, and the people holding those bubble assets will dump them.

Sorry you have to convince me that this is a bubble. In fact the depression of the 1930s tell us the exact opposite. The fact that the govt. did not step in prolonged the crisis and drove the 'malcontents' in Germany to the Nazis and the rest as they say is history.

Through bond bubble, they just delayed the eventual crisis.

Yes but when will the bubble turn into bust is the question isn't it? and how deep will the bust be? That is the 65 million $ question isn't it? That the economy is cyclical (what goes up must come down) is just like predicting that a traffic signal will turn from red to green eventually, isn't it?

Either global trade will see a massive decline or gold price will go through the roof, or a combination of both. If the former happens, everybody in the world will suffer. If the latter happens, we will see a rare phenomena in which many of the rich societies suddenly becoming poor and the so called poor societies suddenly becoming rich, because they never trusted their government printing money and kept physical gold in whatever quantity they could.

Why? the way I see it gold is 'valuable' only in the sense that you can convert it to paper money to buy the goods you want. gold on its own has very little value. It is not really fungible and presumably we are not moving into a barter economy any time soon.

Gold was the money for last 5000 years. Paper money is just a recent phenomenon, which became a global standard due to colonialism, arguing that it is backed by gold. By removing that backing they signed its death warrant.

The fact that gold was money in the last 5000 years means nothing. Ever since the modern nation state was created, they tried initially to peg it to gold - as recently as during the bretton woods system after WW2 (post colonial period) and then of course the US found that they just couldn't back their dollar with gold - because the explosion in trade along with USD becoming a global currency meant that the US couldn't be the money printer of the world and also accumulate gold at the same pace to back the USD. Which was why they broke the gold-$ link in 1971 (because every currency manipulator worth its salt was betting against the USD).

[pentaiah]

Feds are monetizing the debt by proxy now but they will do it more openly very soon.
Since its unipolar ( at least currency wise) world what is the world going to do about it?
It's also unique that sole power also happens to be the largest consumer of products and services
Not much choice but continue to devalue relatively which means the third world and countries that export commodities will suffer inflation and shortages ( if free market exist) as goods will go to higher bidder the sole super power as globalization is happening at even faster rate by day the impact can already be seen in agricultural product prices

......

Likewise, there is a distinction between monetizing debt and what the government is doing now-buying government paper. In the 60's and 70's the Fed increased the money supply to help finance the Vietnam War and to pay for the "Great Society" programs of Lyndon Johnson. The money created went directly into spending. Spending increased in both the defense sector and as welfare given directly to the poor. The money was then immediately spent on goods and services which led to an inflationary spiral that took inflation from about 2% to over 14% at its peak. All prices rose, including wages.


That is not the case today. Inflation has been tame and no one mentions the terrible deflation in housing prices when they speak of the inflation the Fed is creating. The Fed is increasing the money supply, but in contrast to the 60's and 70's, this money has gone directly into bank reserves instead of consumer's pockets. Hence no additional spending has occurred. The objective is to recapitalize the banks and keep them solvent, not recapitalize individuals.

Credit expansion is almost frozen as a result. Very little money is being lent out or given away by the Fed. That's why money has not found its way into the broad economy. It is locked up in banks. We have a potential inflationary threat but the Fed can take that money back at least as quickly as they provided it. And they have promised to do just that if needed.

This is the shell game

[Austin]

Sliding pound: British currency loses 67% of its value over last 30 years

While the British pound slides on the currency markets in reaction to a downgrade of the UK's triple-A credit rating, examination of its purchasing power shows it has had an even more dramatic decline over the last three decades.

A survey by Lloyds TSB Private Banking shows that over the past 30 years the British pound’s value has fallen by almost two thirds.

In other words one would need £299 today to have the equivalent spending power of £100 in 1982.

According to Lloyds TSB Private Banking, the decline by a further 56 per cent over the next 30 years is inevitable if retail prices continue to rise at the current pace.

The pound tracking against a basket of currencies has reached its lowest level since July 2010 on Monday reaching $1.5069 against the dollar; this follows the Moody’s downgrade of the UK's cherished triple-A credit rating to AA+. It also dropped to a three-year low against the dollar last week. Later on Monday the British currency showed signs of recovery going up to $1.5144.

“People in the UK are feeling progressively poorer,” Mike Ingram market analyst of the BGC brokers told RT.

“The real wages in the UK are back to where they were in 2003. That’s a decade without any increase in prosperity effectively wiped out,” he said.

[anmol]

[pankajs]

Going South

How about this for irony: Remember the solid, strong economies of Northern Europe, the ones that signed up for one bailout after another of their less well-off brethren to the south? Remember how, together with the guiding hand of the European Central Bank (ECB), they pulled the eurozone back from the brink of disaster? Not so fast. Now it's their turn to feel economic pressure, meaning they could soon risk going from being part of the solution to being part of the problem. That should be of interest to markets around the world.

This is exactly what's happening in Europe today. And it speaks to a phenomenon captured brilliantly decades ago by John Maynard Keynes, the famous British economist, who observed: "If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has."

Although you might not know it from reading the newspapers, the situation in Europe remains worryingly fragile. Yes, financial markets have been calmed substantially by the "whatever-it-takes" commitment of the ECB. But underlying economic conditions continue to deteriorate at a worrisome pace. Every month Europe's stronger economies are getting pulled deeper and deeper into a crisis they neither can control nor have fully explained to their citizens.

In the coming months, Germany and others will feel forced yet again to make additional loans -- this time knowing that they will not be repaid in full. They will see their economies disrupted by a more generalized slowdown in the European trading bloc. And when these events inevitably collide, the underpinnings of the current regional economic integration, including the effectiveness and credibility of the European Union itself, will again be at risk.

But there was another less visible yet much more important factor at play too: the lack of political courage to call a spade a spade. And it's still creating problems today.

From day one, eurozone officials have refused -- at least publicly -- to make the call central to any proper resolution of a systemic debt crisis: differentiating between a liquidity problem (where debtors need emergency funding to help them overcome a contained short-term issue) and a solvency one (where a fundamental economic and financial restructuring is needed).

In public, eurozone officials reiterate increasingly inconsistent twin mantras: 1) that Greece will achieve growth and debt sustainability, and 2) that this will occur without official creditors suffering principal losses on the loans they have made to the country. I suspect, however, that they would privately acknowledge that at least the latter, if not also the former, is unlikely.

The argument for continuing the charade is threefold. First it's PR, which buys time for some of the system to heal. Second, there's real concern that negativity could bring about harmful contagion. Third, there's simply no single national or regional leader willing to make the really tough decisions -- even collectively, they're unable to do so.

Meanwhile, things in Greece will get worse, meaning the country will sink deeper into its dependency on the rest of Europe. As the burden of future debt reduction continues to shift from the private sector to European taxpayers, the financial virus risks spreading even more as indecisive signals from eurozone officials add to the confusion regarding debt sustainability in other peripheral economies -- most importantly, Italy and Spain. And of course, the longer all this persists, the greater the economic and financial headwinds facing the stronger economies.

Success does not mean abandoning countries like Greece to manage their challenges alone. It does, however, mean that the stronger eurozone partners must ditch the muddled middle for one of two bold decisions: Either let the Greek economy out of the eurozone so that it has the ability to reset itself more quickly, or act boldly to remove Greece's debt overhang by agreeing to deep debt forgiveness on official loans and then to a large package of new grants.

There is no easy solution for the struggling European countries. Yet the longer political leaders shy away from the tough decisions, the greater the chance that there will be a lot more of them. And soon.