Friday, May 27, 2011

Bankrupt nations try to stop the future from happening, fail

Debt is slavery… or at least indentured servitude of the worst kind. That looming mortgage, the high interest credit card debt, the short-term car loan– these are the forces that keep people from breaking free and taking action.

Ironically, debt begets more debt. According to FinAid, the average US student loan debt for a four-year private university graduate is nearly $36,000, and $24,000 for public. Throw in that first car loan and maybe a mortgage, and suddenly you’re staring at hundreds of thousands of dollars in demoralizing claims on your future income.

At this point, most people figure… ‘hey, I’m already in debt up to my nose, might as well get in up to my eyeballs and buy a new plasma screen on credit.’

Debt is an enormous psychological burden that influences life’s major decisions. It’s why so many people stay committed to jobs that are unfulfilling in cities they detest under conditions they find disheartening. Nobody wants to rock the boat too much… take too many risks and you could lose your job, and hence the ability to make those monthly payments.

This familiar story has been playing out across the developed world for years. This is not an ill, however, that exclusively affects individuals and families. Even at the macro level, debt has the power to subjugate entire nations to the whims of their creditors.

Enter the IMF.

In July 1944, world leaders gathered in Bretton Woods, New Hampshire to be dictated terms of the new global financial system. The US dollar was set as the global reserve currency, and the International Monetary Fund was established to shower the world’s nations with the dollars they needed to participate in this system.

Like most governmental and non-governmental organizations, however, the IMF eventually took on a life of its own.

(The CIA is a perfect example of this; formally established in 1947, the CIA was charged with… wait for it… being the ‘central’ agency to coordinate US intelligence. It grew quickly into its own beast, culminating in the creation of the post-9/11 National Intelligence Directorate. It’s job? You guessed it: being the ‘central’ agency to coordinate US intelligence.)

Over the years, the IMF became the roving economic police force of the ruling class, coercing developing nations to take enormous loan packages they had no hope of paying off.

As a result, the local IMF (or World Bank) representative in developing countries became extremely powerful figures. Leaders in poor countries were so terrified of loan default, the IMF was able to shape policy and allocate national resources as the west saw fit.

Clearly the tables have turned.

By 2011, the IMF’s biggest customers have become ‘developed’ (i.e. contracting) countries like Greece which are relying more and more on the generosity of China. Now with the IMF’s former chief locked up in disgrace for the foreseeable future, the race is on to see who will replace him.

The new order of things is very clear. The western hierarchy of the past is insolvent, and its capital has migrated south and east. Western leaders refuse to acknowledge this reality and are clinging desperately to antiquated institutions like the IMF in order to retain control of a now defunct financial system.

Newsflash: the IMF is only relevant to western leaders who live in the past. French Finance Minister Christine Lagarde’s official bid to become the new IMF chief only shows how pathetic their intentions are. It’s like someone trying to take command of the Titanic as she’s headed toward the ocean floor.

China, the world’s second largest economy, is routinely relied upon to bail out the west… yet it has a paltry 3.65% of the IMF’s voting power. Europe, however, is arguably the most insolvent region on the planet, though it insists on remaining at the helm. Ultimately, the market doesn’t care and has been orienting itself towards the developed world for years.

Little by little we are seeing signs of a revolution in the financial system– grumblings from Zimbabwe about establishing an asset-backed currency, new exchange-traded gold contracts in Asia, more bank wiring routes that bypass New York City, and corporations in the developing world issuing debt on the international market in local currency with ease.

I’ve written extensively that China’s renminbi is being increasingly considered a reserve currency to compete with the dollar and euro. Other developing countries have already entered into swap agreements to accumulate renminbi reserves, and even western companies are issuing renminbi-denominated debt.

There are signs of more liberalized exchange controls all the time; it’s possible for individuals and corporations to hold savings in renminbi through a variety of ways… you can even walk into the New York City Bank of China branch and open an account.

The latest move is American Express’s new renminbi-denominated Travelers Cheques– a ‘cash equivalent’ issued by a non-Chinese financial institution. This is a major step, and its implications are far, fare more important than whichever white person is jonesing to head an irrelevant organization of the past.

Western leaders simply don’t want to accept their loss of primacy; they’ve become enslaved themselves, not only by the insurmountable sovereign debts they’ve accumulated, but by their stubborn refusal to acknowledge the simple reality of a new system they can’t stop and don’t control.

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Fed's secret loans to banking giants revealed

Dees Illustration

Credit Suisse, Goldman Sachs and Royal Bank of Scotland each borrowed at least $US30 billion ($29 billion) in 2008 from a Federal Reserve emergency lending program whose details weren't revealed to shareholders, members of Congress or the public.

The $US80 billion initiative, called single-tranche open-market operations, or ST OMO, made 28-day loans from March through December 2008, a period in which confidence in global credit markets collapsed after the September 15 bankruptcy of Lehman Brothers Holdings.

Units of 20 banks were required to bid at auctions for the cash. They paid interest rates as low as 0.01 per cent that December, when the Fed's main lending facility charged 0.5 per cent.

“This was a pure subsidy,” said Robert A. Eisenbeis, former head of research at the Federal Reserve Bank of Atlanta and now chief monetary economist at Florida-based Cumberland Advisors. “The Fed hasn't been forthcoming with disclosures overall. Why should this be any different?”

The Federal Reserve Bank of New York, which oversaw ST OMO, posted aggregate data about the program on its website after each auction, said Jeffrey V. Smith, a New York Fed spokesman. By increasing the availability of short-term financing when private lenders were under pressure, “this program helped alleviate strains in financial markets and support the flow of credit to U.S. households and businesses,” he said.

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Subpoenaed Documents Show Goldman Sachs Offered to 'Tear Up' AIG Derivatives Contracts at 'Right Price' Before NY Fed Took Over Negotiations


This is not without complexity. Let us go over what we know.

AIG has said they were negotiating "tear-ups" with counterparties at 50 cents on the dollar before the NY Fed told them to 'stand down' in negotiations with counterparties. 'Stand down' was the exact language from emails unearthed last week by Hugh Son of Bloomberg.

Goldman openly admits that they were willing to tear up contracts with AIG for the 'right price,' as you will see below.

But Goldman CEO Lloyd Blankfein told Angelides and the FCIC panel last week that they were 'never asked' by the the New York Fed negotiators, working on behalf of AIG, to accept any haircut, or less than 100 cents on the dollar.

The only logical conclusion is the following -- somebody's lying.

Either New York Fed officials lied to investigators and reporters when they said that they had worked for a week to extract haircuts from AIG counterparties.


Goldman Sachs CEO Lloyd Blankfein was lying when he testified under oath that haircuts were never proposed by NY Fed negotiators.

Considering that Goldman has been forthright about the many discussions it had with AIG (pre-bailout) attempting to reach agreement on a tear-up price, it doesn't make sense for them to falsely claim that the NY Fed officials never asked them to take a haircut.

It sounds like Goldman Sachs just threw the New York Federal Reserve, or at least the portion devoted to managing the AIG bailout, squarely and directly in front of a 10-ton House Oversight committee bus, named ISSA.

The only problem with this, as I will be explaining later, is that the NY Fed, though guilty of malfeasance, is not the bank we should be focusing on, and Geithner is not the individual.

It's Goldman Sachs, Lloyd Blankfein, Ed Liddy, Dan Jester and the ringmaster, Henry Paulson. More coming.


From Bloomberg

Jan. 26 (Bloomberg) -- Goldman Sachs Group Inc. was the most aggressive bank counterparty to American International Group Inc. before its bailout, demanding more collateral while assigning lower values to real estate assets backed by the insurer, documents obtained by lawmakers show.

A month before the September 2008 rescue, Goldman Sachs approached AIG about tearing up contracts protecting the bank against losses on collateralized debt obligations, or holdings backed by mortgages, according to a BlackRock Inc. presentation dated Nov. 5, 2008. Goldman Sachs was the only counterparty willing to cancel the credit-default swaps and bear the risk of further CDO losses, provided that AIG make payments based on the bank’s larger-than-average estimate of market declines.

“Goldman Sachs is the least risk-averse counterparty,” according to the presentation, which was prepared by the asset manager for AIG and later given to the Federal Reserve Bank of New York. The firm is “the only counterparty willing to tear up CDS with AIG at agreed-upon prices and retain CDO exposure.” The document was obtained by the Congressional panel scheduled to hold a hearing tomorrow on AIG’s $182.3 billion bailout.

The presentation offers the clearest picture yet of the negotiations between AIG and its counterparties before a rescue that fully reimbursed banks including Goldman Sachs for $62.1 billion in CDOs. The BlackRock materials indicate that Goldman Sachs, which has been pilloried by lawmakers for its dealings with AIG, may have been betting that the securities would rebound from the values it assigned to them.

“We had always made it clear that we were prepared to tear up contracts, it just had to be at the right price,” Lucas van Praag, a spokesman for Goldman Sachs in New York, said in an interview. “We’d had many discussions over a long period of time about doing it, I don’t know why BlackRock chose August” as a specific example.

BlackRock indicated that Goldman Sachs might be willing to accept less money than it was entitled to under its AIG contracts because the bank hadn’t received all of the collateral it requested.

“Because Goldman prices have been consistently lower than third-party prices, Goldman and AIG have negotiated a collateral posting protocol in which Goldman’s prices are given a 12 percent positive haircut for collateral posting,” the document says.

AIG posted about $6 billion in collateral to Goldman Sachs on the contracts before the bailout, according to the BlackRock document, a third of the sum that the insurer turned over to banks. Goldman Sachs’s bets accounted for about 22 percent of the assets insured by AIG through the swaps.

Goldman Sachs, the most profitable securities firm in Wall Street history, was allowed to keep collateral, including $2.5 billion posted after the bailout, and given $5.6 billion from Maiden Lane III in exchange for the CDOs in the deal to retire the swaps.

Goldman Sachs’s portfolio was expected to experience larger losses than the overall AIG portfolio because of so-called Alt-A residential mortgage-backed securities, BlackRock says in the document. While 38 percent of the assets covered by AIG’s agreement with Goldman Sachs were rated AAA, 25 percent were below investment grade, the document says.

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National Inflation Association co-founder admits NIA is a FRAUD!

World Bank Predicts the Demise of the US Dollar by 2025

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This week, the World Bank published a report predicting the demise of the US dollar as the major reserve currency by 2025. The transition will be driven by emerging market growth rates of 4.7% a year, compared to only 2.3% for developed countries. Six countries, Brazil, China, India, Indonesia, Russia, and South Korea, will account for half of the world economy by then.

The greenback will be replaced by a multi-currency system made up of the dollar, the euro, and the Chinese renminbi. The evolution will be driven by a sharp rise in third party international trade, direct investment, and mergers and acquisitions. Global multinationals based in the developed world will play a diminishing role on the world stage.

While I agree with the report’s growth assumptions, its conclusions are a mile off. It assumes that Chinese growth continues at its blistering, double digit rates. It won’t. I see Chinese growth peaking out in five years, when its population pyramid starts to invert as a result of the “one child” policy. It also assumes that the Chinese float the renminbi, which they have been so far been loath to do. The rudiments of a domestic Chinese bond market have yet to develop.

As for the Euro, it would not exactly be my first choice for a reserve currency these days. It might not even exist in 15 years, at least in its current form.

Reports like this have been spewing forth from international agencies for at least the last four decades, and I immediately file them in the wastebasket where they belong. By the time the dollar really loses its reserve status, my main concerns in life will be what flavor the Ensure is that day, and whether my Depend’s are getting changed on time.

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The American Manufacturing Crisis and Why it Matters

Despite the denial chorus of the same politicians, financiers, and economists who told us prior to 2008 that our financial sector was fine, the American public is increasingly aware of the truth: American manufacturing is in a state of deep crisis. (And, as I argued in a previous article, the recent small uptick in this sector doesn’t change that fact.)

Let’s start with manufacturing employment. Below is a chart giving the grim story of job losses in this sector. (Source)

This degree of manufacturing job loss is not inevitable or normal. The U.S. actually enjoyed relatively stable employment levels in manufacturing as recently as the year 2000. Then, thanks to our burgeoning trade deficit, things fell off a cliff.

Neither is there anything inevitable about our poor export performance—which is, by definition, half the cause of that deficit. Over the decade after 2000, America’s share of world exports dropped from 17 to 11 percent. But the share of the European Union, home of trade-savvy export superstars like Germany, held steady at 17 percent, despite the relentlessly expanding share of China and the rest of the industrializing Third World. (Source)

Our trade deficit is going to be balanced, the hard way or the easy way, eventually. And it will be essentially impossible for the U.S. to balance its trade without healthy manufacturing exports. Unless, of course, we are willing to radically curtail our imports, which means either:

a) A reduced living standard, or:

b) We start producing the formerly imported goods for ourselves. This, of course, itself requires a strong manufacturing sector, so we’re back where we started.

So there’s no way to avoid manufacturing.

People sometimes imagine that the U.S. can balance its trade by exporting more services or agricultural goods. Unfortunately, the numbers just don't add up.

For example, in 2010, we ran a deficit in goods of $646 billion, while our surplus in services was only $149 billion. (Source) Even worse, thanks to the offshoring of services, our surplus in services is shrinking, not expanding.

As for agriculture, forget it. Our surplus in agriculture is less than a tenth the size of our overall deficit.

It is crucial to understand that manufacturing is not the “past” of our economy. It is, in fact, a big part of our future (albeit an endangered part).

For example, it is no secret that the U.S. will need to transition, over the next few decades, to green energy technologies—whatever form they ultimately take. And these technologies, be they solar cells, windmills, electric cars, fusion reactors or dilithium crystals, are emphatically not virtual. One cannot download them.

They are good old-fashioned things. And there’s nothing low-tech about an electric car.

Unfortunately, the U.S. is losing its position in green-energy manufacturing, as shown by the fact that we now run a multi-billion dollar deficit in these goods.

One fact that belies the idea that manufacturing belongs to the past is that manufacturing is the origin of 70 percent of U.S. research and development. (According to one recent study, 22 percent of manufacturing firms engage in some kind of innovation, compared to only 8 percent of other companies.) So, despite the myth that innovation is a post-industrial activity, losing our manufacturing means losing a lot of our future opportunities to innovate.

Can service industries fill the gap? No. Among other things, even healthy service companies frequently depend upon manufacturing. For example, many companies sell design, customization, operation, optimization, training and maintenance for the products they make. But the skills needed to provide these services often only accrue to those who are intimately involved with building the product in the first place.

Manufacturing tends to draw these other activities along with it. In the words of economist Gregory Tassey of the National Institute for Standards and Technologies —which is, by the way, just about the only serious national civilian industrial-policy agency left in this country:
When technological advances take place in the foreign industry, manufacturing is frequently located in that country to be near the source of the R&D. The issue of co-location of R&D and manufacturing is especially important because it means the value-added from both R&D and manufacturing will accrue to the innovating economy, at least when the technology is in its formative stages. Thus, an economy that initially controls both R&D and manufacturing can lose the value-added first from manufacturing and then R&D in the current technology life cycle—and then first R&D followed by manufacturing in the subsequent technology life cycle.
It is no accident that 90 percent of electronics research and development now takes place in Asia, hardly boding well for America’s future in an industry we dominated as recently as the early 1970s.

This won’t just hurt blue-collar workers. Despite the unfortunate image of manufacturers employing lunch-bucket labor, in reality, 51 percent of their current workforce consists of skilled production workers, 46 percent of scientists and engineers, and only 7 percent is unskilled production workers. (Source) So losing manufacturing industry means losing not just assembly-line jobs, but many white-collar jobs, too.

It’s not just electronics that’s decaying. Other high-tech industries are, with a few exceptions, in no better shape, as shown in the chart below. (Source)

What categories of manufactured goods does the U.S. still have a strong position, signaled by a trade surplus, in? Only aircraft, aircraft parts, weapons, and specialized machine tools (mainly machine tools for making the former). These areas are the last redoubt of American industry largely because they have been the beneficiaries of just about the only institution in the U.S. which still does serious industrial policy and blocks inappropriate trading relationships: the U.S. military.

This may be a clue to what America needs: an appropriate dose of protectionism, plus some serious government-led industrial policy to stoke the fires of industry bright again.

Ian Fletcher is Senior Economist of the Coalition for a Prosperous America, a nationwide grass-roots organization dedicated to fixing America’s trade policies and comprising representatives from business, agriculture, and labor. He was previously Research Fellow at the U.S. Business and Industry Council, a Washington think tank founded in 1933 and before that, an economist in private practice serving mainly hedge funds and private equity firms. Educated at Columbia University and the University of Chicago, he lives in San Francisco. He is the author of Free Trade Doesn’t Work: What Should Replace It and Why.