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Sat

10

Oct

2009

Worry, Worry, Worry - Global Economy
Saturday, 10 October 2009 06:31
by Stephen P. Pizzo

I look forward to the day when I can sit down at this keyboard in the morning and, looking ahead, write a column while humming “Zippity Do Dah, Zippity Day.”

Instead I find myself spending a lot of time worrying. Of course, that's hardly news to regular readers. I am worrier – a persistent pessimist.

My condition is not inherited, but a learned response. At a young age I discovered a simple truth: pessimists are rarely disappointed, but often pleasantly surprised. Optimists, on the other hand, live the flip side of that rule.

I only mention this because lately the focus of my worries has been the economy. Not the US economy, but the global one. Since it became just that, “global,” just focusing on the US economy is like worrying about you tire pressure but never checking the oil.

And what I see has me about as worried as I get. Avoiding a lot of economic la de da, here's what's got me fretting:

* The value of the US dollar is dropping like lead turd – which is about how our creditors (read China) are see it these days

This is why the price of gold and other commodities (also known as “real stuff,” has soared in recent weeks. More and more countries, investors and those with “real stuff,” like oil, to sell are looking for other ways to price their stuff fearing that a dollar they take in payment today will w ether away in value before they can convert it into some kind of other real stuff.

All this is mighty dangerous for America, and Americans, right now. Sure a devalued dollar makes US goods and services cheaper overseas. And in normal times that can be a nice advantage to have. But not now. Not when pretty much half of every dime the government needs to fund everything from the military to health care to bank bailouts has to be borrowed from a handful of other countries... particularly China.

Which is why every time the dollar dips another few percentage points in value, Chinese finance ministers put out an emergency call for fresh underwear. China is now sitting on more than three-quarters of a trillion in US, dollar-denominated, debt, and the last thing they want is to be repaid with dollars worth a fraction of what they bargained for when they lent us the dough.

And those worries could not come at a worse time for the US government. In 2008 the US budget deficit was $455 billion. But this year that deficit will be more than $1 trillion, and we're gonna need to borrow a lot of that from an increasingly nervous China. (See Chart)

* Which brings me to devaluation.


Devaluation of national currencies has always been the refuge of last resort for nations that get themselves in over their heads. Simply reneging on an international debt would be fiscal suicide for a nation. But when world markets are allowed to discount a nation's currency based on the fundamentals then the debtor nation can claim, “We didn't do it. They did it.”

Too many nations got themselves in over their heads, not the US. And it often only takes a small disturbance to trigger an avalanche in conditions like these. Say hello to tiny Latvia.


Latvia's Woes Rise as Auction Fails
Latvia's halting austerity program and its proposal to modify mortgages are causing "another wave of distrust" to roll over the Baltic nation, the central bank said Wednesday, issuing a warning for the country hit hardest by economic strains across Europe... Under EU rules, countries must keep budget deficits below 3% of GDP. According to the commission, the EU's executive arm, 20 of the bloc's 27-member countries are on track to break that limit this year. The commission blamed falling tax revenue coupled with exceptional state spending to help the unemployed, prop up ailing banks and stimulate economic recovery.Latvia's government is on the verge of giving up on a central tenet of its austerity program by allowing a devaluation. That could goose the economy by making exports more attractive, and it would eliminate the expensive process of buying lats to maintain the currency's peg against the euro.

Devaluation would have serious consequences. The Swedish banks that made euro-denominated mortgages would see foreclosures surge as fewer borrowers would be able to make payments. Latvia also would likely lose any chance of being allowed into the euro zone soon. would make devaluation politically palatable, because it would ease the pain that Latvian households with euro-denominated mortgages would suffer if the lat were devalued.

Ah, if only it were only Latvia:

In addition to Germany and Italy, the commission warned Austria, Belgium, the Czech Republic, the Netherlands, Portugal, Slovakia and Slovenia about budget deficits. (Full Story)

Yep. The whole interconnected “free market” world is awash in debt owed to one another. And, as push comes to shove, they are increasingly eyeballing each other like gunfighters, unblinking, fingers twitching at their sides, waiting to see which country goes for it's devaluation first.

Meanwhile oil producing nations, particularly the Saudi Sand and Oil Kingdom, are fixing to stop pricing oil in dollars, and replace it with the average of a “basket of currencies.” Which means that if you thing three bucks a gallon is high, get ready for $5 or even $6 or more.

But wait, you say, none of these worries make sense. Look at the stock market. The equities markets have boomed in recent months, edging to within snorting distance of 10,000 on the DOW.

I wish I could get all giddy about that, but the driver behind that has nothing to do with anything real, or anything helpful.

Over the past decade or so of laissez-faire global finance those who create value in the equities markets figured out how to profit even more without actually creating actual value. It's been a period of fiscal alchemy in which they turned, not lead, but hot air, into gold – at least for them.

Here's the problem in a nutshell:

Over the last couple of decades or so, the book value of assets — stocks, bonds and bank deposits — exploded. They now represent four times the actual annual global gross domestic product.

The Mckinsey Global Institute estimates this trend peaked sometime in 2007 at $194 trillion – compared to much more grounded and realistic levels such as $43 trillion in 1990 or the $94 trillion in 2000.

Which says to me that at least $100 trillion that's been added to the world's books since 2000 was largely if not entirely, hot air.

That hot air funded the last three bubbles.. the dotcom bubble, the housing bubble and the securities bubble. And it's that $100 trillion in hot air, in search of the next bubble, that's driving the equities and commodities markets upward.

“It's not a matter of could it happen again; it's a matter of when," says Kenneth Rogoff, an economics professor at Harvard University and co-author of a book on bubbles, "This Time Is Different: Eight Centuries of Financial Folly."

All of which, when taken together, has me deeply and profoundly worried. On one side we have a small group of individuals, companies and national and extra-national institutions trying to leverage that $100 trillion in hot air on their books into another few trillion in hot air – on which of course they pocket very real returns in trading fees, capital gains and Soprano Family-type relationships with others of their kind. Because, after all, “their thing” has served them very well indeed.

On the other hand we have entire nations across the globe, not third world nations, but developed nations, flat broke, rattling their tin cups at one another while living in terror that no one will lend them any more money -- and at the same time worrying that those who owe them money will devalue their currencies thereby rendering them even more fiscally screwed than they were already.

Back here in the US of A that tin cup has become a yawning 55-gallon barrel, as we need to borrow more and more to fill the holes left in our own institutions when those Soprano financiers pulled the plug on their Ponzi schemes. Just this morning we learned that even after bailing out Freddie and Fannie and AIG and BofA and …. that now we are going to have to borrow a few more billions to bail out the FHA as well. (Oh, and then there's those two expensive wars someone believes we need to continue funding as well.)

It would be one thing if what we're going through right now was just the collapse of the US financial system. But it's not. This time it's anyone who is anyone in the developed world – from the G8 right up to the G20.

Those Soprano Financiers were great lovers. They found the world's G-spot.

Now we've all got the clap – or likely worse.

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wallace said:

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laissez-faire is not to blame..
laissez-faire capitalism is not to blame. blame it on the increasingly interventionist polices of government. any instance you can claim the fault is laissez-faire, i can show you the beginning of the problem in a government or FED interference with the market.
 
October 12, 2009
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