Wednesday, June 17, 2009

Regulatory reform and the NWO...

Regulatory reform and the NWO...

United States Treasury Secretary Tim Geithner and National Economic Council Director Larry Summers jointly wrote an op-ed piece in the Washington Post on Monday, June 15, to lay out the policy goal of the Barack Obama administration's regulatory reform plan to be announced two days later....

The essay describes the current financial crisis as "the product of basic failures in financial supervision and regulation", by pointing out that "our framework for financial regulation is riddled with gaps, weaknesses and jurisdictional overlaps, and suffers from an outdated conception of financial risk. In recent years, the pace of innovation in the financial sector has outstripped the pace of regulatory modernization, leaving entire markets and market participants largely unregulated."

Yet the administration's regulatory reform plan is generally viewed
as having backed away, due to the political difficulties involved, from a more extensive structural overhaul that would have consolidated all banking regulation into one unified agency.

The op-ed essay identifies "five key problems in our existing regulatory regime - problems that, we believe, played a direct role in producing or magnifying the current crisis".
The essay states: "First, existing regulation focuses on the safety and soundness of individual institutions but not the stability of the system as a whole. As a result, institutions were not required to maintain sufficient capital or liquidity to keep them safe in times of system-wide stress. In a world in which the troubles of a few large firms can put the entire system at risk, that approach is insufficient. The administration's proposal will address that problem by raising capital and liquidity requirements for all institutions, with more stringent requirements for the largest and most interconnected firms. In addition, all large, interconnected firms whose failure could threaten the stability of the system will be subject to consolidated supervision by the Federal Reserve, and we will establish a council of regulators with broader coordinating responsibility across the financial system."

Yet, capital adequacy for large financial firms, while important, will not by itself eliminate systemic risk since systemic meltdown can be caused by massive counterparty defaults on the part of large number of small firms and investors holding structured financed instruments that are off the balance sheets of the big firms to cause insolvency of the big firms.

The problem is that even small firms are now "too big to fail" because of opaque interconnectedness that can cause the system to fail not at its big nodes but at its weakest points throughout the system. The administration's two top economists do not see fit to blame run-away "innovation", only the failure of regulation to keep pace with it. That is like blaming bank guards for bank robbers.

The essay states: "Second, the structure of the financial system has shifted, with dramatic growth in financial activity outside the traditional banking system, such as in the market for asset-backed securities. In theory, securitization should serve to reduce credit risk by spreading it more widely. But by breaking the direct link between borrowers and lenders, securitization led to an erosion of lending standards, resulting in a market failure that fed the housing boom and deepened the housing bust. The administration's plan will impose robust reporting requirements on the issuers of asset-backed securities; reduce investors' and regulators' reliance on credit-rating agencies; and, perhaps most significant, require the originator, sponsor or broker of a securitization to retain a financial interest in its performance. The plan also calls for harmonizing the regulation of futures and securities, and for more robust safeguards of payment and settlement systems and strong oversight of 'over the counter' derivatives. All derivatives contracts will be subject to regulation, all derivatives dealers subject to supervision, and regulators will be empowered to enforce rules against manipulation and abuse."

The non-banking financial system is essentially an anti-banking system in that it allows securitization to convert debt into security; that is, credit into capital. It is an insurgent war against capitalism itself. Pension funds are allowed to invest in debt instruments as if they were security instruments. Such instruments are in reality stripped of security, with returns commensurate with risk levels. The word security is derived from the Ancient Greek se-cura and literally translates to "without fear". Structural finance actually promotes fearlessness that no regulation can negate.

The essay states: "Third, our current regulatory regime does not offer adequate protections to consumers and investors. Weak consumer protections against subprime mortgage lending bear significant responsibility for the financial crisis. The crisis, in turn, revealed the inadequacy of consumer protections across a wide range of financial products - from credit cards to annuities. Building on the recent measures taken to fight predatory lending and unfair practices in the credit card industry, the administration will offer a stronger framework for consumer and investor protection across the board."

Improved consumer protection is certainly needed, but the best way to protect the consumer is to adopt a full-employment economy with rising wages so that workers do not have to assume unsustainable debt in order to buy the products they make.

The essay states: "Fourth, the federal government does not have the tools it needs to contain and manage financial crises. Relying on the Federal Reserve's lending authority to avert the disorderly failure of nonbank financial firms, while essential in this crisis, is not an appropriate or effective solution in the long term. To address this problem, we will establish a resolution mechanism that allows for the orderly resolution of any financial holding company whose failure might threaten the stability of the financial system. This authority will be available only in extraordinary circumstances, but it will help ensure that the government is no longer forced to choose between bailouts and financial collapse."

There is no "appropriate" government mechanism to contain and manage financial crises. The solution is to prevent recurring financial crises. A new resolution mechanism to shift private debt into public debt does little to prevent recurring financial crises. In fact, it may well make such crises routine.

The essay states: "Fifth, and finally, we live in a globalized world, and the actions we take here at home - no matter how smart and sound - will have little effect if we fail to raise international standards along with our own. We will lead the effort to improve regulation and supervision around the world."

US promotion of neoliberal globalization of trade and finance has been the main cause of recurring global financial crises. The lack of international labor standards and wage scales has permitted US corporations to exploit cross-border wage arbitrage that has caused global wage stagnation to generate wage/price imbalance, notwithstanding the essay's misapplied claim of a saving/consumption imbalance. US opposition to international financial regulatory standard has allowed US financial firms to exploit cross-border arbitrage of risk in the name of innovation.

Neither the op-ed essay nor the administration's plan addresses the need for a federal regulatory regime for the insurance sector, which is now governed by state insurance commissions in a tradition of state rights. This issue is particularly central since under-regulated financial risk insurance practices have been a key contributor to run-away systemic risk.

The administration aims to curb excessive risk-taking through reform of structured finance and compensation practices that encourages risk taking, including "say on pay" for shareholders and regulation against abuses of risk induced by short term compensation while leaving the penalty of future loss to shareholders.

Under the Obama plan, the Federal Reserve will retain day-to-day supervision of the largest bank-holding companies, which the George W Bush administration had proposed taking away. The Fed may become the sole regulator for both banks and non-bank financial companies that reach a comparable size and complexity. The Fed is also likely to be given the final authority on bank capital requirements, including a surcharge for the systemically important financial institutions.

However, not all systemic risk powers will be concentrated in the Fed. The Obama plan will propose giving the Federal Deposit Insurance Corporation (FDIC) special resolution powers to wind down important large financial institutions. These powers will extend the capacity of FDIC to manage the orderly failure of a complex financial company, which policymakers hope will mitigate the moral hazard created by recent bail-outs.

Nonetheless, the plan places great reliance on the Fed, which is likely to be controversial in Congress, with critics charging that the Fed had failed to exert its existing regulatory powers over banks in mortgage lending.

Fed chairman Ben Bernanke believes that macroprudential powers (systemic risk powers) may allow a central bank to prevent credit and asset price bubbles not easily addressed with interest rates. But other Fed officials are apprehensive that the central bank is setting itself up for predictable failure, and that the exercise of macroprudential powers will entangle the Fed in political fights that will undermine independent monetary policy-making.

Larry Summers likes to say the Obama administration inherited the financial crisis from the Bush administration, but the Obama plan for regulatory reform essentially inherits the plan of Henry Paulson, the last Treasury secretary in the Bush administration. Paulson advocated consolidation of a regulatory regime "largely knit together over the last 75 years, put into place for particular reasons at different times and in response to circumstances that may no longer exist".

The Geithner plan eliminates the Office of Thrift Supervision (OTS), which oversaw an array of collapsed large institutions such as IndyMac, Washington Mutual and AIG. The OTS is to be merged with the Office of the Comptroller of the Currency (OCC). The shotgun marriage was first proposed by Paulson.

Paulson also wanted to merge the Commodity Futures Trading Commission (CFTC) into the Securities and Exchange Commission (SEC) to ensure that derivatives, the weapons of mass financial destruction, would be properly put under financial arms control. The proposal is not in the Geithner plan, not because the Treasury did not like the idea but because the CFTC, with long historical ties to Chicago, has a powerful lobby. But the SEC will have to devolve some power to a new commission responsible for supervising consumer financial products.

Plans on securitization will force lenders to retain at least 5% of the credit risk of loans that are securitized. Asset-backed securities and the entire over-the-counter derivatives market will face new reporting rules. Large "systemically risky" institutions will have to hold more capital, and hedge funds will have to provide more data on their trading positions.

George Soros, the speculator who broke the Bank of England over its defense of the pound sterling, said in the Financial Times that a requirement for lenders selling securitized loans as securities to retain 5% exposure "is more symbolic than substantive". Yet the wider regulatory reform plan has already attracted criticism from bankers who say it will add to the cost of capital.

Republicans are preparing to fight several of the Obama proposals, with lawmakers particularly skeptical about giving more powers to the Federal Reserve, even though much of the Obama plan has been inherited from the previous Republican administration.

Monday, June 15, 2009

The Era of Cheap Oil Is Over

Every summer, the Energy Information Administration (EIA) of the US Department of Energy issues its International Energy Outlook (IEO)--a jam-packed compendium of data and analysis on the evolving world energy equation. For those with the background to interpret its key statistical findings, the release of the IEO can provide a unique opportunity to gauge important shifts in global energy trends, much as reports of routine Communist Party functions in the party journal Pravda once provided America's Kremlin watchers with insights into changes in the Soviet Union's top leadership circle.

So here's the headline for you: For the first time, the well-respected Energy Information Administration appears to be joining with those experts who have long argued that the era of cheap and plentiful oil is drawing to a close. Almost as notable, when it comes to news, the 2009 report highlights Asia's insatiable demand for energy and suggests that China is moving ever closer to the point at which it will overtake the United States as the world's number-one energy consumer. Clearly, a new era of cutthroat energy competition is upon us.

Peak Oil Becomes the New Norm

As recently as 2007, the IEO projected that the global production of conventional oil (the stuff that comes gushing out of the ground in liquid form) would reach 107.2 million barrels per day in 2030, a substantial increase from the 81.5 million barrels produced in 2006. Now, in 2009, the latest edition of the report has grimly dropped that projected 2030 figure to just 93.1 million barrels per day--in future-output terms, an eye-popping decline of 14.1 million expected barrels per day.

Even when you add in the 2009 report's projection of a larger increase than once expected in the output of unconventional fuels, you still end up with a net projected decline of 11.1 million barrels per day in the global supply of liquid fuels (when compared to the IEO's soaring 2007 projected figures). What does this decline signify--other than growing pessimism by energy experts when it comes to the international supply of petroleum liquids?

Very simply, it indicates that the usually optimistic analysts at the Department of Energy now believe global fuel supplies will simply not be able to keep pace with rising world energy demands. For years now, assorted petroleum geologists and other energy types have been warning that world oil output is approaching a maximum sustainable daily level--a peak--and will subsequently go into decline, possibly producing global economic chaos. Whatever the timing of the arrival of peak oil's actual peak, there is growing agreement that we have, at last, made it into peak-oil territory, if not yet to the moment of irreversible decline.

Until recently, Energy Information Administration officials scoffed at the notion that a peak in global oil output was imminent or that we should anticipate a contraction in the future availability of petroleum any time soon. "[We] expect conventional oil to peak closer to the middle than to the beginning of the 21st century," the 2004 IEO report stated emphatically.

Consistent with this view, the EIA reported one year later that global production would reach a staggering 122.2 million barrels per day in 2025, more than 50 percent above the 2002 level of 80.0 million barrels per day. This was about as close to an explicit rejection of peak oil that you could get from the EIA's experts.

Where Did All the Oil Go?

Now, let's turn back to the 2009 edition. In 2025, according to this new report, world liquids output, conventional and unconventional, will reach only a relatively dismal 101.1 million barrels per day. Worse yet, conventional oil output will be just 89.6 million barrels per day. In EIA terms, this is pure gloom and doom, about as deeply pessimistic when it comes to the world's future oil output capacity as you're likely to get.

The agency's experts claim, however, that this will not prove quite the challenge it might seem, because they have also revised downward their projections of future energy demand. Back in 2005, they were projecting world oil consumption in 2025 at 119.2 million barrels per day, just below anticipated output at that time. This year--and we should all theoretically breathe a deep sigh of relief--the report projects that 2025 figure at only 101.1 million barrels per day, conveniently just what the world is expected to produce at that time. If this actually proves the case, then oil prices will presumably remain within a manageable range.

In fact, however, the consumption part of this equation seems like the less reliable calculation, especially if economic growth continues at anything like its recent pace in China and India. Indeed, all evidence suggests that growth in these countries will resume its pre-crisis pace by the end of 2009 or early 2010. Under those circumstances, global oil demand will eventually outpace supply, driving up prices again and threatening recurring and potentially disastrous economic disorders--possibly on the scale of the present global economic meltdown.

To have the slightest chance of averting such disasters means seeing a sharp rise in unconventional fuel output. Such fuels include Canadian oil sands, Venezuelan extra-heavy oil, deep-offshore oil, Arctic oil, shale oil, liquids derived from coal (coal-to-liquids or CTL) and biofuels. At present, these cumulatively constitute only about 4 percent of the world's liquid fuel supply but are expected to reach nearly 13 percent by 2030. All told, according to estimates in the new IEO report, unconventional liquid production will reach an estimated 13.4 million barrels per day in 2030, up from a projected 9.7 million barrels in the 2008 edition.

But for an expansion on this scale to occur, whole new industries will have to be created to manufacture such fuels at a cost of several trillion dollars. This undertaking, in turn, is provoking a wide-ranging debate over the environmental consequences of producing such fuels.

For example, any significant increase in biofuels use--assuming such fuels were produced by chemical means rather than, as now, by cooking-- could substantially reduce emissions of carbon dioxide and other greenhouse gases, actually slowing the tempo of future climate change. On the other hand, any increase in the production of Canadian oil sands, Venezuelan extra-heavy oil, and Rocky Mountain shale oil will entail energy-intensive activities at staggering levels, sure to emit vast amounts of CO2, which might more than cancel out any gains from the biofuels.

In addition, increased biofuels production risks the diversion of vast tracts of arable land from the crucial cultivation of basic food staples to the manufacture of transportation fuel. If, as is likely, oil prices continue to rise, expect it to be ever more attractive for farmers to grow more corn and other crops for eventual conversion to transportation fuels, which means rises in food costs that could price basics out of the range of the very poor, while stretching working families to the limit. As in May and June of 2008, when food riots spread across the planet in response to high food prices--caused, in part, by the diversion of vast amounts of corn acreage to biofuel production--this could well lead to mass unrest and mass starvation.

A Heavy Energy Footprint on the Planet

The geopolitical implications of this transformation could well be striking. Among other developments, the global clout of Canada, Venezuela and Brazil--all key producers of unconventional fuels--is bound to be strengthened.

Canada is becoming increasingly important as the world's leading producer of oil sands, or bitumen--a thick, gooey, viscous material that must be dug out of the ground and treated in various energy-intensive ways before it can be converted into synthetic petroleum fuel (synfuel). According to the IEO report, oil sands production, now at 1.3 million barrels a day and barely profitable, could hit the 4.4 million barrel mark (or even, according to the most optimistic scenarios, 6.5 million barrels) by 2030.

Given the IEA's new projections, this would represent an extraordinary addition to global energy supplies just when key sources of conventional oil in places like Mexico and the North Sea are expected to suffer severe declines. The extraction of oil sands, however, could prove a pollution disaster of the first order. For one thing, remarkable infusions of old-style energy are needed to extract this new energy, huge forest tracts would have to be cleared, and vast quantities of water used for the steam necessary to dislodge the buried goo (just as the equivalent of "peak water" may be arriving).

What this means is that the accelerated production of oil sands is sure to be linked to environmental despoliation, pollution and global warming. There is considerable doubt that Canadian officials and the general public will, in the end, be willing to pay the economic and environmental price involved. In other words, whatever the IEA may project now, no one can know whether synfuels will really be available in the necessary quantities fifteen or twenty years down the road.

Venezuela has long been an important source of crude oil for the United States, generating much of the revenue used by President Hugo Chávez to sustain his social experiments at home and an ambitious anti-American political agenda abroad. In the coming years, however, its production of conventional petroleum is expected to fall, leaving the country increasingly reliant on the exploitation of large deposits of bitumen in the eastern Orinoco River basin. Just to develop these "extra-heavy oil" deposits will require significant financial and energy investments and, as with Canadian oil sands, the environmental impact could be devastating. Nevertheless, successful development of these deposits could prove an economic bonanza for Venezuela.

The big winner in these grim energy sweepstakes, however, is likely to be Brazil. Already a major producer of ethanol, it is expected to see a huge increase in unconventional oil output once its new ultra-deep fields in the "subsalt" Campos and Santos basins come on line. These are massive offshore oil deposits buried beneath thick layers of salt some 100 miles off the coast of Rio de Janeiro and several miles beneath the ocean's surface.

When the substantial technical challenges to exploiting these undersea fields are overcome, Brazil's output could soar by as much as 3 million barrels per day. By 2030, Brazil should be a major player in the world energy equation, having succeeded Venezuela as South America's leading petroleum producer.

New Powers, New Problems

The IEO report hints at other geopolitical changes occurring in the global energy landscape, especially an expected stunning increase in the share of the global energy supply consumed in Asia and a corresponding decline by the United States, Japan and other "First World" powers. In 1990, the developing nations of Asia and the Middle East accounted for only 17 percent of world energy consumption; by 2030, that number, the report suggests, should reach 41 percent, matching that of the major First World powers.

All recent editions of the report have predicted that China would eventually overtake the United States as number-one energy consumer. What's notable is how quickly the 2009 edition expects that to happen. The 2006 report had China assuming the leadership position in a 2026-2030 timeframe; in 2007, it was 2021-2024; in 2008, it was 2016-2020. This year, the EIA is projecting that China will overtake the United States between 2010 and 2014.

It's easy enough to overlook these shifting estimates, since the reports don't emphasize how they have changed from year to year. What they suggest, however, is that the United States will face ever-fiercer competition from China in the global struggle to secure adequate supplies of energy to meet national needs.

Given what we have learned about the dwindling prospects for adequate future oil supplies, we are sure to face increased geopolitical competition and strife between the two countries in those few areas that are capable of producing additional quantities of oil (and undoubtedly genuine desperation among many other countries with far less resources and power).

And much else follows: as the world's leading energy consumer, Beijing will undoubtedly play a far more critical role in setting international energy policies and prices, undercutting the pivotal role long played by Washington. It is not hard to imagine, then, that major oil producers in the Middle East and Africa will see it as in their interest to deepen political and economic ties with China at the expense of the United States. China can also be expected to maintain close ties with oil providers like Iran and Sudan, no matter how this clashes with American foreign policy objectives.

At first glance, the International Energy Outlook for 2009 hardly looks different from previous editions: a tedious compendium of tables and text on global energy trends. Looked at another way, however, it trumpets the headlines of the future--and their news is not comforting.

The global energy equation is changing rapidly, and with it is likely to come great power competition, economic peril, rising starvation, growing unrest, environmental disaster and shrinking energy supplies, no matter what steps are taken. No doubt the 2010 edition of the report and those that follow will reveal far more, but the new trends in energy on the planet are already increasingly evident--and unsettling.....

“History is littered with wars which everyone knew would never happen.”
Why is Iran seen as a threat to the USA? Wouldn't facilitating peace in the Middle East be a better way of making USA safe than ratcheting up conflict and taking sides with Israel all the time?

US Joint Forces Command's Joint Operating Environment 2010

refer to page 29....



Joint Forces Command is a useless organization that was given the job of writing crap like this by Rumsfeld. because he liked an admiral who was then commander there. the main purpose of the command seem to be to hand out consulting contracts to unemployed retired general officers and beltway bandit consulting companies. Having consulted there several times I know all about it. This paper has no effect on the government at all. I doubt if very many people have ever read it. think of it as science fiction written for a big fee. Now, if this were a National Intelligence Estimate (NIE) that would be a different matter but it is not....

Here's the link to the German study

Google number of oil futures versus actual oil on American soil, when that collapses hope there is something in the

German report information:

I know peak oil is a huge concern , and there's no doubt we'll eventually run out, but don't stake too much on this. And remember the whole concept was created by Royal Dutch Shell in the 1950s as a marketing scheme to shift both public and private funds towards their then recently acquired uranium interests so they could profit off of the nuclear industry....

Saturday, June 13, 2009

Washington Sleeps for creeps.... As Oil Prices Stir

Washington Sleeps As Oil Prices Stir...

Energy: Will oil hit $250 a barrel? The Russians think so, as crude prices climb to an eight-month high. Meantime, House Republicans advance a plan to help the administration keep a domestic energy promise....

The cost of July deliveries of crude bounced over $73 Thursday as the American Petroleum Institute reported shrinking U.S. inventories as the dollar weakens against the euro.

Alexei Miller, chairman of the Russian energy giant Gazprom, is repeating his prediction of a year ago that oil may eventually reach the $250 mark. That may be wishful thinking on his part, seeing how the Russian economy and military are dependent on oil revenues.

But one thing is certain — a recovering global economy is going to need ever more energy, and it can't wait for switch grass. A wobbly U.S. economy overburdened by current and future debt is likely to face ever-rising energy prices.

House Republicans hope to lower those prices and make a change in our listless domestic energy policy with the American Energy Act. The measure provides incentives for increased oil and gas production on public and private lands and authorizes drilling in a tiny portion of the frozen tundra of the Arctic National Wildlife Refuge.

Rather than planting trees in a Third World backwater, the plan's "carbon offsets" involve building 100 new nuclear power plants over the next 20 years.

With 31 announced reactor applications already in the pipeline, this is a doable goal. It will lower domestic energy prices and clean the air more effectively than an administration cap-and-tax plan that would cause electricity prices to "necessarily skyrocket."

Reprocessing of spent fuel rods, already done by France and other countries, makes nuclear power a renewable resource, one that emits no greenhouse gases. The administration gives nuclear energy lip service while stopping a storage depository for these rods in Yucca Mountain, Nev.

The House GOP is actually trying to help President Obama keep a promise. "In the short term," he said in April, "as we transition to renewable energy we can and should increase our domestic production of oil . . . We still need more oil, and we still need more gas." The House GOP wants to help him do just that.

But in a classic case of the doubletalk we've all become familiar with, the administration is moving in exactly the opposite direction. Its cap-and-trade plan punishes those who produce and use domestic energy. It has proposed eliminating all tax incentives to produce oil and gas, and has slapped a 13% excise tax on all energy coming from the Gulf of Mexico.

Interior Secretary Ken Salazar has canceled 77 oil and gas leases that were assigned to Utah. He stopped plans to lease oil shale rights in five Western states estimated to hold between 1 trillion and 2 trillion (with a "t") barrels of recoverable oil. The Obama administration has decided not to issue leases for gas well drilling on the Roan Plateau in Colorado.

Exploration in the Chukchi Sea off Alaska has been impeded by such developments as the listing of the yellow-billed loon as an endangered species.

Science magazine reports that the U.S. Geological Survey now finds it holds more than anyone thought — 1.6 trillion cubic feet of undiscovered gas, or 30% of the world's supply and 83 billion barrels of undiscovered oil, 4% of the global conventional resources.

We are being denied this by a bunch of loons.

"It's a very nonsensical position we're in right now," Alaska Gov. Sarah Palin told IBD in an interview. "(We) ask the Saudis to ramp up production of crude oil so that hungry markets in America can be fed, (and) your sister state in Alaska has those resources."

The really sad part is that in a nation starved for energy and jobs, we continue to keep our heads in the sand and our energy in the ground....

Mulling Over Why Oil Prices Have More Than Doubled

We return to the matter of oil prices, the questions being: Why have they more than doubled over the last four months; and are they headed still higher in the short term?

Oil today closed above $70 a barrel for the first time in seven months. As a memory-jogger, they were at $33 just in February. But unlike the last explosion in prices -- to $147 a barrel 11 months ago -- no one seems to be ruling out a role on the part of speculation.

Indeed, as the Wall Street Journal’s Ben Casselman has noted, there appears to be a broad consensus that billions of dollars in speculative money has settled in oil, thus driving up the price. The reason is that traders and investors are buying crude, among other commodities like copper, as protection because they don’t want to hold dollars whose value has been weak and volatile.

There is much said about “fundamentals.” That is, more than 2.6 billion barrels of oil is in storage around the world – including some 130 million barrels just on ships that are trolling global waters until prices go up -- and demand shows no sign of recovering. This thinking goes that the speculators have canceled out these fundamental truths.

But, isn’t it possible that the collapse in oil prices to $32 was in itself an overshoot, and that oil is at a truer balance in the $60- to $70-a-barrel range?

That seems as rational a view as any I have heard. Yet, at Alaron Energy, Phil Flynn attributes much of the price runup to Ben Bernanke over at the Federal Reserve. Flynn, normally among the clearest communicators among observers of the market, has been resorting to economic gobbledy gook for weeks about an obscure economic practice called quantitative easing.

we are talking simply about the Fed buying federal assets like treasury bonds. By taking the Fed’s money, the sellers of these assets now have oodles of cash burning a hole in their collective pockets, Flynn argues. And what are they doing with it? Among other things, according to Flynn, buying oil.

John Authers at the Financial Times argues – probably rightly -- that the Fed may keep its current policy in place for some time. But Flynn says that the futures market suggests that the Fed may move quicker than some expect.

Of course, the longer-term trend is clear. Oil prices seem likely to spike again sooner or later because oil companies have halted so many exploration and drilling projects that, when the global economy recovers, there is probably going to be an oil shortage. And we all know what happens in oil shortages....

Don't leave it to the bank executives who will naturally take care of themselves first, maybe the country later.

Obama rejected that option. He was most reluctant to nationalize banks or to assert full control of those zombies that government has had to keep on life support. His political logic was obvious--maintain the appearance of temporary interventions to assist private enterprise and avoid any accusations of left-wing activism. The right called him a socialist anyway.

What are the odds Obama will win his bet? Not so hot right now, despite frequent pep talks from his economic advisers. If you think back to where this crisis began last year and what the authorities described then as their emergency response, big pieces are still missing in action.

Bush's treasury secretary, Hank Paulson, stampeded the Democratic Congress into providing $750 billion to soak up the rotten assets burdening the balance sheets of the largest banks. That plan was not pursued. The rotten assets are still largely there.

Obama's treasury secretary, Timothy Geithner, came up with an alternative approach--a complicated Monopoly game in which government would underwrite private investors to buy up the bad financial paper. That didn't happen either. The bankers let it be known they would not sell the stuff--not at discounted prices, not if it meant admitting the depths of their true losses.

Meanwhile, the government has also ducked the explosive question of derivatives--the casino-like "credit default swaps" that were very, very profitable for banks like JP Morgan Chase but became the time bomb threatening to blow up the entire system. The time bomb is still ticking. The bankers don't want give up that lucrative business. The Obama officials have not yet found the nerve to go against the bankers' desires....because the Siamese twins CIA/MOSSAD still rule the day and have much different agendas.... for the world..... together with the FED.....

Finally, there is the real economy where most Americans dwell. Obama's team is counting on a recovery in the second half of this year and his advisors keep predicting it with increasing confidence. The president is betting on that too. If his optimism is not confirmed by events, his problems multiply. The stock-market restoration celebrated by the bankers will begin to look like another financial bubble, driven by false hopes. Banking problems will worsen and they will he back for still more bailouts. And President Obama will have to take a second look at his happy assumptions. He might start by replacing some of the cheerleaders....

Is Deflation the real enemy...?

Is Deflation the real enemy...then why is OIL spiking up fast again?

The Republicans are convinced that hyperinflation is just around the corner, but don’t bet on it. The real enemy is deflation, which is why Fed chief Bernanke has taken such extraordinary steps to pump liquidity into the system.

The economy is flat on its back and hemorrhaging a half a million jobs per month. The housing market is crashing, retail sales are in a funk, manufacturing is down, exports are falling, and consumers have started saving for the first time in decades. There’s excess capacity everywhere and aggregate demand has dropped off a cliff. If it wasn’t for the Fed’s monetary stimulus and myriad lending facilities, the economy would be stretched out on a marble slab right now. So, where’s the inflation?

Here’s Paul Krugman with part of the answer: “It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger . . .

“Is there a risk that we’ll have inflation after the economy recovers? That’s the claim of those who look at projections that federal debt may rise to more than 100 percent of G.D.P. and say that America will eventually have to inflate away that debt - that is, drive up prices so that the real value of the debt is reduced . . . Such things have happened in the past . . .

“Some economists have argued for moderate inflation as a deliberate policy, as a way to encourage lending and reduce private debt burdens (but) . . . there’s no sign it’s getting traction with U.S. policy makers now.” (“The Big Inflation Scare” Paul Krugman New York Times)

Krugman believes that conservatives have conjured up the inflation hobgoblin for political purposes to knock Obama’s recovery plan off-course. But even he’s mistaken, there’s little chance that inflation will flare up anytime soon because the economy is still contracting, albeit at a slower pace than before. A good chunk of the Fed’s liquidity is sitting idle in bank vaults instead of churning through the system where it could do some good. According to Econbrowser, excess bank reserves have bolted from $96.5 billion in August 2008 to $949.6 billion by April 2009. Bernanke hoped the extra reserves would help jump-start the economy, but he was wrong. The people who need credit, can’t get it, while the people who qualify, don’t want it. It’s just more proof that the slowdown is spreading.

That doesn’t mean that the dollar won’t tumble in the next year or so when the trillion dollar deficits begin to pile up. It probably will. Foreign investors have already scaled back on their dollar-based investments, and central banks are limiting themselves to short-term notes, mostly three-month Treasuries. If Bernanke steps up his quantitative easing (QE) and continues to monetize the debt, there’s a good chance that central bankers will jettison their T-Bills and head for the exits. That means that if he keeps printing money like he has been, there’s going to be a run on the dollar.

Now that the stock market is showing signs of life again, investors are moving out of risk-free Treasuries and into equities. That’s pushing up yields on long-term notes which could potentially short-circuit Bernanke’s plans for reviving the economy. Mortgage rates are set off the 10-year Treasury, which shot up to 3.90 percent by market’s close on Friday. The bottom line is that if rates keep rising, housing prices will plummet and the economy will tank. This week’s auctions will be a good test of how much interest there really is in US debt.

At some point in the next year, the dollar will lose ground and commodities will surge, causing uneven inflation. But for how long? That depends on the state of the economy. Dollar weakness and speculation can drive up the price of oil, (oil is up 100 percent in the last two and a half months, from $34. to $68.) but falling demand will eventually bring prices back to earth. Presently, there’s a bigger glut of oil sitting in tankers offshore than any time in the last 15 years. Which brings us back to the original question; how bad is the economy?

The answer is, really bad! Here’s a short blurb from economist Dean Baker in an article in the UK Guardian: “The decline in house prices since the peak in 2006 has cost homeowners close to $6 trillion in lost housing equity. In 2009 alone, falling house prices have destroyed almost $2 trillion in equity. People were spending at an incredible rate in 2004-2007 based on the wealth they had in their homes. This wealth has now vanished.

“Housing is weak and falling, consumption is weak and falling, new orders for capital goods in April, the main measure for investment demand, is down 35.6 percent from its year ago level. And, state and local governments across the country, led by California, are laying off workers and cutting back services.

“If there is evidence of a recovery in this story, it is very hard to find. The more obvious story is one of a downward spiral as more layoffs and further cuts in hours continue to reduce workers’ purchasing power. Furthermore, the weakness in the labor market is putting downward pressure on wages, reducing workers’ purchasing power through a second channel.” (Dean Baker “Cheerleading the Economy,” UK Guardian)

Don’t be fooled by the cheery news in the media. The economy is hanging by a thread and recovery is still a long way off. The only way to dig out of this mess is to address the underlying problems head-on. That means removing the toxic assets from the banks, revamping the credit system, and rebuilding battered household balance sheets. If these issues aren’t resolved, the problems will drag on for years to come. And even if they are fixed, the economy is still facing a long period of deleveraging and retrenching followed by an anemic recovery. Obama’s fiscal stimulus might give the GDP a jolt in the third quarter, but without help from the government checkbook, economic activity will stay in the doldrums.

Last month, personal savings increased to nearly 6 percent while consumer credit fell by $15.7 billion, the second largest decline in debt on record. According to Brad Setser of the Council on Foreign Relations, “Total borrowing by households and firms fell from over 15 percent of GDP in late 2007 to a negative 1 percent of GDP in q4 2008.” How can these losses to the GDP be made up when private borrowing has vanished without a trace? Consumers have shut their wallets, locked their purses and are refusing to take on any more debt. Despite government efforts to restart the credit markets by backing up loans for 0 percent financing on auto sales and an $8,000 tax credit on the purchase of a new home, (which is tantamount to subprime lending) consumers are digging in their heels. All the hype about inflation hasn’t sent them racing back to the shopping malls or the auto showrooms. Consumers have reached their saturation point and they are not budging. It’s the end of an era.

The unemployment picture is getting bleaker and bleaker. Last week’s report from the Bureau of Labor Statistics concealed the real magnitude of the job losses by using the discredited “Birth-Death” model which exaggerates the number of people reentering the workforce.

Here’s what former Merrill Lynch chief economist David Rosenberg had to say about last Friday’s BLS report: “The headline nonfarm payroll figure came in above expectations at -345,000 in May -- the consensus was looking for something closer to -525,000. The markets are treating this as yet another in the line-up of ‘green shoots’ because the decline was less severe than it was in April (-504,000), March (-652,000), February (-681,000) and January (-741,000). However, let’s not forget that the fairy tale Birth-Death model from the Bureau of Labour Statistics (BLS) added 220,000 to the headline -- so adjusting for that, we would have actually seen a 565,000 headline job decline.”

The BLS figures have been denounced by every econo-blogger on the Internet. The figures are another example of the government’s determination to airbrush any unpleasant news about the recession.

Here’s a better summary of the unemployment numbers from Edward Harrison at Credit Writedowns: “The Business Birth-Death Model added 220,000 jobs to the headline seasonally-adjusted number. Without this number, we are looking at a loss of 565,000 jobs. . . . The number of jobs lost in the last 12 months increased from 5.34 million in April to 5.51 million in May. . . . Other indicators suggest that the shadow supply of discouraged workers not counted in the numbers will now return to the labor force, pushing up the unemployment number. For example, the U-6 unemployment number was a gargantuan 16.4 percent, the highest ever.”(Edward Harrison, Credit Writedowns)

Unemployment now stands at 9.4 percent (16.4 percent?) and will continue to rise whether there’s an uptick in economic activity or not. Businesses are shedding jobs at a record pace, and slashing hours at the same time. The average workweek slipped to 33.1 hours (down two hours from April) a new low. It goes without saying that unemployment is highly deflationary because jobless people have to cut out all unnecessary spending. Beyond the 500,000 layoffs per month, wages and benefits are also under pressure, making a rebound in consumer spending even less probable.

This is from Brian Pretti’s article “Place Your Wagers”: “The year over year change in the Employment Cost Index (ECI) is the lowest number in the history of the data. . . . in the absence of household credit acceleration . . . aggregate demand [will fall].

The year over year change in wages has never been this low in the records of the data . . . Wages and salaries. . . . are all in negative rate of change territory. They are ALL contracting year over year.

“Absent household balance sheet reacceleration in leverage, it sure seems a good bet forward corporate earnings are now as dependent on household wages, salaries and broader personal income as at any time in recent memory. And corporations to protect margins and nominal profits are pressuring wages and salaries downward.” (“Place Your Wagers” Brian Pretti, Financial Sense Observations)

From a workers point of view, things have never been worse. Demand is falling, employers are slashing inventory and handing out pink slips, and entire industries are being boarded up and shut down or shipped overseas.

Economists Barry Eichengreen and Kevin O’Rourke make the case that, in many respects, conditions are deteriorating faster now than they did in the 1930s. Here’s what they found:

1. World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots.’
2. World stock markets have rebounded a bit since March, and world trade has stabilized, but these are still following paths far below the ones they followed in the Great Depression.
3. The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around. (“A Tale of Two Depressions,” Barry Eichengreen and Kevin O’Rourke, VOX)

Their conclusion: “Today’s crisis is at least as bad as the Great Depression.”

Yeah, times are tough, but what happens when housing prices stabilize and the jobs market begins to pick up; won’t that put the Fed’s trillions of dollars into circulation and create Wiemar-type hyperinflation?

Many people think so, but Edward Harrison anticipates a completely different scenario. The author takes into account the psychological effects of a deep recession and shows how trauma can have a lasting effect on consumer habits, thus, minimizing the chance of inflation. It’s a persuasive thesis.

‘Here’s what he says, “Richard Koo goes further in his book “The Holy Grail of Macro Economics.’ Here, he argues that the unwind of great bubbles suffers from what he labels a ‘balance sheet recession.’ In essence, companies go from maximizing profits, as they had done in normal times, to a post-bubble concern of reducing debt. Regardless of how much priming of the pump monetary authorities do, the psychology of debt reduction will limit the effectiveness of monetary policy as a policy tool.

“In my view, the catalyst for this change of psychology is the ‘debt revulsion’ that ushers in the panic phase of an asset bubble collapse. (Charles Kindleberger highlights the various stages of a bubble and its implosion in his seminal book ‘Manias, Panics and Crashes.’ In this particular bubble, debt revulsion began post-Lehman Brothers. What we have seen, therefore, is a reduction in leverage and debt as the most leveraged players have gone to the wall. But, more than that, the household sector has gotten religion about debt reduction as the savings rate has increased dramatically since Lehman. In fact, I would argue that companies learned their lesson about debt from the aftermath of the tech bubble. It is the household sector in the U.S. (and the U.K.) which is heavily indebted. Therefore, if the psychology of a balance sheet recession does take form, it will be the household sector leading the charge.

“In sum, the psychology after a major bubble is very different than the psychology before its collapse. The post-bubble emphasis becomes debt reduction and savings, making monetary policy ineffective, not because financial institutions are unwilling lenders but because companies and individuals are unwilling borrowers. These are forces to be reckoned with for some to come.” (Edward Harrison, “Central banks will face a Scylla and Charybdis flation challenge for years” Credit Writedowns)

Seductive interest rates, lax lending standards and nonstop public relations campaigns, persuaded millions of people that they could live beyond their means by simply filling out a credit application or fudging a few numbers on a mortgage loan. These are the real victims of Wall Street’s speculative bubble-scam. For many of them, the agony of losing their home, or their job, or filing for personal bankruptcy will be felt for years to come. At the same time, the experience will keep many of them from getting in over their heads again. The same phenomenon occurred during the Great Depression. The pain of losing everything shapes behavior for a lifetime, which is why the savings rate has spiked so dramatically in the last few months. There’s been a tectonic shift in attitudes towards consumption and there’s no going back to the pre-bubble era.

If Harrison is right, our decades-long spending-spree is over and people will be looking for ways to live more modestly, pay-as-they-go and avoid red ink. This is good news for the economy’s long-term strength, but bad for short-term recovery. Deflation will persist even while savings grow and consumption comes more into line with personal income. The dollar will fall hard if Bernanke continues to load up on Treasuries, but with a few slight adjustments, he should be able to avoid a full-blown currency crisis. Thus, Zimbabwe-type hyperinflation is unlikely; the ongoing slowdown should keep inflation in check.

Friday, June 12, 2009

When the ‘magic moment’ turned to nightmare for BRAZIL...

When the ‘magic moment’ turned to nightmare....

President Lula fancied his country’s economy was ‘decoupled’ from the rest of the world’s. But when the economic crisis reached Brazil this March, it came on a tidal wave. Half a million people are now in poverty or extreme poverty

In May 2008 the US economy had begun its decline, but in Brazil things still looked fine. President Luiz Inácio Lula da Silva reckoned that his country was experiencing a “magic moment” (1): after a 5.67% rise in GDP in 2007, government morale was high. What was going on elsewhere didn’t matter; growth would continue “at its present rate for the next 15 to 20 years” (2).

By October 2008 the international financial system was collapsing. But Brazil still wasn’t worried. “Up there [in the US] the crisis is a veritable tsunami. If it arrives here it will only be a little wave, not even big enough to surf on,” the president said reassuringly in a speech on 4 October. A few months later, Luciano Coutinho, head of Brazil’s national development bank (BNDES), added: “Decoupling has, yes, taken place,” (3), alluding to the theory that the growth of countries on the periphery of the world capitalist system had become independent of the shocks felt at its centre.

Then came March 2009. When the wave did arrive, it brought a storm with it. The Bradesco bank’s estimates of GDP growth plummeted from more than 4% in June 2008 to 2.5% in December – and then to -0.3% this April. The rating agency Morgan Stanley has even predicted a 1.5% contraction in the Brazilian economy, which would be its biggest setback since 1948 (4).

In the last quarter of 2008, Brazil’s industrial output dropped by 19%. Eight hundred thousand workers lost their jobs between October and January (nearly 1% of the workforce), and that doesn’t even begin to take account of job losses in the informal economy, which employs around 40% of Brazilian workers. Half a million Brazilians have found themselves back in poverty or extreme poverty. The “magical moment” has turned into a nightmare from which Brazil will not emerge, according to its president in a speech on 6 April, until “we ask God for the crisis to disappear from Europe, the US and Japan”. More soberly, the Financial Times concluded on 11 March that Brazil’s economic results meant an end to the debate about its immunity from global contagion. The myth of decoupling was over.

None of this is surprising, though, given how much has been done in the past 15 years to increase the country’s dependence on foreign capital. One of the most significant developments has been the acceleration of foreign access to Brazil’s financial markets. This is all the more remarkable as it was made possible by sociologist-turned-president Fernando Henrique Cardoso, whose work aimed to “build a path to socialism” (5) and the former trade unionist, President Lula.

Something Marx never imagined

In the late 1960s, Cardoso, who studied at the EHESS (Ecole des hautes études en sciences sociales) in Paris, rejected the idea that a country on the periphery could develop by means of foreign capital without increasing its dependence: “The system of domination reappears as an ‘internal’ force through the social practices of local groups and classes which try to promote foreign interests” (6). Twenty years later, first as finance minister (1993-4) and then president (1995-2002), he discovered that the world had changed. He told Mais! magazine in 1996: “We have something that Marx never imagined… Capital has very quickly become internationalised and today it has become abundant. Some countries are able to derive profit from this situation. Brazil is one of them”.

Influenced by what he considered the successful economic stabilisation of Mexico and Argentina achieved through neoliberal policies, Cardoso made opening up Brazil to foreign capital the centrepiece of his own plans. The aim was no longer to promote autonomous development by substituting local production for imports. It was to facilitate imports so that they reinvigorated competition and gave a spur to productivity. Cardoso set about changing Brazil in order to woo investors. Tariff barriers came down, exchange controls were freed up and the constitution revised to enable an ambitious programme of privatisations to go through.

Imports leapt by 52.7% between the first and second half of 1994. As a result, many Brazilian businesses closed or had to go into partnership with foreign companies, which accounted for 70% of Brazilian mergers and acquisitions between 1995 and 1999. Somewhat amazed by the brazenness of this denationalisation programme, the staunchly pro-liberalisation Veja magazine observed that “the history of capitalism has rarely seen the transfer of control on such a scale in such a short period” (7).

In 2000 Rubens Ricupero, secretary general of the United Nations Conference on Trade and Development, assessed the effects of economies opening up to foreign capital: “The commercial objectives of the multinationals and the objectives of the host economies do not necessarily coincide” (8). “Not necessarily” is something of an understatement.

Under Cardoso, Brazil deindustrialised and the official unemployment rate almost doubled to reach 9%. Meanwhile headline GDP didn’t get above 1%. Opening up his country’s borders and relaxing exchange controls came at a price: Brazil’s balance of payments (value of exports minus the value of imports) fell from $10.5bn in 1994 to -$3.5bn just one year later. It had been in the black since 1980 but it was to remain in the red until 2000.

Brazil became a dependent nation since, as Cardoso himself put it, “to overcome our deficits we need a constant influx of foreign capital” (9). Efforts to attract that capital redoubled in spite of its harmful effect on the economy. And yet deficits weren’t brought under control.

Investors in Brazil are like investors everywhere: they want as significant a return on their investment as possible and they want to be able to repatriate those profits. Where foreign investment is insufficient to staunch the outflow of capital, foreign debt goes up; in Brazil’s case it rose from $150bn in 1994 to $250bn in 2002.

In a manner reminiscent of the US financier Bernie Madoff, who recently showed that the old pyramid fraud was alive and well, Brazil came up with a “Ponzi scheme”, by which yesterday’s debts are paid off today with borrowing which fuels tomorrow’s debts. The difference was that while Madoff only swindled the rich, the Brazilian government got a whole nation to cough up, in particular through stratospheric interest rates and a raft of austerity measures.

Perhaps this is unsurprising; when an economy is organised for the benefit of speculators, they tend to get preferential treatment. Brazil’s many high net-worth individuals quickly cottoned on to the fact that, with the interest rate so high, buying up debt securities was an enticing prospect. Many businesses have given up on productive investment. Development Cardoso-style became a synonym for financial development. Domestic debt rose by 900% during his presidency, while investment stagnated and became more and more dependent on foreign money, especially in the field of technology.

Cardoso was not the first to want to modernise Brazil, but he had the greatest impact. In 1998, The Economist reported approvingly that Cardoso had achieved in a little less than four years nearly as much as Margaret Thatcher had done in 12. His main opponent in Brazil, Lula da Silva, was less impressed; to him Cardoso was the “executioner of the Brazilian economy”.

Idol of investors

The election of Lula da Silva, a former “red” trade unionist, to the presidency in 2002 caused alarm. “Foreign investors had always wondered how Brazil would behave under a president from the left,” remembers Emilio Odebrecht, heir to the eponymous industrial empire. Lula had, after all, insisted during the 1998 presidential campaign (which he lost): “If it comes to paying interest or filling the stomachs of the people, I’m on the side of the people” (10). In the end though, according to Odebrecht, Silva’s election was “the best thing that could have happened to this country” (11). To the surprise of activists in his own party, once he was president, Lula soon became the idol of the investors and the financial markets.

At the time of his election, the Brazilian economy was dependent on a further loan from the IMF. As the Wall Street Journal explained on 14 August 2002, “The IMF loan is structured to induce the leftwing presidential frontrunners, Luis Inácio Lula da Silva and Ciro Gomes, to continue the conservative economic policies of the outgoing president, Fernando Henrique Cardoso.”

Was Lula already convinced that it was “impossible to govern without the support of the oligarchs” (12)? Perhaps. It’s certainly the case that he readily accepted governing on their behalf. Javier Santiso, an economist at the OECD, was delighted: “The transfer of power between Cardoso and Lula was a lesson in political elegance” (13). Those voters who had been hoping for a break with the past were doubtless less impressed by this display of refinement.

In his speeches, Lula continued to defend the idea of economic sovereignty. (What did it matter that it was precisely due to his country’s economic dependence that it was able to take such advantage of a favourable international economic situation?) If capital was pouring in, it showed Brazil was “becoming its 
own boss”.

But you can’t change a system and at the same time keep milking it. Brazilian exports grew at an average annual rate of 20% in 2003-6, temporarily resolving the balance of payments problem. But those exports were stimulated by a new wave of direct foreign investments, which went from $10bn in 2003 (about 2% of GDP) to the record level of $45bn in 2008 (or 3.5% of GDP). In other words, these exports came at the cost of even deeper penetration of the Brazilian economy by foreign capital.

You need to govern for all and not just for the poor, was Lula’s advice to his Bolivian counterpart Evo Morales on 16 January this year. It’s a recommendation he has taken to heart himself. And if the whiff of prosperity that the country has enjoyed has brought some relief for the working classes – thanks to social programmes that are mainly based on handouts – it has transformed into a veritable avalanche of opulence for the speculators.

In 2007, for example, the inflow of foreign currency linked to the export boom inflated the value of the Brazilian real by around 20% relative to the dollar, while at the same time domestic debt securities enjoyed an annual interest rate of 13%. Foreign investors (or Brazilians who had borrowed dollars abroad at relatively low interest rates) therefore benefited from a return on investment of more than 30% at the end of the year. It’s hardly surprising that internal debt reached 160bn reais in January 2009 (over $680bn) or three times the country’s currency reserves, which the president boasts of as a sign of Brazil’s economic independence. In this arena all that has been achieved is further lining the pockets of the 20,000 Brazilian families who hold 80% of debt securities. Servicing those debts eats up 30% of the federal budget. Less than 5% of that budget meanwhile goes on health and 2.5% on education.

When Lula accepted the status quo on coming to power, he also accepted its vulnerability. As Cardoso himself admitted: “If billions of dollars can enter Brazil, then they can also leave it” (14). In fact, in times of crisis, the periphery goes from a situation of dependence with regard to the centre to a state of total subjugation in view of its need of liquidity. And if currency movements can’t be depended upon to deliver in terms of development, then massive outflows can be relied on to weaken a country’s economy. Therein lies the paradox of dependence: you lose when the dollars come in and you lose again when they go out.

Balance of payments sieve

In the space of a few months, the collapse of the international financial system transformed the Brazilian balance of payments into a sieve through which money poured. Take the commercial balance: it has been declining since 2006 – the value of the real has meant that imports have been growing at a faster rate than exports – and this January it recorded its first deficit in 93 months. There’s no real sign of recovery in sight since the IMF predicts an 11% fall in world trade in 2009. In conditions such as these, it becomes more difficult for Brazil to import the equipment on which its own output depends.

Repatriation of profits and dividends abroad rose to nearly $34bn in 2008 (nearly 3% of GDP), an increase of 50% over the previous year, and of 500% compared to 2003. The current account balance also recorded its biggest deficit in 10 years in 2008: $28.3bn or 2.5% of GDP.

Today, Brazil stresses that it has international reserves of around $200bn to reassure investors worried about the risk of a balance of payments crisis. It was negative in the last quarter of 2008 for the first time since the end of 2005, but with a deficit that was seven times greater, at $21bn, or 1.85% of annual GDP. For the moment, Brazil believes it has a significant room for manoeuvre; its intervention rate was close to 11% this March. However, according to the economist Paulo Henrique Costa Mattos, current liabilities could reach $600bn (15).

With the majority of the world’s countries rushing to get themselves deeper into debt, there’s strong competition on the government bond market; rates will go up and the weight of debts will further press down on the balance of payments and on the shoulders of Brazilians.

There’s nothing new about the phenomenon of dependence. In 1969, the Chilean foreign minister Gabriel Valdés told President Nixon: “Private investment has meant and does mean for Latin America that the sums taken out of our continent are several times higher than those that are invested… In one word, we know that Latin America gives more than it receives.”

In the past, some governments (not only those on the left) defended autonomous development programmes based on import substitution. Such projects were criticised by those who thought that, as they would be run by national bourgeoisies, they were doomed to failure. For those critics there was only one course: social revolution. The sociologist Cardoso was one of them. So, too, was the unionist Lula da Silva.

If Silva had truly wanted to decouple the Brazilian economy when he came to power, he should perhaps have opted for something other than embracing his predecessor’s economic programme. By failing to do so, he exemplified the transformation of a party of the Latin American left, which the OECD economist Javier Santiso described approvingly in these terms: “Expressions such as ‘class struggle’, ‘planned economy’ and ‘strategies of import substitutions’ have been replaced by others such as ‘democratic consensus’, ‘institutional consolidation’, ‘economic deregulation’ and ‘openness to the free market’.”

And so that is Lula da Silva’s box of tricks for tackling Brazil’s current economic difficulties. The US is asked for more trade, and the Brazilians are asked to tighten their belts. And God is asked for a return to the economics of the centre.

What about the foreign investors and the creditors at home? Nothing or very little is being demanded of them. When asked recently about who bore responsibility for the present crisis, the Brazil’s president replied: “We didn’t create the problem but we are part of the solution” (16). One has to wonder....

Wednesday, June 10, 2009

Silicon Valley, Japan and US Diplomacy

PALO ALTO,, Calif. — The announcement of Silicon Valley attorney and Barack Obama fundraiser John V. Roos as U.S. ambassador- designate to Japan has sparked questions about what this appointment means for the U.S.-Japan relationship. Is the choice of a Washington outsider with no obvious Japan experience a sign of "Japan passing"?

The personal qualifications and interests of the ambassador-designate will become clearer in the coming months under the scrutiny of the press and Senate confirmation. But one can already argue that Roos' experience as a key player in the creation and growth of some of Silicon Valley's greatest companies instead may be just right for the relationship of the U.S. with an emerging New Japan.

As CEO of Wilson Sonsini Goodrich & Rosati (WSGR), Roos leads an institution that is more than just a large law firm in the San Francisco area. WSGR changed the legal services industry by establishing a new type of specialized practice, namely full service legal solutions for new high-tech companies and related industries.

Until John Arnot Wilson established the direct predecessor of WSGR in Palo Alto in 1961, entrepreneurs in what would later become Silicon Valley had little alternative but to go to San Francisco law firms whose expertise and worldview focused on large corporate clients and traditional financial institutions.

Wilson and his team developed a culture as well as a suite of legal services that was responsive to, and aligned with, the needs of high-tech entrepreneurs and venture investors. In 1969, they even took the pioneering step of creating an investment company to manage the stock options that some startup clients were using instead of cash to pay their legal fees.

With a history that includes assisting in the formation of the first Silicon Valley venture capital firms and seeing companies like Apple Computer and Google through initial public offerings, WSGR has played a direct role in shaping the Silicon Valley of the present.

Roos came to WSGR in 1985 as part of an aggressive expansion of the firm from 32 lawyers in 1981 to 97 lawyers in 1986. Promoted to partner in 1988, he became a player in the subsequent exponential growth both of the firm and of Silicon Valley. WSGR now includes around 600 attorneys, and its client base numbers over 300 public and 3,000 private companies. Moreover, Roos, who became CEO in 2005, achieved his professional success during a time of major seismic shifts in the Silicon Valley business environment: several boom-and-bust economic cycles, the emergence of new technology paradigms, and intense globalization.

According to the "2008 Index of Silicon Valley," a language other than English is now spoken in 48 percent of the homes of Silicon Valley, more than double the U.S. national average.

His experience puts Roos at the center of a dense network of personal and business relationships with key players in every aspect of the Silicon Valley new venture ecosystem: serial entrepreneurs, venture capitalists, angel investors, top university innovators and successful venture accelerators, as well as the large firms, opinion makers, journalists and others with whom they interact.

Accordingly, Roos has direct personal insights into the full range of conditions that face the high-tech industries that have come to the forefront of business relationships between the U.S. and Japan. His work as an attorney has required him to recognize and adapt quickly to the corporate cultures and concerns of new clients on a case-by-case basis. His success, achieved in the volatile atmosphere of Silicon Valley, bodes well for his ability to grasp quickly the new patterns of institutional change that are beginning to emerge in what has been termed the New Japan.

The scale and breadth of change already under way in Japan extends to all sectors: economy, government and politics and social structure and culture itself. It has been clear for some time that Japan is in the process of making a major shift toward a more innovation-based knowledge economy.

Japanese government programs and private sector emphasis on increasing the capacity for entrepreneurship, open innovation and global integration all point to some new model of economic competitiveness for Japan. Government itself has been the object of numerous efforts at reform, and the future impact of current demographic trends (low birth rate, aging population) has become a top concern among Japanese citizens as well as policymakers.

Nevertheless, exactly which new patterns will become the stable, dominant characteristics of New Japan is still an open question. This topic is the focus of several recent and ongoing research programs in U.S. universities and research institutions, including some that are being conducted jointly with Japanese counterparts.

The U.S. Foreign Service likewise includes many professional career diplomats with a wealth of experience who have been following all aspects of the evolution of U.S.-Japan relations. Ambassadors are encouraged by the State Department to develop their own signature, country-specific programs.

For example, former U.S. Ambassador to Italy Ron Spogli launched the Partnership for Growth, a comprehensive program to grow a new venture ecosystem, which resulted in a measurable increase in new venture formation and angel and venture investing in Italy.

Any ambassador will have many resources at his disposal to deal with the full range of issues that may appear in the U.S.-Japan relationship. It is his personal experience as a driver of the Silicon Valley innovation machine under conditions of rapid, dramatic change that makes John Roos a very promising choice for ambassador to Japan at the present time....or an expansion of conflicts into South East ASIA....?

Global military expenditure in 2008 is estimated to have totaled $1,464 billion, an increase of 4% in real terms compared to 2007, and of 45% since 1999. Military expenditure comprised approximately 2.4% of global gross domestic product (GDP) in 2008, the Stockholm International Peace Research Institute (SIPRI) writes in its Yearbook 2009.

The Swedish analysts write that the driving forces behind the increase were the wars in Iraq and Afghanistan, Russia's return to the global scene, as well as the growth of China. This may be so, but it appears that growing world tensions were the root cause of these and other factors.

According to SIPRI, the United States' military expenditure was the largest in the world in 2008, $607 billion (41.5% of the world's total). Other large military spenders were China ($84.9 billion), France ($65.7 billion), Britain ($65.3 billion), and Russia ($58.6 billion).

Twenty-five years ago, the world was divided into two warring camps. But the Cold War they were waging, although it cost them much money and effort, actually had a stabilizing effect on the world. The two superpowers controlled their satellite countries, and although the global arms stockpiles were sky-high and mutual rhetoric was very harsh, the number of local conflicts taking place simultaneously was relatively stable.

The disintegration of the socialist bloc and subsequently the Soviet Union disrupted the balance, and the probability of conflicts grew dramatically. New players tried to fill the military vacuum, which resulted in new local wars, including in the former Soviet Union. The number of simultaneous conflicts grew from 25-30 in 1972-1974 to 30-35 in 1985-1986, and peaked at 45-50 in 1992-1993.

After that, their number plummeted, only to start growing again in the 21st century, when the Soviet Union's adversaries in the Cold War increased their military activity.

Many analysts believe that the conflicts in the Persian Gulf and the Balkans would have been unimaginable when the Soviet Union was strong, because its influence alone could prevent Iraq's invasion of Kuwait and the subsequent U.S. Operation Desert Storm to liberate it, and also the interference of foreign powers in the internal Yugoslav conflict.

By the end of the 1990s, NATO and above all the United States unambiguously demonstrated their intention to use military force to solve domestic and global problems. After the terrorist attack against the United States on September 11, 2001, Washington ordered the invasion of Afghanistan and Iraq to liquidate terrorist organizations and lower the terrorist threat. However, these goals have not been attained to this day.

The civil wars in Iraq and Afghanistan were provoked by foreign interference, which local people view as occupation. As a result, more and more innocent civilians are dying in terrorist attacks there and in other countries.

The growing threat of military conflicts has encouraged many countries to increase spending on the acquisition of modern weapons and training of their armed forces. The trend has spread worldwide, from Southeast Asia to Latin America.

Another factor spurring military expenditure is the growing prices of weapons and military equipment. This explains why military expenses are growing although the number of military systems each particular country has is decreasing. A modern fighter plane now costs $30-$100 million compared to $8-$10 million 25-30 years ago, even though the dollar has become considerably weaker.

The Untied States, although it spends over $600 billion on its armed forces, has to gradually cut the number of the main types of armaments, from aircraft carriers to armored personnel carriers. The same is true of other countries, including Russia.

The number of weapon systems is decreasing, but the world is not becoming a safer place....

Tuesday, June 9, 2009

China desperate to diversify and hedge against US Dollars holdings

China desperate to diversify and hedge against US Dollars holdings

China's fraught relations with the International Monetary Fund are driven by two conflicting agendas - the country's effort to gain unimpeded access to resources in the developing world on bilateral terms, and its interest in using the IMF's facilities as a international organization to issue Special Drawing Rights (SDR) assets to help Beijing diversify away from the US dollar.

At the same time, the West is trying to incorporate China, Brazil, Russia and India, the "BRIC" countries, into the IMF system and thereby assert the continued relevance of Western financial institutions and leadership in the midst of the worst crisis since the modern international regime was created after World War II.

There is a growing sense of urgency behind China's engagement
with the IMF as America's enormous recession-fighting budget deficit causes US bond yields to creep up.

The world is starting to share Beijing's publicized anxiety about inflation eroding the value of the dollar and is beginning to think about the unthinkable - a future in which the US dollar is gradually stripped of its historical role as the international currency and something else, maybe the SDR, replaces it.

The potential exists for an important evolution in the function of the IMF - if the Barack Obama administration can keep its eye on the ball and overcome Republican opposition.

The International Monetary Fund and the People's Republic of China do not make for an easy fit. In fact, it's hard to think of two institutions further apart in philosophy and practice than the IMF and the PRC.

In Asia, China's continued economic success during and after the Asian financial crisis of 1997-98 is an open rebuke to the monetary and exchange rate policies promoted by the IMF as the solution to the region's ills.

In the southern hemisphere, China has sold itself as anti-IMF, providing needed investment to ostracized regimes without onerous calls for reform. Now, the global financial system has experienced a major failure triggered by abuses in the developed countries that once used the IMF as their monetary and financial lawgiver to the developing world, and the BRIC countries are being called upon to help save the IMF's bacon.

China cares enough about the world financial system not to let it go down the tubes and is willing to support the IMF in its role as bailout provider of last resort to the hapless European economies like Latvia and Iceland that followed the Wall Street pied piper to financial oblivion.

At the Group of 20 summit in London this spring, China pledged to pony up US$40 billion to do its part in a joint international effort to boost the IMF's lending capacity by $500 billion. But China's engagement with this fading relic of American financial dominance is cautious, equivocal and, it appears, somewhat self-serving.

The IMF and China have been going head-to-head in the developing world. The IMF and its sister project lending organization, the World Bank, have historically demanded conformity to Western requirements for transparency, deregulation, and denationalization - structural reforms - as a precondition for financial assistance. As long as the West was able to maintain a de facto monopoly on foreign assistance this approach won the acquiescence of the targeted states - if not happy economic results.

However, when the Chinese government offered an alternative - one that took the form of a bilateral negotiations between equal sovereign states - developing nations were eager to take it.

Bush misses Africa play

The story of how the George W Bush administration took its eye off the geopolitical ball and allowed the Chinese to steal an economic and diplomatic march in Africa is now the stuff of legend. The case of Angola - where China blew an Italian bidder for an oil concession out of the water with a pre-emptive $2 billion infrastructure credit - is cited as the world's wake-up call. Now Angola has eclipsed Saudi Arabia as China's largest supplier of oil.

China's success in Africa has compelled the IMF to do a little soul searching. Case in point: the revealingly named Exogenous Shocks Facility, intended to provide rapid assistance to developing countries crushed by the collapse in the international economy through no fault of their own.

The IMF also excited a flurry of enthusiasm when it announced that it would abandon the structural reform requirements that are the hallmark of its detested and counterproductive interference in local economies. However, it turned out that the structural reform requirements have only been waived for a select group of countries already meeting the IMF criteria, so that a round of paperwork can be eliminated.

It appears that the IMF is trying to work through the crisis as an isolated anomaly, not a sea change in the structure of the international economy and a power shift away from the United States and Europe model of open-market globalization to the rise of a network of Chinese-style, managed, bilateral and multilateral trading arrangements in goods and services.

The IMF has not endeared itself to Beijing as it has championed the interests of Western creditors, the US government, and American and European mining firms to pressure the government of the Democratic Republic of the Congo to renegotiate one of China's biggest overseas resources deals - a $9 billion infrastructure project for copper and cobalt transaction.

China's ambassador to the DRC angrily characterized the IMF's stance as "blackmail". Yu Yongding of the Chinese Academy of Sciences was undoubtedly reflecting internal official attitudes to the IMF when he spoke to China Daily in the run-up to the G-20 conference: "They [developed countries and pressure groups] have already targeted our wallets but we have many reasons to object," said Yu, a formal central bank advisor. "If we do so, it will seem like the poor is rescuing the rich, wouldn't it?"

He added that China's friends in the developing world have cautioned against giving loans to the IMF. "Even if you do decide to do so, the sum should not be big," Yu quoted them as saying.

Reuters also picked up on the story, describing a white paper critical of the IMF's coddling of rich states that the Chinese government circulated prior to the summit:
[The] section on the IMF touches a raw nerve because of China's belief that the Fund spends too much time lecturing developing countries on how to run their economies.

According to this line of thought, the Washington-based fund could have tempered the present crisis by sounding the alarm earlier and louder about the economic imbalances building up in rich countries, notably the United States, whose voting share gives it the power to veto the most important IMF decisions.

"The IMF should strengthen oversight over macroeconomic policies of all parties, particularly the major reserve currency economies, and provide oversight information and improvement recommendations to its members on a regular basis ... " the paper says.
Diplomats say China has still not forgiven the fund for introducing new currency surveillance rules in June 2007, at Washington's behest, that make it easier for it to determine whether a country is keeping its exchange rate fundamentally misaligned to boost exports. Beijing objected to the rulebook, regarding it as a US ploy to enlist the fund in its campaign for a stronger yuan.

Insurmountable bias

The Chinese consensus appears to be that the IMF's pro-Western bias is institutionalized and, for the time being, insurmountable. The key advantage of the developed countries resides in the fact that important decisions require an 85% vote.

The United States holds a 17% voting share, giving it a veto. Even if the US vote share dropped below 17%, the change would be more symbolic than real unless there was also a massive shift in voting rights away from US allies in Europe and Japan to the BRIC countries and the developing world.

Not surprisingly, China is already looking beyond the IMF to a new regional grouping to provide financial support to Asian economies.

On May 29, 2009, Forbes reported:
A key breakthrough came early this month when ASEAN plus three, [the Association of Southeast Asian Nations plus China, Japan and South Korea] ... finally agreed in Bali to create a US$120 billion regional reserve fund. The deal came after China and Japan, the two largest contributors to the fund, buried their hatchets and agreed to each fork out an equal sum, or 32% of the total needed to create the fund.

If the regional reserve fund succeeds, it would represent the first regional institution in Asia that is blessed with real financial power and with teeth to enforce discipline among members. But the hard part is only beginning, with negotiations to set up a multilateral surveillance institution now under way. The success, or the lack of it, will determine how far Asia will move towards regional integration. Hadi Soesastro, senior fellow of Jakarta-based Centre for Strategic And International Studies, said the new institution wasn't designed "to replace the IMF, but to supplement it."
Given this context, it is not surprising that China's engagement with the IMF is a matter of situational advantage, not enthusiastic endorsement. Nevertheless, Beijing's pursuit of its priorities might bring revolutionary changes to the IMF.

Beijing appears most interested in exploiting the IMF's desire for increased cash and continued relevance as a means of reducing China's exposure on the inflation-threatened US dollar.

US inflation is a major concern of the Chinese government. The US budget deficit in 2009 will reach an eye-popping 12.9% of gross domestic product. The IMF (irony alert) endorses a 3% cap for states with their financial house in order.
During US Treasury Secretary Geithner's recent visit to China, Yu Yongding took him to task, as Bloomberg tells us:
The US should take China's interests into consideration "so that your own interest can be protected," Yu said. "You should not try to inflate away your debt burden." China could still diversify some of its Treasury holdings into euros or commodities, Yu added.
"Yes, some people say the euro is very weak," Yu said. "Okay, weak is good, we'll buy very cheap."
The best outcome for China would still be to negotiate with the US and reach agreement on its Treasury holdings, Yu said. "The borrower should keep their promises," he added. "The US should be a responsible country."
China is, one would imagine, guardedly hopeful that the Barack Obama administration will be able to fix the US economy, cut the deficit down to reasonable size, and get international trade (and Chinese exports) humming again.

But it also doesn't want to be under the US gun and be forced to buy Treasury bills to finance a yawning deficit simply because Beijing has no place else to put its money. So China is looking for options, and not just the euro threat that Yu wielded.

A roundtable of Chinese economists convened on the occasion of Treasury Secretary Geithner's visit this month expressed the majority view that holding US bonds was risky, and advised the careful, long-term diversification of dollar holdings into "tangible and strategic commodities," equities and bonds, and through overseas mergers and acquisitions.

In addition, China is pursuing several avenues for decreasing dollar exposure that involve utilizing and repurposing the primary supranational financial institution - the IMF. Somewhat opportunistically, China proposed that the IMF sell off 400 tons of gold in order to finance its operations. One of the main likely purchasers of that much gold would, of course, be China, which recently surpassed Switzerland as the world's fifth-largest holder of gold reserves.

Nudging IMF away from dollar

In a development of considerably more long-term significance, China is also trying to nudge the IMF into creating large-volume and liquid internationally tradable financial instruments that are not dollar-based.

China's stated interest in funding the IMF's emergency fund through a $40 billion bond purchase is bound up in the suddenly not-so-arcane issue of Special Drawing Rights. In March, the president of the People's Bank of China, Zhou Xiaochuan, proposed that the world should look at transitioning from the US dollar to the SDR as a reserve

The SDR is a little-used fiat currency that the IMF is authorized to issue. It is based on a basket of currencies: at present, the US dollar accounts for 44%, the euro 34%, the British pound 11% and the Japanese yen 11%.

Since the SDR is a universally accepted international financial instrument whose value does not rely on solely on the dollar, the Chinese are interested in it as a chance to hedge, albeit partially, against a potentially tanking dollar.

Zhou invoked John Maynard Keynes, who proposed a supranational currency at the time of the Bretton Woods conference in 1944 as the most logical, multi-polar solution to international settlement of accounts. However, Mr Zhou probably derives his enthusiasm for the SDR from philanthropist George Soros and economist Joseph Stiglitz, enthusiastic cheerleaders for the SDR, rather than from a close reading of Mr Keynes.

Both Soros and Stiglitz consider the US dollar an inappropriate currency for the international settlement of accounts because of the vast deficits the US has been running.

Foreign governments with a surplus of dollars find that the only safe haven of any size is the US Treasury market, so that the world economy is, in effect, doing business in order to subsidize US deficit spending. Shifting toward a new international currency, such as the IMF's SDR, would tie currency creation to actual terms of trade instead of to the US deficit; the US government would be forced to live within its means; developing countries would invest their SDRs in development projects instead of Treasuries; and nirvana would ensue shortly.

China's floating of the SDR issue provoked a spasm of terror on America's far-right wing, which raised the specter of a new world currency supplanting the dollar inside the United States. Among mainstream economists, the general response has been that replacement of the dollar by the SDR in international settlements is "not gonna happen".

Despite professions of bafflement and scorn from Western economists, the prospect of SDR bonds has elicited strong interest from all the BRIC countries, especially Russia - an indication that people who actually run economies rather than simply talk about them find the SDRs a potentially valuable and significant development.

Indeed, the evolving relationship between the IMF, the SDR, and China offers some interesting wrinkles. The potential creation of SDRs is connected to the "New Arrangements to Borrow" (NAB) - the initiative announced at the Group of 20 summit to increase the IMF's ability to lend by $500 billion.

The NAB is designed to be pain- and cost-free: a pre-emptive show of financial force modeled on the guarantees the US government is providing to American financial institutions, in this case demonstrating that the IMF was backed by an additional $500 billion in commitments.

The purpose is to convince the financial markets that banks and markets in target countries are backed by ample resources from the IMF and are viable, so that credit will ease and lending resume - without the IMF (or its backers) having to actually disburse the cash.

The philosophy was recently put on display in Poland, which received a $20 billion commitment - not $20 billion - from the IMF as an expression of confidence in its reasonably healthy economy and financial sector.

The proposed $100 billion contribution to the NAB proposed by President Obama at the Group of 20 meeting isn't cash either - it's a credit line, to be drawn if and when the IMF needs it. Japan has already provided a similar $100 billion facility.

Cash - not credit

Interestingly, the BRIC countries aren't interested in offering a credit line, despite the seemingly attractive possibility that it might never be called on. They want to expend hard cash to lend money to the IMF today - by buying bonds - and get some of those diversified SDRs in return.

Surprisingly, the dominant force in the IMF - the Obama administration - does not appear hostile to the SDR.

Obama's economic brain, Office of Management and Budget director Peter Orszag, is a follower of Stiglitz. There are signs that the Obama administration accepts the idea that being able to fund US deficits through creation of international fiat currency creates a moral hazard, and that China's desire to move away from the dollar is understandable and, from a macroeconomic point of view, perhaps even desirable.

Whether the NAB facility and the coveted SDRS ever materialize will be decided by running the gauntlet of the US Congress. Unfortunately, the Obama administration seems to be recapitulating, rather disastrously, its missteps on the closing of Guantanamo.

The remaining $400 billion in support is contingent on the US coming up with its $100 Billion - just as, in the case of the Guantanamo closure, Europe was going to take Uyghur detainees if the US took a few....

The White House has not been able to frame or sell the IMF credit line very effectively. Domestic consensus building has largely been limited to the release of a letter from the Bretton Woods Association - albeit with an impressive bipartisan list of signatories including Henry Kissinger, Condoleezza Rice, Paul Volker, Brent Scowcroft, Colin Powell, and Robert Rubin - urging arrangement of the credit. [1]

Instead of simply defining the $100 billion as a credit, Orszag awkwardly characterized it for budget purposes as a low-risk swap of assets whose risk, if it took place, had a 5% risk of default, that is a budgetary cost of $5 billion. [2]

In order to speed approval of the credit line, the IMF credit line was tacked on to the Supplemental Appropriation for the Iraq and Afghan wars. The Senate passed the appropriation but House Republicans have seized on the issue - as they did the case of Guantanamo prisoners - as a way to defeat Obama both domestically and in the eyes of the international community.

It looks like the NAB issue will be misleadingly painted as a $100 billion giveaway to bail out Old Europe and a profanation of the sacred cause of funneling $98 billion to deserving troops and contractors without distracting amendments.

The White House's efforts to whip the bill through the House of Representatives are complicated by liberal anti-war and anti-IMF activists' attempt to add about 40 Democratic "no votes" to the Republicans' and defeat the Supplemental.

The Obama administration will have to decide if it is worth expending its political capital to fight for the rather remote and abstract imperative of a contingency fund for the IMF. If it doesn't, the entire
refinancing of the IMF may go down the tubes.

For the purposes of China, the NAB will offer an interesting possibility if it goes ahead. If the credit was drawn down, the US would be holding IMF securities denominated in SDRs - which it could sell to China. Likewise for the Japanese $100 billion and, presumably, the other credit lines. And those proposed bonds will be denominated in SDRs also.

Half a Trillion dollars in SDR-denominated securities is not going to topple the US dollar from its throne as the world's reserve currency. But it would provide a significant haven for a chunk of China's US dollar reserves - now north of $1.5 trillion - if and when Beijing decides that it wants to decrease its exposure to the dollar.

And it would give China a compelling reason to support the survival of the IMF - and the continued creation of SDRs.....

This is a tale of two very powerful nations. One, called the world’s only Superpower, has a very aggressive foreign policy with a massive network of military installations around this planet. The other, the world’s skyrocketing economic power, has a low-key foreign policy and no real military presence except within its borders. America and China, with two distinctly different philosophies and agendas are on a collision course that will determine which of them will lead the world in the decades to follow.

China is ruled by a Communist government, but it also has a capitalistic economic system. Among major industrial nations, China has the most dynamic, fastest growing economy. Its projected growth for 2009 is 6 percent while America and the rest of the world are just trying to survive. Its military budget is minuscule, less than 10 percent of America’s. It is involved in no foreign wars. Because its economy depends a great deal on petroleum imports, it has been very active in setting up contracts and agreements for oil all around the world, including South America, with very aggressive business and diplomatic efforts.

America is a democratic republic, governed by an elected president and Congress with a capitalistic economic system. Its economy has been in a steady decline for some time as U.S. corporations have aggressively outsourced millions of manufacturing jobs. Its military budget is larger than all other major industrialized nations in the world combined. The U.S. maintains a military presence in more than 750 installations around the world and is involved in conflicts and occupation in both Iraq and Afghanistan. It imports most of its petroleum needs from foreign sources and its military is actively engaged in securing and protecting its oil interests in various parts of the world.

Yes, these are two very powerful nations whose agendas in world affairs, economic strategies, and use of military resources could hardly be more different. And, yet, these two nations are locked together in the world’s largest economic arrangement -- at least for the time being.

How did America ever get to the point where it is so dependent on Chinese manufacturing and the need to continually borrow from it to finance those purchases? How did America go from once being the premier creditor nation in the world to the premier debtor nation?

Since the 1980s, America has transformed itself from the world’s premier manufacturing juggernaut into a nation that has concentrated on outsourcing manufacturing to nations all over the world while morphing into a service economy. The long-time tenuous and adversarial relationship between unions and managements finally caused a total rupture that saw corporations put outsourcing into high gear. That enriched CEOs, increased profits and stock values, enriched investors and, thereby, initiated the demise of the American working class.

At that point, manufacturing, the cornerstone of America, began a rapidly escalating decline. This was the defining moment for an economy that relies on consumers for 70 percent of GDP. When that turn away from manufacturing and embrace of rampant outsourcing took place, it guaranteed an ongoing decline in its economy as the purchasing power of the working class Americans began to erode.

During this period, Japan was the rising economic star and began accelerating its manufacturing engine. China was not much of a real factor as a top economic player but it was beginning to show real potential power. So Japan’s presence on the American stage underwent a stage of rapid growth as it entered into US automobile and electronics markets as a major force that could provide quality products at extremely competitive prices.

How did the U.S. corporations react to this potential threat to their supremacy? They continued their process of outsourcing every type of manufacturing that they could to whatever overseas sources with cheap labor they could find. Of course, the U.S. auto industry years before had set up manufacturing plants in Europe and other nations overseas. Now they would watch as various foreign auto manufacturers, Japanese, German, and others returned the favor and set up plants in America.

So here we are, but what does the future hold? Well, China holds the trump cards and most of the aces. It patiently watches and waits as America continues to spend itself into economic oblivion with a never-ending war on so-called Islamic terrorists and the continued massive importing of products once produced in America.

China, at least for the time being, is continuing to loan us billions of dollars while watching our trade and national deficits rise to astronomical heights. Out of the nearly $2 trillion that China holds in foreign exchange reserves, about $1 trillion is in U.S. government securities. This massive transfer of wealth from the U.S. to China cannot continue unabated for it is eroding the economic foundation of our nation. What must we do?

One of the answers to this dilemma is that America simply cannot and must not allow this situation to continue to deteriorate. It must rebuild its manufacturing base and reverse the destructive outsourcing of jobs or we will never restore our economic foundation.

Robert Reich, former Labor Secretary under President Clinton and a noted economist, in a recent article indicated that we are losing routine jobs, including traditional manufacturing jobs but not to worry because they will be replaced in the future by “symbolic-analytic work” by “people who analyze, manipulate, innovate and create. These people are responsible for research and development, design and engineering or for high-level sales, marketing and advertising. They’re composers, writers and producers. They’re lawyers, journalists, doctors and management consultants.”

Well, Mr. Reich is the economist and I am not, but I don’t buy into his reasoning at all. This appears to be the same old theory, slightly repackaged, that we heard in the 1980s about how the service economy was the way of the future for America. My point is this: you can create all the symbolic-analytic jobs you want but, if we do not have a sizable portion of the American workforce performing work that takes some form of raw materials, together with labor, to create products that are purchased by Americans and exported to foreign nations, the majority of Americans will not have the purchasing power to fuel our consumer-driven economy.

We can rebuild our manufacturing base if we can change the poisoned philosophy of corporate outsourcing that has led to enormous corporate profits and the destruction of the American workforce. Mr. Obama and the Congress must enact appropriate legislation, and they most certainly have the power, that provides tax credits to corporations that do not outsource or to those that bring jobs back. Secondly, those corporations that continue to outsource must be assessed tax penalties.

In addition to returning outsourced basic manufacturing jobs to America, a great potential lies with developing a massive new green industrial sector where government stimulus dollars and private funds create new jobs to manufacture solar panels, windmills, rapid transit systems and various new energy sources to replace fossil fuels. Besides reversing the outsourcing of American jobs, there is no better way to solve our economic problems than by the aggressive promotion of programs to develop new sources of energy.

It’s time for the American people to say “enough is enough” and demand that President Obama begin the very necessary process of reversing our extremely aggressive and expensive military presence around the world that is causing a terrible hemorrhaging of our economic base. Our national debt is increasing so rapidly that it is becoming unsustainable. Our foreign wars, occupations and the maintenance of that huge complex of military installations around the world are bleeding America dry. Our government must understand that it is now time to scale back this entire military machine before it is too late and we find ourselves entering national bankruptcy. The question is how in the world do Obama and our leaders in Congress not understand that our military actions and policies are bringing America to the edge of bankruptcy?

What will happen if we do not have the wisdom and the courage to change? First of all, our debtor position with China will reach such massive proportions that China, at some point, will announce that it can no longer continue lending America the many billions of dollars as in the past; and that, in fact, it will put a moratorium on any more loans until America puts its economic and monetary systems in order. At this point, the value of the dollar would be in distinct danger and could unravel so quickly that it would no longer be used as the world’s reserve currency.

The funding for the entire military complex around the entire world would rapidly begin to dry up. The U.S. would have to close the majority of these bases. And when that happened, what in the world would we do with the thousands upon thousands of our military that, when discharged, would have no job opportunities in a failing economy?

Signs of great concern are beginning to emerge from China. A report coming out of China states that the chairman of the state-controlled China Construction Bank, Guo Shuqing, is looking into the possibility of issuing loans to Chinese import/export companies in yuan, the base Chinese currency. This would allow domestic Chinese and foreign trading companies to use the yuan to settle their debts instead of the U.S. dollar. Also, China has been switching their U.S. treasury securities from longer to shorter terms recently.

I am not saying that China wants the American economy to collapse -- not at all, for China knows that America is its cash cow, for now, and it would be happy to continue to feed at this financial trough. However, realists that they are, the Chinese clearly see that America is headed on a dangerous course that threatens to collapse its economic foundation and they may be positioning themselves for that eventuality.

Another scenario, not a pretty one, would involve foreign creditor nations, most notably China, buying up all sorts of American corporations. In fact, this scenario is already underway with Chrysler and General Motors both going into bankruptcy proceedings. Chrysler will survive, at least for a while, with Fiat of Italy owning most of the assets and managing the operations. General Motors is shedding several auto divisions, with a Chinese industrial conglomerate buying the Hummer line of GMC. This scenario may be the model for the future, as more and more U.S. corporations fail because of bad management and greed and various foreign nations, with China at the forefront, acquiring American corporate resources for pennies, nickels or dimes on the dollar.

America has now painted itself into a corner economically. There are few signs that the Obama administration and the Congress understand the urgent need to aggressively promote a rebirth of manufacturing and rapidly reduce our military presence across the planet. If they do not have the vision and the courage and cannot dedicate themselves to the best interest of the American people, then this is what will happen: China will become the preeminent economic power in the world. The American dollar will no longer have any significant effect on world commerce and will be replaced. Our vast military establishment around the world will rapidly disintegrate, as there will be no funds to further fuel its existence. At that point, America will have forfeited its position as the world’s leading economic power and as the lone Superpower.

Message to President Obama and the U.S. Congress: If ever there was a time for real change in America, that time is now!

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