Tuesday, December 13, 2011

Eurozone Leaders Rendezvous at ‘The Last Chance Saloon’?

(NEW) Fragile and Unbalanced in 2012 http://www.economonitor.com/nouriel/2011/12/15/fragile-and-unbalanced-in-2012/?utm_source=contactology&utm_medium=email&utm_campaign=EconoMonitor_Highlights%20-%20A%20Weekly%20Recap%20of%20some%20of%20the%20Best%20Pieces%20on%20EconoMonitor_10_27_111  Author: Nouriel Roubini

(NEW) http://mobile.nytimes.com/article?a=882026&single=1&f=28 Will China Break?, Paul Krugman

Author: Satyajit Das
(Note: I highly recommend Satyajit's work, especially his book; "Traders, Guns and Money" on the global derivatives toxicity; "Knowns and Unknowns In The Dazzling World of Derivatives." You can read no-one with more real world ground experience and authority in the banking and derivatives trading business. This 2006 book is even better than his newest... Also, this most recent article sums the world problems most succinctly...)

European summits – over twenty at last count – have produced little. The planned summit on 9 December 2011 may well be the last chance for Euro leaders and Euro-crats to avoid a financial disaster. Unless European leaders overcome their common sense deficit, which is proving as intractable as budget and trade deficits, this may not end well.

The last comprehensive and final plan – the fourth in the last 18 months – failed to mollify investors and markets. The crisis is now engulfing Italy, Spain and now re-infecting Ireland and Portugal. Stronger countries like France (at risk of losing its AAA credit rating) and Germany are increasingly vulnerable.

Standard & Poor’s is reviewing the ratings of a number of 15 Euro-zone countries with negative implications. This action was “prompted by … belief that systemic stresses in the Euro-zone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the Euro-zone as a whole.” The rating agency highlighted tightening credit conditions across the Euro-zone, higher funding costs for many Euro-zone sovereigns, high levels of government and household indebtedness, the rising risk of an European recession and a lack of agreement among European policy makers on tackling problems.

Critical Points…
The curious pas de deux between European banks and sovereigns has reached a critical stage. Needing to raise money and keep interest costs down, governments are pressuring banks to buy their bonds and use them as collateral to raise fund from central banks and the European Central Bank (“ECB”). At the same time, European banks exposed to the risk of large losses on holdings of sovereign bond, which would render them potentially insolvent need governments to support the banking system.

Time is running short. European Sovereigns and banks need to find Euro 1.9 trillion to re-finance maturing debt in 2012. Italy alone requires Euro 113 billion in the first quarter and around Euro 300 billion over the full year. European banks need Euro 500 billion in the first half of 2012 and Euro 275 billion in the second half. This means they need to raise Euro 230 billion per quarter in 2012 compared to Euro 132 billion per quarter in 2011. Since June 2011, European banks have been only able to raise Euro 17 billion compared to Euro 120 billion for the same period in 2010.

There has to be acknowledgment that austerity – draconian budget cuts and tax increases – to bring budget deficits and public debt under control cannot deal with the problem – the deflation of the debt-fuelled bubble. There also has to be acknowledgment that Europe doesn’t have a “liquidity” problem which can be alleviated by substituting fleeing private sector lenders with official lenders such as the European Union (“EU”), ECB or the International Monetary Fund (“IMF”).

The European Financial Stability Fund (“EFSF”), the European bailout fund, is now largely irrelevant, It lacks the resources to quarantine Spain and Italy as well as, increasingly, Belgium, France and Germany from contagion.

Schemes to increase the capacity of the EFSF – borrowing to leverage the fund or partial guarantees or seeking Chinese funding – are simply far fetched or incomprehensible. The EFSF’s attempt to raise money to meet existing commitments has run into problems, meeting lack lustre support and a sharp increase in costs.

In the event that the AAA guarantors are downgraded, the EFSF structure, as originally envisaged, becomes unworkable. Rating agencies have signalled that the EFSF’s AAA rating is under threat. The risk that the cost of funding for the bailout fund is greater than the rate that it can charge is now increasingly evident.

European countries have a “solvency” problem – they have debt that they can never seriously expect to pay back. Stronger nations cannot save the peripheral nations without ultimately destroying their own credit and ability to raise funds.

Commonly touted solutions, such as fiscal union (greater integration of finances where Germany and the stronger economies subsidise the weaker economies) or debt monetisation (the ECB prints money) are unworkable.

Germany and France are unwilling or unable to increase the size of their commitments. Restricted by the German Constitutional Court’s decision, for the moment, Germany cannot or will not go above Euro 211 billion in guarantees for the bailout funds already committed –about 7% of its GDP. Fiscal integration would have a higher cost than Germany is willing to pay or can sustain without affecting the country’s creditworthiness.

France is at the limit of its financial capacity and at risk of losing its AAA credit rating. Fragile coalition governments in Netherlands and Finland are increasingly reluctant to increase their commitments to the bailout process. These constraints make full fiscal union difficult.

Stronger European countries have seen a sharp increase in the cost of their financing. Netherlands 10 year debt is trading around 0.40% above Germany, down from a November high of 0.68% but well above the 0.10% where it traded historically. Austria’s 10 year rate relative to Germany fluctuated between 0.80% to 1.90% in November, up from an average of 0.23% over the last 10 years. Finland’s 10-year spread to German bonds reached 0.79% in November, well above the low of 0.07% in January 2011 and an average of 0.35% over the last year. Finland’s 10 year bonds are trading at around 1.00% over that of neighbouring Sweden, down from a high of 1.37% but well above an average difference of 0.04% since the introduction of the Euro in 1999.

The higher rates and increased volatility of rates has made it increasingly difficult for these countries to finance, despite relatively sound public finances. For Finland, where 75% of its debt is sold to foreign investors, this is increasingly problematic.

The ECB is not allowed and also unwilling to print money. Germany’s Bundesbank opposes debt monetisation. The accepted view is that, in the final analysis, Germany will embrace fiscal integration or allow the printing of money. This assumes that a cost-benefit analysis indicates that this would be less costly than a disorderly break-up of the Euro-Zone. This ignores a deep-seated German mistrust of modern finance as well as a strong belief in a hard currency and stable money. Based on their history, Germans believe that this is essential to economic and social stability. It would be unsurprising to see Germany refuse the type of monetary accommodation and open-ended commitment necessary to resolve the crisis by either fiscal union or debt monetisation.

Printing money may buy some time. But it does not deal with the level of debt, the problems related to bank holdings of sovereign bonds (a small fall in value may affect the solvency of many institutions), allowing countries to regain access to investors on a sustainable basis or economic competitiveness.
If fiscal union and debt monetisation are unavailable, a “controlled” debt restructuring of some nations may be the only option available.

Contagion…
What happens in Europe will not stay in Europe. The shock will be rapidly transmitted through trade, investment and the financial system to the rest of the world. Problems in international money markets will not be welcome for America businesses and the Federal government, which relies on foreign investors for financing. It may truncate the nascent American recovery.

Not only are their financial health and savings affected by what happens in Europe, if the International Monetary Fund (“IMF”) gets involved American will be bearing around 16% of the bill for any European bailout.

The US and Europe account for around 40% of world GDP and 25% of trade. They also make up around 60% of direct investment flows and 60% of financial assets. Europe and the US is each other’s most important market for goods and services.

In 2010, the EU purchased just over $400 billion worth of US goods and services, around 20% of total exports. US exports to Asia are frequently components of or driven by exports to Europe.
The expected economic slowdown in Europe will affect US exports, one part of the American economy that is doing well growing are around 11%, the fastest rate for more than a decade. The slowdown in emerging markets that trade with Europe will have secondary effects on America’s economic activity.

A September 2011 report prepared by the Congressional Research Services estimated that American banks exposure to Greece, Ireland, Italy, Portugal, and Spain — some of the most heavily indebted euro zone economies — amounted to $641 billion. US banks direct exposure to European sovereigns is around $100 billion. The net exposure is probably lower due to hedges.

Indirect exposure via dealings with banks exposed to Europe is larger. American banks have exposure to German and French banks are greater than $1.2 trillion, about 10% of total commercial banking assets in the United States. US banks also have substantial open derivatives contracts with European banks, face value of around $750 billion although the current value of the positions is much lower.
In case of defaults or debt restructuring of one or more European nations or distress of a major European bank, US banks would suffer both direct and indirect losses, such as failed hedges. MF Global’s losses and bankruptcy are a stark reminder of the risks.

US retirement investments in European securities are at risk. Indirect exposure to losses on European securities is even greater. Around $800 billion of China’s currency reserves are invested in Europe.
Losses would reduce this savings pool which would affect China’s ability to purchase US Treasuries.
The problems of European banks, previously active in financing local businesses, will compound the problem. These banks are required to increase capital to cover losses, including those on their sovereign bond investment. As they can’t or do not want to issue equity at deeply discounted prices and the limited investor appetite for such issues, the banks may sell assets or reduce lending to raise the required capital. Estimates suggest that these banks could have to sell (up to) $2.5-3.0 trillion in assets, resulting in a sharp contraction in availability of credit.

While they are not a significant component of lending to American businesses, in 2007, European banks accounted for 30% of loans in Asia-Pacific. This has fallen by around half to 15-16% and is likely to shrink further as a result of the problems of these banks. Troubled French banks account for about 11% of maturing loans in Asia Pacific in 2012. It is unlikely that these banks will maintain their level of commitment. Asia-Pacific banks have taken up the slack but are not sizeable enough to fill the gap completely. The absence of credit will affect Asian businesses, which will then flow through to the US through reduced exports.

Recent action by central banks to lower the cost of US dollar funding via liquidity swaps for non-American banks was designed to alleviate some of these pressures. While they have had some effect, the funding position of European banks remains fragile.

The US will be affected through the appreciation of the dollar against the Euro. The Euro has declined in value by already 5% in a few weeks and further falls are possible. This will reduce the competitiveness of America exports, particularly relative to European businesses. Continued decline in the Euro will have a substantial adverse impact on US exports.

Historically, growth in the two economies is highly correlated. A slowdown in Europe is generally reflected in lower growth in the US reflecting the economic linkages. US growth may slow in response to Europe’s problems.

Stock markets are also correlated. American companies, especially with major European operations, have already signalled lower earnings as economic activity slows. Firm affected includes bellwether businesses like GE and McDonald’s. Automobile companies, with sales of nearly 25-30% in Europe, food and tobacco companies are exposed.

Continued problems are likely damage weak consumer and business confidence affecting the recovery.
American investors and financial institutions have reduced exposure to European debt and investments. The US Federal Reserve has provided dollars via European Central banks to help calm markets and avoid a dollar liquidity crunch. But beyond these measures, Americans are largely spectators to the events in Europe.

Nien or Non…
Early signs are not good. The French President has pronounced that no European country will be allowed to default. Germany has placed its faith in more austerity without increasing her financial commitment, proposing a revised treaty between Euro-Zone members to reinforce a commitment to fiscal discipline. Automatic, court-enforced sanctions on countries that exceed 3% of GDP on budget deficits and 60% of GDP on debt are laughable. The bulk of Euro-Zone countries do not and can not meet these limits now or in the forseeable future. As for the proposed fine, they would have to borrow the money to pay them.

Plans to leverage the EFSF are to be tabled, although no one honestly knows whether any investor will support it with cash. The Chinese have said “nein, danke” and “non, merci“.

The ECB will probably slash Euro interest rates and lengthen the term of emergency funding of banks to say two years with easier collateral rules. European central banks may provide money to the IMF to provide money to beleaguered nations. But IMF funding would rank above ordinary creditors and impede the receipt’s access to commerical funding complicating the problem.

No restructuring of the Euro is contemplated as the French, Germans and the EU appear hopelessly devoted to the common currency.

European leaders seem content to discuss long term lifestyle changes with the near death patient in ER.

Thursday, December 01, 2011

Europe's Seemingly Inevitable Slide Towards Financial Disaster...


Posted At : November 27, 2011 11:03 AM | Posted By : Satyajit Das
Related Categories: Global Sovereign Debt Crisis
 
A crucial element of the plan is the ability of Spain and Italy to take action to improve their finances and maintain access to funding at reasonable cost. The EU communique specifically refers to the need for actions by these two members at some length. There is considerable doubt as to whether this will occur.

Spain’s economy is weak, with low growth, low productivity and high reliance on debt. As the country has sought to bring its finances under control, Spain’s growth has slowed with an increase in the unemployment rate to 21% and youth unemployment above 40%. Spain’s banking sector remains heavily heavily exposed to the real estate with the likelihood of further losses. It is difficult to see Italy, weakened by internal political strife, making rapid progress to making required structural changes to its economy and cutting public debt.

The austerity and balanced budget measures, reinforced and reiterated in the plan, cannot deal with the primary problem - the deflation of the debt-fuelled bubble. Strict enforcement of limits on deficits and level of debt would prevent counter cyclical spending by Governments undermining economic recovery and lock the Euro-zone into a death spiral of budget deficits, further budget cuts and low growth.

The problem is compounded by the competitiveness gap between Northern and Southern countries, estimated at 30% difference in costs. For many of the weaker countries, the best option would be to devalue its currency in the same way that the US and Britain are debasing dollars and sterling respectively. The EU’s refusal to contemplate a break-up or restructuring of the Euro makes dealing with this problem difficult.

Unable to devalue or control interest rates, these weaker countries are trapped in a vicious and ultimately self-defeating cycle of cost reduction.
An additional problem is the internal imbalances exemplified by Germany’s large intra-Euro-Zone trade surplus at the expense of deficit states, especially the Club Med countries like Greece, Portugal, Spain and Italy. German reluctance to boosting spending and imports makes any chance of resolving the crisis even more remote.

German banks lent money to many countries to finance exports, which benefited Germany. Germany also gained export competitiveness from a weaker. Reluctance to confront these problems makes a comprehensive resolution of the crisis difficult.

The latest plan has bought time, though far less than generally assumed. The European debt endgame remains the same: fiscal union (greater integration of finances where Germany and the stronger economies subsidise the weaker economies); debt monetisation (the ECB prints money); or sovereign defaults.

The key element of the 27 October Plan was the unwillingness or inability of Germany and France to increase the size of their commitments. Germany is increasingly unwilling to increase its commitments. It is restricted by the German Constitutional Court’s decision, which makes it difficult to increase support for bailouts without a new constitution.

For the moment, Germany cannot or will not go above Euro 211 billion in guarantees for the bailout funds already committed –about 7% of its GDP. Fiscal integration would have a higher cost than Germany is willing to pay or can sustain without affecting the country’s creditworthiness. France is at the limit of its financial capacity. France’s GDP is around US$2 trillion and its debt to GDP around 82%. Following the assumption of the liabilities of the failed Franco-Belgium financier Dexia, the rating agencies have indicated that France faces a rating downgrade.

Netherlands, Finland and Luxembourg are too small to make much difference. Fragile coalition governments in Netherlands and Finland are increasingly reluctant to increase its commitments to the bailout process.

The ECB is not allowed and seemingly unwilling to print money. Theoretically, it would need a change in European Treaties although the ECB has stretched its operational limits. Germany’s Bundesbank opposes debt monetisation. There would be deep-seated unease about printing money in Germany, which is still haunted by the memory of hyperinflation in the Weimar period.

The accepted view is that, in the final analysis, Germany will embrace fiscal integration or allow printing money. This assumes that a cost-benefit analysis indicate that this would be less costly than a disorderly break-up of the Euro-zone and an integrated European monetary system. This ignores a deep-seated German mistrust of modern finance as well as a strong belief in a hard currency and stable money. Based on their own history, Germans believe that this is essential to economic and social stability. It would be unsurprising to see Germany refuse the type of monetary accommodation and open-ended commitment necessary to resolve the crisis by either fiscal union or debt monetisation.
Unless restructuring of the Euro, fiscal union or debt monetisation can be considered, sovereign defaults may be the only option available.

© 2011 Satyajit Das All Rights Reserved. Satyajit Das is author of Extreme Money: The Masters of the Universe and the Cult of Risk (November 2011)

Wednesday, November 16, 2011

Ancient Monetary System Mechanics…

"New"__The Main Event – The U.S. Debt Crisis

S___, the solution was offered by Plato some 2400 years ago__Nobody has eyes or ears__Yet...!!!

"--- The citizen of the ideal state will require a currency for the purpose of every day expenses; This is practically indispensable for workers of all kinds and for such purposes as the payment of wages to wage earners. To meet these requirements, the citizen will possess a currency which will pass for value among themselves, but will not be accepted outside their own boundaries. But a stock of some currency common to the Hellenic world generally i.e., of international currency, will at all times be kept by the state for military expenditures or official missions abroad such as embassies and for any other necessary purposes of state. If a private citizen has occasion to go abroad, he will make his application to the government and go; and upon his return if he has any foreign currency left over in his possession, he will hand it over to the state receiving in exchange the equivalent in local currency." Plato

I and hundreds of heterodox economists have followed on in Plato's footsteps, as did Benjamin Franklin, in offering similar systems' models__Not our fault, if the world is too dumb to listen... It seems the world can't hear intelligence__only inanity and insanity...

"--- We need a fixed value monetary system. At the present time, we have none. Under floating exchanges, America is simply a powerful ship on an ocean, with no rudder. Old gold, silver, and other known standards will no longer work. They will not work due to the massive increases in communication's speed, the varied endowments of nations' natural resources, and encrypted international speculative opportunities. Therefore, we need a new system. INTERNAL EXCHANGE CLEARING is such a system. It is an entirely new fixed value enhancing - [production standard] - monetary system, to benefit all humankind."

You can argue any of the thousands of other models, to the ends of the Earth__The only one that works, is the one that offers a clearing system of currency mechanics, to eliminate inter-nation manipulation__Which the above systems mentioned__Do...

"---There's a wolf in the system... He was born of your laws. He roams from Maine to California - Alaska to Florida - Hawaii to D.C., and Chicago to New York... He is a hungry wolf. He tears into your hind quarters, clear to the bone, with a vicious set of teeth. He is simply after your wallet. He is the [international] speculation wolf, and he operates legally under your floating exchange law system, to rip the very soul from your nation. He will succeed unless you try to understand how he feeds............"

"If we set a [production] standard of value (to control inflation and exchange rates) in one fifth of the entire economy, we can make real unlimited use of the printing press –– while liquidating all state debts."

This last one really makes you choke, don't it S____. A high enough constructive intellect can understand it__though...

S____, just to show you a major fallacy in your thinking, I'll take this example statement of yours...

China is purposely buying up dollars to manipulate their currency low. They are simply central banking every Treasury Dollar they buy from us, even though the value is slightly decreasing, but not by much, as China is controlling the band within its own trade-weighted advantage point. This mechanical trick actually puts extra pressure on China's own internal poorer classes, as the money's not added to its real internal economy, from the Treasury purchases, as doing so would raise the value of China's currency, which China is fighting to its last breath, to keep from happening. The total cost benefit analysis to greater China's position is net positive, by being able to buy cheap commodities, metals, etc., from many nations pegged to China's currency, thus keeping these costs low, while exporting finished products to the high currency nations, which China is Purposely creating, by this Treasury Manipulation Market, a manipulated low currency export status__While the Rich nations all suffer, by exporting jobs and Treasury values to China__Due exactly to China's Manipulation Policies__It's called Mercantilism, and is the oldest unfair trading practice in all of economic history... All you have to do to see who's guilty of currency manipulation practices is look at the global figures for massive balance of payments surplusses__And you'll find China leads the pack. Years ago, the gold and silver standards re-balanced the balance of nations' payments, by forcing nations to give up gold and or silver if they didn't. No nation wanted to then lose its currency base, so re-balance they did__But, with the present's free-for-all fiat-system, there's no means of punishment, in the international system, to force the older style re-balancings of out of balance, balance of payments__Thus we got this giant fiat-system of collapsing imbalancing of currency systems__The only cure of which is New Clearing System Laws Between Nations To Re-Balance The National-Fiat-Frauds...

It's not difficult to understand it S____... It just takes looking at it, at the Balance of Payments Reality Position... China is simply hoarding, just the same as someone stuffing their bank account in their private mattress, so the rest of the economy has no access to the funds__which clearly subtracts from the Global Economies__Which is exactly what all Massive Balance of Payments Surplusses are truly doing__These nations are robbing the Global Economies Blind__And most all political and economic pinheads are too blind to see it is nothing more than a Massive Global Currency War__Taking Place__Now__Everywhere...!!!
Comparative Advantage and Supply and Demand have turned to Outright Comparative Dis-Advantage, Through Massively Imbalanced Currency Manipulation Mechanics... So, you better start looking at the real figures, say at the I.M.F., B.I.S. and C.H.I.P.S....

Tuesday, November 15, 2011

Europe Begins Its Endgame. Watch and Learn, for Europe’s Problems Are the World’s...

Author: Fabius Maximus  Link...

Summary: The endgame for Europe (in its current form) probably has started. Like birth, nobody knows what comes next. Will the process be easy or difficult? Fast or slow? Produce an angel or monster? Here we make some guesses. Pay attention, as Europe’s travails mirror those to come for the world.
Contents
  1. The present: rising stress
  2. What comes next?
  3. The lesson Europe offers to the world
  4. For more information
(1) The present: rising stress
In a troubled marriage the first mention of divorce can spark its dissolution, as the partners protect themselves by grabbing assets and consulting attorneys. Something similar afflicts the Eurozone. The G-20 conference was advertised as the last chance to save the Eurozone. After it passed with no strong action, Greece’s PM proposed a referendum — in response to which Germany’s PM threatened to eject Greece from the EMU.
Now they have taken the next step, making contingency plans. “French and Germans explore idea of smaller euro zone” (Reuters). “Merkel’s Party May Adopt Euro-Exit Clause in Platform, CDU’s Barthle Says” (Bloomberg). Italian bond yields have spiked up in response to the increased risk of default. Next will come capital flight from the PIIGS to safer lands. Such things will destabilize Europe. If continued the current structure will collapse, forcing either unification or fragmentation. Most experts bet on the latter, although anything is possible.
(2) What comes next?
The news media describe the European crisis — like they do almost everything — as a morality tale. Strong northern Europeans sell their fine manufactured goods to their swarthy southern neighbors (loaning them the money to do so). We consume these tales like children. In fact all these nations did well until they joined the EMU. Only after 2000 did the debt for goods trade develop, the inevitable result of a monetary regime designed for Germany wrecking the competitiveness of the southern members of the EMU.
The outcome might disappoint those in the audience hoping for a victory of goodies over baddies. The likely fragmentation of Europe might mean devaluation and default by some of the PIIGS. Freed of their excessive debt burdens and mad German-imposed austerity programs, competitiveness restored by their new (and devalued vs. the Euro) currencies, their economies might recover. That assumes that they manage the process well, using the turmoil as an opportunity to make vital reforms.
What of the heroes of the north, liberated from their weak and feckless southern cousins? Their exports will fall due to the lost southern markets. Their currency (perhaps a super-DeutschMark) might rise in value — like the Japanese Yen and Swiss Franc — to levels making their exports uncompetitive in much of the world (a too-strong currency is an anvil tied to a nation). Their banks will require massive government support, as some of the PIIGS default (in some fashion) on their bonds.
Economics, like medicine and engineering, is a practical science – not a morality.
(3) The lesson Europe offers to the world
The G-20 Summit statement of November 2008 (in the midst of a global collapse) nicely described the problem within Europe and of the world:
Major underlying factors to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes. These developments, together, contributed to excesses and ultimately resulted in severe market disruptions.
In the three years since nothing has been done to solve these problems, either in Europe or the world. Now events force Europe to take action. Events will similarly force global action, eventually.
(a) The madness of the “everybody must save” policy goals, and the lack of necessary global policy coordination
From “Europe is choking on imbalances, will the global system be next?, George Magnus, 9 November 2011
{about deflationary policies}:
  • European countries give top priority to deficit adjustment through more austerity – witness current deliberations in Italy and France.
  • The US debt ceiling crisis resulted in deficit cutting proposals now reaching a critical deadline at the end of November.
  • And many emerging countries, including China, have continued to restrain nominal and real exchange rate adjustments, while pursuing restrictive economic policies to contain inflationary pressures.
The asymmetry of policy adjustment is only ‘sustainable’ in the sense that for as long as it continues, the outcomes will be negative for growth, financial stability and trade and capital movements. This is the result of advanced nations looking to deleverage and raise savings, while key emerging nations pursue economic models based around high levels of savings.
The creation of the G20 in 2008 was a notable milestone in bringing together most of the world’s biggest creditors and debtors. But apart from the coordinated 2008/09 response to the financial crisis, much of which had been pre-determined nationally, its subsequent record doesn’t amount to much of consequence. The recent Cannes Summit showed all too clearly, in spookily reminiscent tones of the London Economic Conference of 1933, that the G20 lacks the leadership to draw up an agree and implement an agenda to unwind imbalances. The financial crisis has sapped the US ability to lead, left China’s unwillingness untouched, and further undermined the capacity of Europe on both counts.
(b) The madness of vendor financing
The current structure of Europe cracks under the slowly rising stress of vendor financing: export-based prosperity for some, debt-financed consumption by others. Unless reformed, this can only end badly. The global economy has similar imbalances. In 2010 the trade surpluses of China, Russia, and East Asia (China being half the total) were almost equal to the US trade deficit of $560 billion. OPEC, Germany, and Japan accumulated another $518 billion surplus. These numbers continue year by year, accumulating stress that will eventually break the current global financial order.
We should watch and learn from Europe’s experience in the months to come. We, and the rest of the world, may follow them sooner than we expect.
(4) For More Information
Articles about Europe:
(1) “Endgame Approaching“, Tim Duy (Asst Prof Economics, U OR), 9 November 2011
(2) “Why Italy’s Days in the Eurozone May Be Numbered“, Nouriel Roubini, Roubini Global Economics, 10 November
(3) “Is This the End of the Faith-Based European Monetary Union?“, L. Randall Wray (Prof Economics, U Missouri-Kansas City), Roubini Global Economics, 10 November 2011
(4) “Europe’s Next Nightmare“, Dani Rodrik (Prof Political Economy, Harvard), 9 November 2011 — Opening:
“As if the economic ramifications of a full-blown Greek default were not terrifying enough, the political consequences could be far worse. A chaotic eurozone breakup would cause irreparable damage to the European integration project, the central pillar of Europe’s political stability since World War II. It would destabilize not only the highly-indebted European periphery, but also core countries like France and Germany, which have been the architects of that project.”
Other posts about the crisis of Europe:
  1. The post-WWII geopolitical regime is dying. Chapter One , 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
  2. Can the European Monetary Union survive the next recession?, 11 July 2008
  3. The periphery of Europe – a flashpoint to the global economy, 8 February 2010
  4. A great speech by the PM of Greece. How soon until an American President says similar words?, 3 March 2010
  5. Governments cannot go bankrupt, 2 April 2010
  6. Our government’s finances are broken. How do we compare with our peers?, 8 April 2010
  7. The EU does Kabuki for Greece. Is it the next domino to fall?, 14 April 2010
  8. About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
  9. Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’, 20 May 2010
  10. The Fate of Europe, nearing the point of decision, 13 September 2011
  11. Europe drifts towards the brink of a cataclysm, 26 September 2011
  12. Delusions about easy fixes for Europe, dreaming during the calm before the storm, 30 September 2011
  13. Every day the new world emerges, yet we see it not. Like today, as Europe begs China for loans, 15 September 2011
  14. Is Europe primed for chaos, as it was in July 1914?, 7 October 2011
  15. We see the outlines of the next cure for Europe. Will it work?, 14 October 2011
  16. Today Europe’s leaders took another step towards the edge of the cliff, 27 October 2011
  17. Where to from here, Europe? Some experts share their views., 8 November 2011
  18. Status report on Europe’s slow re-birth (first, the current system must die), 10 November 2011

Tuesday, November 01, 2011

Today Europe’s Leaders Took Another Step Towards the Edge of the Cliff...

by Fabius Maximus...

(Also:) Europe’s Plan to End the Debt Crisis Can’t and Won’t Work – Part 1
.
Summary: The conference of Europe’s leaders concluded with little results, a failure judged by the expectations they had set. They don’t have time for many more such failures as conditions worsen, the financial contagion spreads across Europe, and their credibility diminishes. Here we conduct a post-mortem on the Summit.

Today the leaders of Europe concluded their 14th meeting during the 21-month-long crisis, their last opportunity to produce specific proposals for the G-20 meeting at Cannes on November 3-5. They failed to agree upon specific and substantial measures to contain the growing economic stress — now reaching Italy (which has the world’s 3rd largest government debt) – and treat Greece’s problems (now the most afflicted sick man of Europe). The few measures they did agree upon are of dubious effect, much like the austerity programs they have prescribed for the PIIGS (now pushing most of them into long-term contractions).

Does anyone give much weight to their expressions of resolve and large promises for future action? While they talk, the rot spreads.

Contents

  1. The announcements from the Summit
  2. The effect of these agreements
  3. China to the rescue!
  4. What about those lazy profligate Greeks?
  5. Other articles on the FM website about Europe’s crisis


(1) The announcements from the Summit


The European Council has resolved to do great things in the future, but today made few or no actual decisions. Details for future actions to come in November.


Reuters provided additional information on the pitifully meager accomplishments of the meeting (the emphasis is mine):

The euro zone aims to leverage its 440 billion euro bailout fund, the EFSF, “several fold” but finance ministers will only agree the details of how that will be done in November, according to a draft statement to be issued after a summit on Wednesday. The statement, obtained by Reuters, says two options are being considered to leverage the fund, one involving it issuing risk insurance and the other built around it taking part in a special purpose investment vehicle. Both models could be deployed simultaneously, the draft statement said.
The Eurogroup of finance ministers will be asked to finalize the terms and conditions for how the EFSF will operate under the leverage schemes in November, the statement said.
In addition, it said the EFSF’s resources could be further enhanced, possibly via cooperation with the International Monetary Fund.
The draft statement also called on Spain to do more to bring its budget into line, while praising it for the steps taken so far. A paragraph on Italy, which is under pressure to do more on pension and other reforms, was left blank but is expected to be added later.

(2) The effect of these agreements

(a) Probably not much more money for Greece, other than the existing programs. Perhaps aid for its banks, and to rollover its government debt.

(b) A large write-down of privately held Greek government debt (which is aprox 200B euro of its 350B debt), two or perhaps even three times the 21% reduction in its net present value agreed upon on July 21st. This would reduce Greek government debt to a still-fantastic 140-150% of GDP (depending on the terms; see this report for details). But Greek banks and pension plans hold much of the this debt. Update: they agreed to 50% cut; see Reuters.

In the short-term this will weaken the banks; only large-scale aid will keep them alive. Long-term this threatens the solvency of Greece’s pension system. Unless accompanied by substantial aid, the net relief might be small.

(c) Europe’s banks will need to raise substantial amounts of new capital from private sources. This might prove difficult to do until Europe’s leaders agree upon long-term and large-scale reforms to stabilize Europe’s government finances and (most important) the internal trade imbalances which have caused these problems.

(d) Most importantly, Europe’s leaders appear to have abandoned (at least for now) their attempts to address the causes of Europe’s problems. The announcement concern only band-aids. They neither fix Greece nor prevent the contagion to continue spreading — as it has for the past 21 months. How the heat has spread to Italy, and even French sovereign yields are rising.

Conclusion: Europe’s leaders are playing Russian Roulette, Each failed conference, each inadequate solution is like pulling the trigger. Each attempt burns time and credibility. Eventually they’ll get a loaded chamber, with the bang initiating the disorderly circumstances they fear. But perhaps only such turmoil will generate the political will to take decisive measures — but it will increase the cost of the measures and making success more difficult.

(3) China to the rescue!

Despite the evident failure of the Summit, excitement spread from a rumor that China would make large loans to Europe, perhaps through the IMF. It’s a mark of the West’s desperation that we greet this foolish story — which has made several appearances this year — with such enthusiasm.

(a) China announced back in January they they would buy EFSF bonds (which are AAA). Both Japan and China have already done so.

(b) The latest rumor originated in China Daily (see here via AFP):

China and other emerging powers have agreed to help eurozone countries facing a debt crisis by taking part in a bailout fund, the China Daily said Wednesday, citing a source close to EU decision makers. The state-owned English language newspaper said leading emerging economies would help to finance the rescue fund through the International Monetary Fund, which would boost their voting rights in the Washington-based lender.The agreement may be written into the final document at a second emergency summit of European leaders, due to begin later Wednesday, the unidentified source told the newspaper.

Reuters published a denial a few hours later: “China diplomat: nothing concrete on investing in EFSF vehicle“.

(c) Europe runs a current-account surplus, and so does not need foreign funds to bailout Greece. If China’s loans are in addition to existing flows, they will depress the RMB (the yuan) vs. the Euro — boosting the competitiveness of China’s exports vs. manufacturers in Europe. Why then seek the funds? Europe’s leaders probably want China’s funds because they do not want to take on the risk themselves of lending to the PIIGS. That of course will not excite China. For more about this see BRICs to the rescue, Michael Pettis (Finance Professor at Peking U; bio here), 6 October 2011.

(d) The previous rumors are discussed in Every day the new world emerges, yet we see it not. Like today, as Europe begs China for loans, including what China will ask in exchange for doing this favor to Europe.

(4) What about those lazy profligate Greeks?

To keep Americans dumb and happy, foreign news must be repackaged as simple morality plays. As has been done with Greece’s problems. In fact they result from stupidity of Greed borrowers and German/French lenders — both locked into a system which depresses Greece’s competitiveness vs. Germany. For a look at the internal dynamics of Greece see The Myth of Greek Profligacy & the Faith Based Economics of the ‘Troika’, “Marshall Auerback and Rob Parenteau, Naked Capitalism, 24 October 2011 — Excerpt:

Rather, the heart of the problem is in the antiquated revenue system that supports that state, which results in a budget shortfall consistently about 10% of GDP. The top 20% of the income distribution in Greece pay virtually no taxes at all, the product of a corrupt bargain reached during the days of the junta between the military and Greece’s wealthiest plutocrats. No wonder there is a fiscal crisis!
So it’s not a problem of Greek profligates, or an overly generous welfare state, both of which suggest that the standard IMF style remedies being proposed here are bound to fail, as they are doing right now. In fact, given the non-stop austerity being imposed on Athens (which simply has the effect of deflating the economy further and thereby reducing the ability of the Greeks to hit the fiscal targets imposed on them), the Greeks really are getting close to the point where they may well default and shift the problem back to those imposing the austerity. This surely can’t be much worse than the slow execution they are facing today.
In reality, the Greeks have one of the lowest per capita incomes in Europe (€21,100), much lower than the Eurozone 12 (€27,600) or the German level (€29,400). Further, the Greek social safety nets might seem very generous by US standards but are truly modest compared to the rest of the Europe.
… Furthermore, if one looks at total social spending of select Eurozone countries as a per cent of GDP through 2005 (based on OECD statistics), Greece’s spending lagged behind that of all euro countries except for Ireland, and was below the OECD average. Note also that in spite of all the commentary on early retirement in Greece, its spending on old age programs was in line with the spending in Germany and France.
In fact, Greece has one of the most unequal distributions of income in Europe, and a very high level of poverty, as the following table shows (source: OECD and Papadimitriou, Wray and Nersisyan). The evidence is not consistent with the picture presented in the media of an overly generous welfare state.
… The country, however, is truly stuck: they can’t devalue, they can’t pay their own way because they do not have a sovereign currency, and nobody will voluntarily finance them. So they must exit and devalue or drop their domestic prices. The massive default, though inevitable, is just a step along the way.
To make the problem worse, export earnings also seem to face their own structural cap that is consistently exceeded by import spending, which means that the debt that finances the government shortfall is increasingly held abroad. The debt is issued under Greek law, but now it is payable in Euros which Greece, as a user of euros, can’t create, given the surrender of its currency and consequent fiscal sovereignty. In this sense, ironically, the fiscal crisis is a consequence of Greece’s success, after a long preparation, in joining the European Union, and hence giving up its own currency, as Professor Perry Mehrling has noted.
The point is that, if this analysis of the source of the problem is correct, then standard IMF austerity policy is unlikely to do much to help. And, as the increasingly intensifying riots on the streets are vividly demonstrating, the patient might not willingly accept the medicine. Despite attempts to turn the country into an economic colony of the EU, Greece is still, after all, a democracy and if one is to judge from the growing unrest in the country, it is far from clear whether Greece (or any other euro zone member for that matter) is really willing to cut spending and raise taxes rates to any degree which will satisfy the Fiscal Austerians dominating economic policy in the euro zone today without at the same time provoking an ungovernable failed state, right in the middle of the euro zone.

(5) Other articles on the FM website about Europe’s crisis

  1. The post-WWII geopolitical regime is dying. Chapter One , 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
  2. Can the European Monetary Union survive the next recession?, 11 July 2008
  3. The periphery of Europe – a flashpoint to the global economy, 8 February 2010
  4. A great speech by the PM of Greece. How soon until an American President says similar words?, 3 March 2010
  5. Governments cannot go bankrupt, 2 April 2010
  6. Our government’s finances are broken. How do we compare with our peers?, 8 April 2010
  7. The EU does Kabuki for Greece. Is it the next domino to fall?, 14 April 2010
  8. About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
  9. Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’, 20 May 2010
  10. The Fate of Europe, nearing the point of decision, 13 September 2011
  11. Europe drifts towards the brink of a cataclysm, 26 September 2011
  12. Delusions about easy fixes for Europe, dreaming during the calm before the storm, 30 September 2011
  13. Every day the new world emerges, yet we see it not. Like today, as Europe begs China for loans, 15 September 2011
  14. Is Europe primed for chaos, as it was in July 1914?, 7 October 2011
  15. We see the outlines of the next cure for Europe. Will it work?, 14 October 2011

Wednesday, October 12, 2011

The Tri-Polar Intelligence of Pure Thought…

"Wisdom is an ocean of visions, poured into a dewdrop, of a single ultimate vision...."

Ever look deep into the pure mind__I mean really deep, to where you can answer the questions about how thought thinks about pure thought…? Follow me to a zone you may never have been before__it won’t hurt, but it may surprise. Most think they know their own minds quite well, but do they really?__I think you’ll see for yourself, there’s much more to pure thought than you’ve so far realized…

Simply take the word intelligence, and ask yourself, ‘What is the intelligence of intelligence…?’ This is that ancient question Socrates first posed millennia ago, with a bit of a twist, as he asked, ‘What is the wisdom of wisdom?’ and ‘What is the science of science?’__but, these same thought-word relations lead us to the same destination. It’s also been asked by others as, ‘What’s the cognition of the cognition?’ and ‘What’s the concept of the concept?’ and ‘What’s the context of the context?’ and you could also ask; ‘What’s the feeling of the feeling…?’ These questions may seem strange to you at first, but when it’s explained__you’ll easily see the importance of such deep investigations of the mind’s purest deep states of thinking. Most likely, you all do think like this now__it’s just you’ve never given it the detail of contemplation to realize it…

Think about it__when one asks themselves’ any one of these single entity questions, one’s thoughts are centered strictly on thought of thinking about thought itself. This is the mode of modal thought, modal logic, modal intelligence or modal wisdom, per se__and no different than thinking about the moods of the mind’s thinking about pure thinking… It’s really the easiest idea in the world to accomplish, it’s just most never think about the mood of their being, upon how such controls their thoughts and actions__but, the realization can be the most profound change in a person’s contemplations about themselves, the world and their actions toward self, others and the world…

If one starts out thinking in the mood of self-referential thinking, or experiential intelligence__one’s mood or modal thought is more childhood-soul to super-consciousness based__a most personal thought stance… If one starts out thinking in the mood of non-self-referential thinking, or operational intelligence of others’ and the world’s ideas__one’s mood or modal thought is more of the intellect to the entire systems’ architectures of all the world’s many systems__a most non-personal stance, yet closely related to the over-soul of global sight… There’s still one more mood or modal thought to contemplate__and that’s one’s modal actionable intelligence, or one’s will to act upon one’s experiential wisdom state, in an attempt to move pieces of such wisdom to one’s operational knowledge state__as it’s really how we all do achieve our best moments in life, that truly satisfy us… For when we accomplish, through our self-knowing actionable intelligence of personal will, to discover totally new ideas and links from our experiential intelligence, to our operational knowledge and action states of mind__we feel we can really set the world afire…

So, next time you’re thinking about thinking about something__first check the mood of the state of mind, you are truly thinking from__and I promise you, that by knowing the mood of your thinking state, is by far the most important progress one can ever accomplish in the evolution of the mind states advancement… It will also give you the chance to really coordinate any presentation state you may choose, from your most personal feelings, thoughts and actions, to the most complex of intellectual contemplations and actions. Along the way of thinking about thinking, you may realize how much the world has lost this art of pure contemplative thought__and how much we all really need to re-instate it__to communicate effectively__as it relaxes the mind more than anything else, to know one has the ability to choose the mood of the conversations and actions one is involved in__purely at the will of knowing one can…

All it requires is to state to another the mode of the thought talked about, whether experiential intelligence, operational intelligence or actionable intelligence__This can also be phrased as experiential wisdom, operational knowledge and knowing intelligent actions__and just simply notify another of the mood change… Many do this without knowing they do it, but to be able to do it knowingly is of great comfort to one’s being, and self-satisfaction…

Therefore; ‘Wisdom is the actionable intelligence capacity, to knowingly move percepts and concepts of experiential wisdom, into the greater world of operational knowledge__to help improve the function and form of our world at large…’

Btw, when anyone actually does see wisdom, even small pieces of it, it’s the most humbling experience in the world, as it’s so huge compared to any one of us__it’s truly overwhelming…

Monday, October 03, 2011

INTERNAL EXCHANGE CLEARING...

A NEW MONETARY SYSTEM for THE ELECTROSPHERE
©LLOYD GILLESPIE
[HOME PAGE] [E-MAG]
[INTERNAL EXCHANGE CLEARING MECHANICS]
[TRIPLE ENTRY BANKING MECHANICS]
[INTRODUCTION TO INTERNAL EXCHANGE CLEARING]
[TABLE OF CONTENTS]
Date: 12-25-02 21:09
--------------------------------------------------------------------------------

"All problems using crude money must be overcome to survive the future eco-techno-electrosphere."

"Since the first wave agricultural revolution only required simple single entry banking –– and the second wave industrial revolution invented and required double entry banking –– then the third wave technological revolution [will] invent and [require] "TRIPLE ENTRY BANKING.""


In 1982 I empirically discovered an entirely new capitalist monetary system. This system is in direct evolution with the existing system. It is fully compatible with all known forms of money systems –– past – present – or future. The system is INTERNAL EXCHANGE CLEARING –– TRIPLE ENTRY BANKING – a transactions truth. This new monetary system can be implemented cost free and effectively either unilaterally or globally. It can be instituted on a percentage basis from one percent, to twenty percent –– its most cost effective and productive percentage of operations' basis.

In this short paper, I will explain why I feel a new monetary system is necessary –– what it exactly is –– and how to painlessly implement it. First, I will discuss the present capitalist system to make clear why such a new system is needed. I will frame my discussion on four tenets –– demographics –– jobs and wages –– the present floating exchange rate non-regime –– and the technological revolution.

Many falsely believe the miracle of capitalist markets will cure all our future problems. Let me see if I can change your mind, to show markets of the future may need some new help. The most glaringly obvious problem is one of demographics alone. With the nation five trillion dollars in debt and both political parties fighting for the next spendable penny, when we at present don't yet have a demographic problem –– where do you think the money is coming from to support the retirement of the massive increase of baby-boomers?

This is not only a problem of our nation, but that of all industrial nations and many of the world's lesser nations as well. Japan has been flat on its economic back for five years now. Europe also has flat growth, high unemployment, massive debts, and intolerable rates of taxation. We need say little of the lesser nations as everyone is well aware of their bankrupt conditions. If we are short of the necessary funds now, what nation or group of nations is going to grow enough to resolve the present quagmire –– let alone the future's massive demographic increase of tax burdens? How will they grow? What economic incentives and organizations are presently planned and feasible? Are they capable of meeting future needs? I simply ask you to be the judge.

If nations are to grow their way out of the demographic problems of the future, where are the jobs and wages necessary to do so coming from? At present we are downsizing every economy in the world –– with massive mergers, outsourcing, and layoffs. Wages for forty to fifty percent of the population of America alone have declined over the last twenty years. Yes, it is true some at the top have benefited precipitously –– but at the cost of the bottom? High skilled jobs, such as unions, have shrunk dramatically –– from thirty-six percent of the work force to sixteen percent of the workplace. Are these evidences of true growth in jobs and wages over the last twenty years ––– as many would have us believe? And they fight against an increase in the minimum wage! Where will jobs and wages come from when the computer-robotic-revolution displaces more human workers ––– daily?

I don't mean to sound pessimistic, as I am not. I am only painting a true picture of present capitalism's stature. The system I am proposing –– INTERNAL EXCHANGE CLEARING –– is thoroughly optimistic. So bear with me while I make my points about the present system's problems.

If you think these problems can be easily solved by conventional policy and market performance, you know little of the workings in the foreign exchange markets. These markets exist wherever a foreign exchange takes place –– sort of everywhere and nowhere. They exist everywhere a computer-telephone link is, and nowhere is there any real control. This system is an absolute free-for-all buying, selling, and swapping trillions of dollars and other currencies around the world at the speed of light twenty-four hours a day –– three-sixty-five days a year. The global transactions' figures presently stand somewhere between two-hundred-fifty and two-hundred-seventy-five trillion dollars per year. They are well over a trillion dollars per business day.

In order to understand the above, you must know these markets encompass the Euro-dollar system – the entire foreign exchange system – the forward exchange markets – the entire international banking system – interest, goods, and services arbitrage and hedging – derivatives – swaps – fixed and floating currencies – nations' inflation and tax systems – and all nations' governments and actions –– to mention just a few. The above includes the most intricate and complex of markets in the world. When the courts can't even understand these intricate markets –– how are the policy makers supposed to?

Let me give you a clear example of the above. George Soros has stated "Speculators can short the markets a trillion dollars quicker than governments can print it." He should know as he made one billion dollars on one speculative trade in 1993 against the European Economic Community –– which he documented in his book "SOROS ON SOROS". This is no isolated case, I assure you. Andrew Krieger has also written a book of his speculative exploits titled "THE MONEY BAZAAR – Inside the Trillion-Dollar World of Currency Trading." Both these books are excellent first hand sources of information about speculating against the present easily manipulated floating exchange non-system. Systems of this character must change to survive the ever increasing encrypted computerized future.

If you think the above issues can be brought under policy control – of two warring political parties in our country – I think you have missed the boat. Not only is it almost politically impossible in our own country, but it is even more politically unlikely to succeed globally. Internal tension and gridlock prevents local problem solving, while global tensions of Chinese communism, and Islamic fundamentalism prevents international problem solving. For these reasons, I have designed INTERNAL EXCHANGE CLEARING to be instituted and function properly unilaterally –– with the support and respect of both warring political parties –– and to further be complementary to and compatible with external international processes.

Before explaining the above system, we must explore my fourth tenet –– the technological revolution. Professor of history Paul Kennedy has done the definitive work in this area. I would like to add my vision about the future of technology. I can nowheres near compare to the stature of Mr. Kennedy, but I have a unique perspective –– as I am an international currency and market speculator –– with considerable computer and robotics expertise.

Mr. Kennedy has rightfully shown the nightmare scenario we could be headed for if change is not undertaken. For his part of warning us, he has received the title of "Dr. Doom." Not only is his work not about doom, it is the most accurate possible course of history I have seen. We have a choice to let the future play out terribly ––– or to change it for the better. We had better listen to those who have better ideas than our own.

With all nations being forced by competition to adopt the latest advances in technology –– we are locked in an ever increasing scenario of technological evolution. The forces of markets are pushing us closer to a robotic and databased wage and pricing mechanism future. As the power and agility of robots increase, companies and corporations will be forced by competition to implement this new technology –– thus eliminating more human jobs and wages. Already, Japan is re-importing jobs they earlier outsourced to human labor, to be handled by robots cheaper at home. In other words, even some of the third world's labor is losing to robots –– and we have just begun. Databases, once simply a tool of improving efficiency within companies and corporations, are now being employed to handle massive world pricing mechanisms and on time global delivery systems. Competition in this area will be the most fierce, because it is the most cost effective method to improve profits. This area alone will be where massive layoffs of upper income workers will come from. So ––– while robots lay off the bottom tier –– databases lay off the top tier! And if you don't think this is true –– just check out who is tops on the web ––– Digital and Inktomi – the fastest!

The future will see massive increases in the use of robots to eliminate human labor and wages' costs –– competition requires it. We will see massive increases in the use of giant supercomputer databases and on time global delivery systems to eliminate human labor and wages' costs –– competition requires it. These two technologies alone can do nothing but downsize further the entire global economy ––– eliminating massive human work forces and wages –––– for the bottom line –––––––– profits!!!

There is no turning back. We must go forward with new monetary systems.


--------------------------------------------------------------------------------

INTERNAL EXCHANGE CLEARING – A NEW MONETARY SYSTEM for THE GLOBAL ELECTROSPHERE©LLOYD GILLESPIE


--------------------------------------------------------------------------------

"All problems using crude money must be overcome to survive the future eco-techno-electrosphere."

"Anyone who thinks the use of crude money will not be necessary in the future is crazy!"

"The present electronic world is diminishing collective opportunity ––– fast!"


Over the past two centuries we have built a wondrous spectacle for the rest of the world to emulate. We have set the standards high for civil human conduct and happiness. The moral, ethical, and family stance we take should make us proud and respected. The institutions we have erected set the rest of the world at awe. Our scientific and industrial evolution and strength have revolutionized the entire planet –– especially since the end of WWII... So why do we feel so insecure?

The reason is we have reached economic entropy under the present world monetary systems and organizations. The technology revolution is creating real job and wage decreases as population increases. This is why we feel so insecure and helpless. To this point in time there are no serious conventional solutions being put forth. This is why I am offering an unconventional solution to our present economic stalemate.

On the surface "INTERNAL EXCHANGE CLEARING" is not a difficult system to understand. It is simply a system to reorganize the control of the foreign exchange market to function more efficiently through internal mechanisms instead of external –– thus making more productive use of our or all nations' national debts. This system will stabilize exchange and inflation rates internally and externally when instituted. This is the real solution we truly seek –– to once and for all end inflation and disequilibria of the exchange rate mechanism. Only this solution will increase real jobs and wages in the coming eco-tecno-electronic revolution of the twenty-first century.

Why? You may ask will this system work better than the present one? What? You may ask is this system and how does it work? I should warn you, this system should not be confused with external exchange clearing advocated by Plato and Dr. Paul Einzig –– though they are the inventors of the groundwork of this system. Plato first advocated such a system some twenty-four-hundred years ago, and Dr. Paul Einzig (the WWII Finance Minister of England) has written the only book on exchange clearing I believe to be in print (Exchange Control, Macmillan and Co.1934). "INTERNAL EXCHANGE CLEARING" is simply a higher evolution of these two great men's work.

"INTERNAL EXCHANGE CLEARING" is based on a new framework of laws for existing markets to function under more efficiently. These new laws recognize and solve the existing problems through a one-fifth military style "P.X". and a "TRIPLE ENTRY BANKING" system. You must realize we do not have a production or resource problem. We have a monetary problem the above system solves at no cost to any parties involved. You say, "This is the old free lunch impossibility." I say, "The future being fast diminished by technological evolution requires a semi-free lunch." Notice this system is only a one-fifth change of existing structures –– and when further inspected is even no total change in existing assets. The system I am proposing takes from no-one, yet has the ability to operate semi-philanthropically for the benefit of all.

The one-fifth level mentioned above does not require being instituted at the twenty-percent level. The system can safely evolve to the twenty-percent level in small increments per year –– through the guidance of the new social contract laws we pass. At present, most every nation of the world is governed approximately twenty-percent by the external forces of multinational trade and international financial flows. "INTERNAL EXCHANGE CLEARING" simply moves the control of the functioning of the mechanics of these markets from external malfunction to internal function. It does not change any actual control of these real and complex markets. They are still free to function as is even after institution. The real change only takes place internally, where we set government in competition with existing business at the one to twenty-percent over time level. By this I mean a reduction in present nationalization from its some forty-percent level to its new twenty-percent level. To accomplish the above, a national set price "P.X." will be instituted, where one to twenty-percent of everything from dust to diamonds is available to all comers alike –– citizen and entrepreneur alike. This is a government created independent "P.X" market totally separate from all present existing businesses –– yet set in competition with all existing business to create truly competitive and fair markets for all players and citizens alike. This market by the very existence of its instituted mechanics automatically controls all inflation, exchange rates, and prices into fair and equitable balances –– once and for ever!

The above market will be semi-philanthropically subsidized by the new "TRIPLE ENTRY BANKING" system –– which must be instituted along with the "P.X." and "INTERNAL EXCHANGE CLEARING" systems. The functioning of the above markets' instituted mechanics make the semi-philanthropic system possible. The system will function unilaterally or universally. It is best recommended as a universal system –– though there is nothing to prevent its unilateral success as well. The advantage of multilateral acceptance is the cooperation of all nations advancing in unison to lessen world tensions. The philanthropic percentage could be set by agreement among many or all participating nations' equal ratios of GNP expansions.

I often state,"We need a fixed value monetary system. At the present time, we have none. Under floating exchanges, America is simply a powerful ship on an ocean, with no rudder. Old gold, silver, and other known standards will no longer work. They will not work due to the massive increases in communication's speed, the varied endowments of nations' natural resources, and encrypted international speculative opportunities. Therefore, we need a new system. INTERNAL EXCHANGE CLEARING is such a system. It is an entirely new fixed value enhancing - [production standard] - monetary system, to benefit all humankind."

It all comes down to: "If we set up government – all government – in business, in competition with existing private commercial business –– we can unilaterally make unlimited reasonable use of the printing press!"

Let's stop the ridiculous political and class battles and consider the abilities of the above to solve our problems ––– and once again unite us in all our desired goals and destinies.

Thank you,
L.A. Gillespie
--------------------------------------------------------------------------------
mailto:lloyd.gillespi@gmail.com
web: http://macromouse.blogspot.com

Tuesday, August 23, 2011

Hutchinson's Blatant Ignorance of Anti-Keynesianism...

Only Alien Invasion Can Rescue Keynes

by Martin Hutchinson
August 22, 2011

New York Times columnist Paul Krugman, in a talk show August 14, remarked that the fiscal stimulus caused by a fake Alien invasion of the United States would best rescue the U.S. economy, providing the inflation and growth that according to him it needs (a real Alien invasion would be equally efficacious, but might cause unpleasant collateral damage.) In that one statement, we can at last nail the Keynesian fallacy, showing once and for all just WHY it is intellectually bankrupt. Krugman is after all not some mere scribbler who has misunderstood the exquisite and subtle nuances of Keynesian economics; he is the proud possessor, unshared with any collaborator, of the 2008 Nobel Memorial Prize in Economic Sciences.

The problem with Keynesian analysis comes down to a factor I discussed last week, the use of Gross Domestic Product as a measure of output or well-being. In the public sector, GDP does not discriminate between activities such as defense and policing that produce genuine benefits for society and the economy (even if those benefits are difficult to quantify precisely) and activities that produce no such benefit. Last week I wrote that by stripping government spending out of the Bureau of Economic Analysis’ measure of Gross Domestic Product, one could arrive at a metric, Gross Private Product (GPP), which measured only those activities traded between a willing buyer and a willing seller, and for which a value is thus determinable.

In general, GPP will underestimate the value of output, because government’s activities have some value to its citizens. In a democracy, if a government undertook activities far in excess of what citizens demanded, or activities that were positively detrimental to its citizens’ best interests, that government would be voted out of office.

However even in a democracy the mechanism that controls government’s activities is very imperfect, since there are generally only two major parties to choose from, and the electorate has only the binary choice of whether to keep a government in office or to replace it with a government of the opposing party. In political systems with proportional representation, such as Belgium, even that simple choice may be unavailable to citizens, since each election results only in the awarding of tickets for a gigantic negotiation between parties on who should form the next government. In such a system, the electorate may believe strongly that some particular item of policy is detrimental to its interests, and yet have no means of making that distaste effective, as all major parties are committed to the offending item. In the very long run, new parties may spring up on a platform of abolishing the offending item, but even then, they may be ostracized by existing parties and thus unable to form a coalition to remove it. In a multinational polity such as the EU, in which communication between different national electorates is limited, the difficulty of expressing an electoral will becomes even more extreme, and the cost to the electorate of unattractive policies may increase ad infinitum.

The greatest distortion of the GDP measure arises in societies where democracy does not exist, and so actions by government are arbitrary, with the populace on whom costs are imposed being helpless to remove them. In North Korea and in the former Soviet empire it is surely now clear that government imposed enormous costs on its people, reducing their living standards far below what would have been available to them under a free-market with a minimalist state. Yet under GDP accounting, every bureaucrat, every secret policeman is counted toward national output – one reason why GDP estimates for the former Soviet bloc were so inflated, with East Germany in 1989 being listed in my Economist 1991 Diary as having a higher GDP per capita than Britain.

Arithmetically, that calculation was correct, but in terms of living standards it was laughable. The inadequacy of GDP as a measure also accounts for the massive decline in reported GDP for the Soviet bloc when the Wall fell. There was a real decline in well-being, from the rupture of traditional trading arrangements between different countries of the former Soviet Union (as between different countries of the former Austria-Hungary after 1918). However the major decline in GDP was due to the removal of government functions that had artificially depressed national welfare while inflating reported GDP. Downsizing the KGB (alas, not far enough) put many unhappy secret policemen out of a job, and reduced GDP, but it greatly increased the life possibilities for everyone else.

Even in authoritarian states in which the price mechanism still existed, such as the Third Reich, the same effect took place. Keynesians will assert that Hitler caused an economic recovery in Germany -- under conventional GDP accounting, in 1960 purchasing-power-parity dollars, GDP increased from $45 billion in 1925 to $77.2 billion in 1938. Keynesians will also agree with the rest of us that little of that happened before 1933, as a modest economic recovery was succeeded by the Great Depression. But except for ardent Nazis and uniform fetishists, few if any Germans enjoyed higher living standards in 1938 than they had in 1925 – the increase had all gone into the state sector, and particularly into armaments, concentration camps and the like. GDP had increased, but the increase was almost entirely concentrated in the tools of oppression – Hitler’s Volkswagen was a prestige demonstration project that went into production of civilian automobiles only in 1946.

The same applies to the well-known Keynesian thesis that World War II cured the U.S. Great Depression. World War II increased GDP, but more than 100% of the increase was devoted to munitions, building the Pentagon, employing teams of bureaucrats to control prices and government activity generally, much of it misguided. Gross Private Product decreased from $921 billion in 2005 dollars in 1940 to $427 billion in 1944, well below 1932’s level, showing that the private economy was badly squeezed. Then in 1946, while GDP decreased by 11%, GPP more than doubled to $1,309 billion. Readjustment was inflationary and disruptive, but it saw an astonishing increase in output and living standards.

The Keynesian thesis can be further demolished by looking at 1946 compared to 1938-40. At the tail end of the Great Depression, in November 1938, there was a massive turnover in the U.S. Congress, similar to the Tea Party revolt of 2010, in which the Republicans gained six Senate seats and an astonishing 72 House seats (9 more than in 2010). Although this did not give them a majority, it stopped dead the New Deal policies of heavy state spending and economic experimentation. GDP increased by 8% per annum between 1938 and 1940 and GPP increased even more rapidly, by 9.2% per annum.

This pulled the U.S. out of the Great Depression, with 1940 GPP 10% above that of 1929, but left the economy far below capacity. If you apply the average 1929-2000 growth rate of 3.43% per annum to 1929’s GPP, you get a 1940 full employment GPP estimate of $1,203 billion in 2005 dollars, 31% above the actual figure. That suggests that without the war the 1938-40 boom would naturally have continued, perhaps slowing somewhat, until it ran up against resource constraints. Apply 1938-40’s actual growth rate to the next six years and you get a 1946 GPP of $1,558 billion, 19% above actual 1946 GPP. Applying the 1929-2000 growth rate to 1929 GPP gives you $1,473 billion in 1946, 13% above the actual level. 1947 and 1948 showed further GPP increases, but reduced actual GPP’s gap below full employment GPP only to 11%.

Bottom line: without the war, GPP would have continued recovering at a rapid rate after 1940, probably giving a higher GPP by 1946. Second bottom line: a combination of the Great Depression and the war, probably mostly the latter, depressed 1946’s GPP by around 10%-12% below the level it would naturally have reached in a free peaceful market.

Intuitively this makes sense. As policy was stabilized after 1938, the U.S. economy began recovering rapidly to its natural full-employment level. World War II depressed the private economy to a low level, but its effect was mostly temporary, with an astonishing bounce-back as peace returned. However, a combination of the Great Depression and the damage caused by the war caused the United States to lose about 10%-12% of its full-employment output by 1946-48 (catching up which long-term may have resulted in the exceptionally good economic performance of 1948-66.) The Keynesian story of World War II’s economic boost makes no sense; this one does.

Returning now to Krugman’s Alien invasion, any such enormous “War of the Worlds” rearmament effect, on the analogy with World War II, would increase GDP, by definition, as heavy government spending pushed up the numbers. Conversely it would depress GPP, as private output for private consumption was diverted to make Heat-Ray Defense Shields and Inter-Galactic Bug Spray, neither of which would have any value if there were no Aliens. Once the Alien War was declared to be a hoax, GPP would recover close to its previous level, as peacetime reconversion occurred, probably without much direct diminution from a war that did not exist.

If the U.S. deficits had been acceptably financed at moderate interest rates, that would be that. The only long-term effect of the non-existent war would be a greatly increased level of government debt and some redundant and useless anti-Alien equipment. However, if the U.S. started anti-Alien rearmament with today’s excessive level of deficits and debt the potential effect would be much more serious, resulting in either a debt default or hyperinflation or both. Germany’s GDP declined by 10% in real terms between 1913 and 1925, in a period when Western Europe’s GDP as a whole rose by 10%. Since almost all of Western Europe experienced World War I and Germany was not invaded (so suffered little direct industrial destruction) the 20% relative German underperformance must have been largely the result of the Weimer hyperinflation and effective default on pre-war debt. A U.S. hyperinflation and default, likely if we fought imaginary Aliens, would presumably have a similar effect on U.S. output and living standards, making us 20% poorer.

Krugman is an exceptionally intelligent man of great integrity. But Keynesianism, and the Gross Domestic Product metric that it uses, are weapons of intellectual charlatanism. Until a better metric is developed, taking account of government’s value rather than its cost, we should measure our economic well-being by Gross Private Product, direct our economic policies accordingly, and let the government take care of itself.

Friday, July 22, 2011

The euro crisis will give Germany the empire it’s always dreamed of...

The Telegraph, by Peter Oborne

Many of the biggest losers from the Wall Street Crash were not those greedy speculators who bought at the very top of the market. There was also a category of investor who recognised that stocks had become badly overvalued, sold their shares in the summer or autumn of 1928, then waited patiently as the market surged onwards to ever more improbable highs.

When the crash came in October 1929, they felt thoroughly vindicated, and waited for the dust to settle. The following spring, when share prices had consolidated at around a third lower than the all-time high reached the previous year, they reinvested the family savings, probably feeling a bit smug. Then, on April 17, 1930, the market embarked on a second and even more shattering period of decline, by the end of which shares were worth barely 10 per cent of their value at their peak. Those prudent investors who had seen the Wall Street Crash coming were wiped out.

There was one crucial message from yesterday’s shambolic and panicky eurozone summit: today’s predicament contains terrifying parallels with the situation that prevailed 80 years ago, although the problem lies (at this stage, at least) with the debt rather than the equity markets.

After the catastrophe of 2008, many believed and argued – as others did in 1929 – that it was a one-off event, which could readily be put right by the ingenuity of experts. The truth is sadly different. The aftermath of that financial debacle, like the economic downturn after 1929, falls into a special category. Most recessions are part of the normal, healthy functioning of any market economy – a good example is the downturn of the late 1980s. But in rare cases, they are far more sinister, because their underlying cause is a structural imbalance which cannot be solved by conventional means.

Such recessions, which tend to associated with catastrophic financial events, are dangerous because they herald a long period of economic dislocation and collapse. Their consequences stretch deep into the realm of politics and social life. Indeed, the 1929 crash sparked a decade of economic failure around much of the world, helping bring the Weimar Republic to its knees and easing the way for the rise of German fascism.

So we live in a very troubling period. The situation is very bad in the United States, where ratings agencies are threatening the once unimaginable step of downgrading Treasury bonds, and Congress is consumed by partisan wrangling over raising the nation’s debt limit. But it is desperate in Europe, because the situation has been exacerbated by a piece of economic dogma.

The faith of leading European politicians and bankers in monetary union, a system of financial government whose origins can be traced back to the set of temporary political circumstances in the immediate aftermath of the Second World War, and which was brought to bear without serious economic analysis, is essentially irrational. Indeed, in many ways, the euro bears comparison to the gold standard. Back in 1929, politicians and central bankers assumed that the convertibility of national currencies into gold (defined by the economist John Maynard Keynes as a “barbaric relic”) was a law of nature, like gravity. European politicians have developed the same superstitious attachment to the single currency. They are determined to persist with it, no matter what suffering it causes, or however brutal its economic and social consequences.

There is only one way of sustaining this policy, as the International Monetary Fund argued ahead of yesterday’s summit in Brussels. Admittedly, the IMF should not be regarded as an impartial arbiter. Theoretically, its responsibilities stretch around the globe, but it has become the plaything of a reactionary European elite, of whom its latest managing director, Christine Lagarde (a dreadful and backward-looking choice), is the latest manifestation. However, the IMF was entirely correct when it pointed out that the only conceivable salvation for the eurozone is to impose greater fiscal integration among member states.

This advice was finally being taken yesterday – and it is almost impossible to overestimate the importance of the decision which European leaders seemed last night to be reaching. By authorising a huge expansion in the bail-out fund that is propping up the EU’s peripheral members (largely in order to stop the contagion spreading to Italy and Spain), the eurozone has taken the decisive step to becoming a fiscal union. So long as the settlement is accepted by national parliaments, yesterday will come to be seen as the witching hour after which Europe will cease to be, except vestigially, a collection of nation states. It will have one economic government, one currency, one foreign policy. This integration will be so complete that taxpayers in the more prosperous countries will be expected to pay for the welfare systems and pension plans of failing EU states.

This is the final realisation of the dream that animated the founders of the Common Market more than half a century ago – which is one reason why so many prominent Europeans have privately welcomed the eurozone catastrophe, labelling it a “beneficial crisis”. David Cameron and George Osborne have both indicated that they, too, welcome this fundamental change in the nature and purpose of the European project. The markets have rallied strongly, hailing what is being seen as the best chance of a resolution to the gruelling and drawn-out crisis.

It is conceivable that yesterday’s negotiations may indeed save the eurozone – but it is worth pausing to consider the consequences of European fiscal union. First, it will mean the economic destruction of most of the southern European countries. Indeed, this process is already far advanced. Thanks to their membership of the eurozone, peripheral countries such as Greece and Portugal – and to an increasing extent Spain and Italy – are undergoing a process of forcible deindustrialisation. Their economic sovereignty has been obliterated; they face a future as vassal states, their role reduced to the one enjoyed by the European colonies of the 19th and early 20th centuries. They will provide cheap labour, raw materials, agricultural produce and a ready market for the manufactured goods and services provided by the far more productive and efficient northern Europeans. Their political leaders will, like the hapless George Papandreou of Greece, lose all political legitimacy, becoming local representatives of distant powers who are forced to implement economic programmes from elsewhere in return for massive financial subventions.

While these nations relapse into pre-modern economic systems, Germany is busy turning into one of the most dynamic and productive economies in the world. Despite the grumbling, for the Germans, the bail-outs are worth every penny, because they guarantee a cheap outlet for their manufactured goods. Yesterday’s witching hour of the European Union means that Germany has come very close to realising Bismarck’s dream of an economic empire stretching from central Europe to the Eastern Mediterranean.

History has seen many attempts to unify Europe, from the Habsburgs to the Bourbons and Napoleon. This attempt is likely to fail, too. Indeed, a paradox is at work here. The founders of the European Union were driven by a vision of a peaceful new world after a century of war. Yet nothing could have been more calculated to create civil disorder and national resistance than yesterday’s demented move to salvage the single currency.