The one point I wish to make emphatically is that only under a fiat currency trade system can these large deficits and surpluses be created, in the same manner as the debt bubbles, and asset bubbles.
This is not a new idea, of the natural balance that hard currencies present in a global trading system. But it has been forgotten, put aside in recent years. My friend Hugo Salinas-Price has written a nice presentation of those ideas in his essay Gold Standard: Protector and Generator of Jobs.
I have written on the topic many times, most recent in The Great Flaw In Free Trade Theory and other Vain Beliefs, Hoaxes, and Follies.
Under a hard currency or asset system of trade, as one country draws down its stock of gold, for example, its gold-backed currency would automatically become devalued since there would be less gold underpinning it.
Conversely, as a country built up a trade surplus, over time so much gold would flow to that country so that its currency would appreciate relative to the currencies of the debtor nations.
These changes in valuation would tend to 'balance' the trade flows naturally, and unilateral mercantilism would fail long before it threatened the stability of the international monetary system. That is not to say that exploitative trade might not exist, such as under the British Empire. These took more of a form of colonialism, a kind of mercantilism among master and vassals. But any trade imbalances between developed nations with their own currencies could only grow large with great difficulty.
A fiat currency regime allows huge imbalances not only to exist, but to grow to dangerous and unsustainable levels that threaten the very system itself.
Some of today's problems are indeed because the US is acting as the 'deficit of last resort' because it owns the world's reserve currency. This is known as Triffin's dilemma.
My thoughts about Triffin's Dilemma and the international trade structure I was operating within during the 1990's, and especially after Bill Clinton allowed China to obtain free trade status after a large currency devaluation and without a floating currency stipulation, was that ultimately the world would be plunged into a currency war that would likely either lead to a unified financial order, possibly a triumvirate of sphere's of influence, or the failure of the dollar and a radical restructuring of the global financial power structure.
So far we seem to be on track....
Here is Michael Hudson's talk on Debt and Restructuring from April 13, 2012
He served on the CFTC with Brooksley Born in the late 1990's. This is how I first became aware of his opinions about regulatory matters.
I had hoped he, among some notable others, might have found a place in the Obama Administration if it had been truly interested in financial reform. And we all know how that went, and how it still goes today....
Since July 2001, Michael Greenberger has been a professor at the University of Maryland School of Law, where he teaches a course entitled "Futures, Options and Derivatives."
Professor Greenberger serves as the Technical Advisor to the United Nations Commission of Experts of the President of the UN General Assembly on Reforms of the International Monetary and Financial System. He has recently been named to the International Energy Forum’s Independent Expert Group that provided recommendations for reducing energy price volatility to the IEF’s 12th Ministerial Meeting in March 2010.
Professor Greenberger was a partner for more than 20 years in the Washington, D.C. law firm of Shea & Gardner, where he served as lead litigation counsel before courts of law nationwide, including the United
States Supreme Court.
In 1997, Professor Greenberger left private practice to become the Director of the Division of Trading and Markets at the Commodity Futures Trading Commission (CFTC) where he served under CFTC Chairperson Brooksley Born. In that capacity, he was responsible for supervising exchange traded futures and derivatives.
He also served on the Steering Committee of the President's Working Group on Financial Markets, and as a member of the International Organization of Securities Commissions' Hedge Fund Task Force. After service at the CFTC, Professor Greenberger served as Counselor to the United States Attorney General in 1999, and then became the Justice Department's Principal Deputy Associate Attorney General....Saving Capitalism From the Capitalists: Are the Trading Desks Destroying the Futures Markets?Dan Norcini is my friend, one of the more savvy people I know in the markets. He has made his living as an off-exchange trader for many years. The concerns he has about he viability of the markets is genuine, and of great importance.
People forget the reasons why some markets exist, what their function in support of the real economy is fundamentally all about.
The responsibility for this distortion of the markets, and their taxing effects on the real economy, are the responsibility of the Congress and the regulators. Unfortunately they have been bought by unenlightened, short term self-interest in a variety of ways. And the same people who bought them have sold the public a bill of goods, and appealed to the worst of their emotions to keep them from thinking.
And the public bears some responsibility in this for their long standing willingness to see themselves and their fellows duped, abused, and ill-used for the sake of some outlandishly misguided idealism or a craven selfishness.
There is nothing new or unique in this. As long as there have been markets there have been those who would tip the scales, cheat and defraud, buy the judges, and take what belongs to others, often hiding their misdeeds under sanctimonious camouflage like slogans about freedom and the flag.
The difference is that this time it is not our fathers and grandfathers and great grandfathers that stand the watch on the wall, but ourselves. And our children and grandchildren will live with the results of our faithfulness or folly.
This deterioration in the quality of the markets is another nail in the coffin for the efficient markets hypothesis, and the power of deregulation to free the natural goodness of traders and bankers in its full flower.
Order in society is the result of hard work, sacrifice, integrity and a never ending devotion to the principles of justice. On the other hand, the natural outcome of unbridled greed and fear is crime, injustice, and anarchy.
Algorithms Gone Wild - AGAIN, and AGAIN, and AGAIN
By Dan Norcini
April 13, 2012
What more is left to say at this point other than the fact that the hedge fund computers and their damnable algorithms have destroyed the integrity of the US futures markets. The sheer size, extent, ferocity and volatility of the moves that these pestilential computers are creating have rendered these markets basically useless for what they originally came into being for, namely, risk management for commercial entities.
Price swings of this magnitude are blowing up hedged positions put on by commercials and other end users/merchants/processors, etc. While margins are reduced for legitimate hedgers, they still must meet any and all margin calls on any hedged position, whether that is a long position or a short position. Some will say that all they need to do is to buy or sell the corresponding physical commodity and while simultaneously lifting the hedge. That might work fine on paper but in the real world it is a fabrication.
A cattle feedlot, a grain elevator owner/operator, a cocoa processor, a cotton mill, etc, may or may not have the actual product ready to sell as it is still maturing or growing in the field or may not be ready yet to actually buy the product but they might have hedges in place while they are waiting. So much for their hedges in this sort of idiotically insane trading environment. Their hedges are getting blasted to kingdom come but they must maintain the thing if it moves against them meaning that they need cash to meet any and all margin calls.
At some point, the cost of doing so, with hedge fund running prices all over the damn planet on a daily basis, is no longer feasible.
I am predicting here and now that unless something is done to corral these hedge funds, the futures market is going to become useless as a risk management tool for non-speculative entities...
Read the rest here.
With gasoline prices staying stubbornly high, the number of hybrid and electric cars manufactured is soaring skyward. Toyota Motors (TM) is far and away the biggest beneficiary as the world’s largest manufacturer of hybrid cars with its Prius family that now extends to five models. Nissan Motors (NSANY) is expected to complete construction of a Tennessee plant that will produce 150,000 all-electric Leafs a year in 2014.
Beyond these obvious beneficiaries it gets a little more complicated. I found this interesting table from the QVM Group that listed the impact that electric cars, which will soon be produced at one million units a year, will have on the supply and demand for raw materials. Here are my comments:
Aluminum (AA): Lighter cars need more aluminum for bodies
Coal (KOL): Greater electricity needs increase demand from this cheapest of sources.
Copper (CU): Big increase in demand for copper wire from electric motors and the grid.
Corn (CORN): Kiss the pork barrel ethanol program goodbye. Demand falls.
Natural Gas (UNG): Some 100% of new power generation facilities are gas fueled.
Lead: Older technology batteries still use lots of lead.
Lithium (SQM): You can’t lose. If electric car demand doesn’t kick in, then fertilizer demand will.
Nickel: The same batteries use nickel
Oil (USO): Some analysts think gasoline demand could drop by 50% by 2020 because of electric cars, mileage improvements in conventional cars, and the discovery of huge new fields in the US with fracking technology.
Platinum (PPLT): Demand falls from fewer catalytic converters, but this will be offset by growing monetary demand for the white metal.
Uranium (NLR) : More power demand means more nukes everywhere.
Zinc: Battery demand again......