Economics & Finance: The Carve Up Begins

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Decline of Global Trade | Currency Wars |De-Dollarization

1. Decline of Global Trade:

While the global economy is doing well, the amount of stuff that is imported and exported around the world goes up, and when the global economy is in recession, the amount of stuff that is imported and exported around the world goes down.

It is just economics. Governments have become very adept at manipulating  other measures of economic activity such as GDP, but the trade numbers are more difficult to hide.  For many years, China has been leading the revolution in global trade. But now we are witnessing something that is almost unprecedented. Chinese exports are falling, and Chinese imports have all but collapsed. Why import raw materials to manufacture goods for which there are no buyers.

In the US, the picture is even more bleak, The American economy is a consumer-driven one, in which consumption makes up 75% of its GNP. Since the 2008 Crash, all the economic indicators are down. More than half the labor force does not have a job. Thus, no income means no consumption.

Major retailers , such as Wal Mart and McDonalds, are announcing a profit slump, and are shrinking the size of their operations. This will have a huge ripple effect. There are thousands of companies that do business with Wal Mart, and they are starting to get squeezed.

It is the same in all the economies of the world. Business is slowing down at a rapid pace.

This is reflected in the movement of goods by sea. The Baltic Dry Index is a good indicator of the movement, usage, and price of sea-going traffic.  As of the 15 January the Baltic Dry Index is standing at 415 – less than half of what it was in 2007! Many shipping companies have parked off their ships.

In fact, there is hardly much shipping traffic between Europe and North America, as of today.

As this emerging worldwide recession deepens, a lot more people are going to lose their jobs. That is going to cause suffering and poverty to increase. So, none of us should be excited that the global economy is collapsing. There is already so much pain around us, and what is to come is beyond what most of us would even dare to imagine.

2. Currency Wars :

In August 1971, Washington went off the gold standard. The country was in the midst of a crisis, the result of an ongoing currency war that had destroyed faith in the US dollar.

Today, we are engaged in a new currency war, and another crisis of confidence in the dollar is here. The growth in globalization, derivatives and leverage over the last 45 years have made financial panic all but impossible to contain.

The new crisis has begun in the currency markets, and is spreading quickly to stocks, bonds and commodities. When the dollar collapses, the dollar-denominated markets will collapse too. Panic will quickly spread throughout the world.

Today, the US Federal Reserve is engaged in the greatest gamble in the history of finance. Beginning in 2007, the Fed fought off economic collapse by lowering interest rates and lending freely. Eventually rates reached zero, and the Fed appeared out of bullets.

Then, in 2008, the Fed found a new bullet : quantitative easing , or QE. This is essentially a program of printing money to bail out the banks short-term obligations, and maintain liquidity in the system.the Fed inflated asset prices. Commodity prices, and consumer prices to offset the natural deflation that follows a crash. It is basically engaged in a tug-of-war against deflation that normally accompanies a depression. This is the essence of the Fed’s gamble. It must cause inflation before deflation prevails; it must win the tug-of-war.

In a tug-of-war, the rope is the channel through which stress is conveyed from one side to the other. In the contest between inflation and deflation, the rope is the dollar. The dollar bears all the stress of the opposing forces and sends that stress around the world. The value of the dollar is the way to tell who is winning the tug-of-war. This particular tug-of-war is actually a full-on currency war, and is an attack on the value of every stock, bond and commodity in the world.

In the best of all possible worlds for the Fed, asset values are propped up, banks get healthier, government debt melts away and no one seems to notice. Yet, by printing money on an unprecedented scale, the Fed was hoping for the best, and quite unprepared for the worst. In 2016, the worst is knocking on our very doors.

The effects of printing dollars are global; by engaging in quantitative easing, the Fed has effectively declared currency  war on the world. The effects were soon felt around the world; higher inflation, higher food prices . and stock market bubbles, from Brazil to China to South Africa.

Printing money means the US dollar is devalued so foreign creditors get paid back in cheaper dollars. The devaluation means higher unemployment in developing countries as their exports become more expensive for those that are importing them. The resulting inflation also means higher prices for inputs needed in developing economies like copper, oil and food. Foreign countries began to fight back, as the currency war expanded.

Currency wars have been fought before, and they always end badly. At best, currency wars offer the sorry spectacle of countries stealing growth from trading partners. At worst, they degenerate into sequential bouts of inflation, recession, and violence as the scramble for resources leads to invasions and wars. The historical precedents are sobering enough, but the dangers today are even greater, exponentially increased by the scale of financial linkages throughout the world. If the dollar falls, America’s empire falls with it.

This new currency war is the most meaningful struggle in the world today – the one struggle that determines the outcome of all others.

A currency war, fought by one country through competitive devaluations of its currency against others, is one of the most feared outcomes in international economics. Nothing positive ever comes from a currency war. So it was shocking to global financial elites to hear Brazilian Finance Minister Guido Mantega, flatly declare in September 2010, that a new currency war had begun.

The crash of 2008 changed the equation. Suddenly, instead of expanding, the economic pie began to shrink and countries began to fight over the crumbs.

At the heart of every currency war is a paradox. While currency wars are fought globally, they are driven by domestic distress.  Currency wars begin in an atmosphere of insufficient internal growth. The country that starts down this road typically finds itself with high unemployment, low or declining growth, a weak banking sector and deteriorating public finances. In these circumstances it is difficult to generate growth through purely internal means and the promotion of exports through a devalued currency becomes the growth engine of last resort.

In an economy where individuals and businesses will not expand and where government spending is constrained, the only remaining way to grow is to increase net exports, and the fastest, easiest way to do that is to cheapen one’s currency.

So currency devaluation as a path to increased exports is not a simple matter. It will lead to higher input costs, competitive devaluations, tariffs, embargoes and global recession sooner rather than later. Given these adverse outcomes and unintended consequences, one wonders why currency wars begin at all. They are mutually destructive while they last and impossible to win in the end. In short, currency wars are “a race to the bottom”.

As with any policy change, some history is instructive. The 20th century was marked by two great currency wars. The first currency war ran from 1921 to 1936, and ended in World War 2. The second currency war ran from 1967 to 1987, and was finally settled in 1985 with the Plaza Accord, without descending into military conflict. We are now at the tail-end of the third currency war which began in 2008, and will most likely end in a global war. And all indications are that this war is just around the corner.

South Africa – a prime example :

We chose the country of South Africa for the following reasons ; it is a major exporter of raw minerals, and agricultural goods. It imports manufactured goods, and energy. It has a vibrant banking sector, and a huge equities market, centered around the Johannesburg Stock Exchange, or the JSE. It is an emerging market, and Africa’s largest economy. Lastly,  all of the above economic and financial indicators , as outlined in ‘currency wars ‘ fit perfectly in the South African context.

The country took a battering towards the end of 2015, in relation to the firing of its Finance Minister. The currency, the Rand, was badly mauled in the ensuing crisis.

Its primary exports declined in prices on a backdrop of a slowing  global trade  conditions.

The US Fed, in late 2013, stopped its quantitative easing program. It stopped printing money. A few months later, the effects began to be felt in the commodities markets. Every commodity from oil to wheat declined in price. Stocks and bonds began to follow suit.

These declines in asset prices began to be felt on the key stock markets, namely the New York Stock Exchanges, such as the Dow Jones. Investors in these markets were faced with mounting losses. And if they were investing in these markets on margin, they had a choice; either sell out and hope to recover some capital. Or, sell off shares in other markets around the world, in order to meet mounting margin calls from their brokers.

So, if an investor on the Dow Jones were to sell his shares on the JSE, he would repatriate these funds back to the US, in order to hold onto his shares on the Dow Jones. In the case of South Africa, the JSE would show a fall, then as these funds move out of the local currency, the Rand then drops in value as money flees the economy.

First is a fall on the Dow Jones; followed by a fall on the JSE; followed by a fall of the rand vs the US dollar.

Given the fragile state of the international banking system, the zombie-like conditions of all major economies, and the drop in profits of businesses, the stock markets are declining. Since the start of 2016, all  major markets from China to Russia, to Brazil, to the EU countries are falling. This , in turn, has an effect on the Dow Jones. It is also falling.

When share prices fall, investors are faced with margin calls from their brokers. Hedge funds, banks, and other investors go bankrupt. The stock markets fall even further.

Currently, the Dow Jones has fallen by 10% since January 3. It is expected to fall another 10 to 20% over the next few months. This means that even more shares would be sold on the JSE, and funds moved back to New York. The rand would fall even further than where it currently is now. Our analyses on this, based on various economic and financial indicators, suggest a rand-dollar exchange rate of R20 to R23 by the end of  2016.  And this is a conservative estimate.

South Africa has suffered a loss in capital of close onto $30 billion in the past 4 weeks. And it does not look like capital flight will be slowing down. The banking system will be severely impacted. Expect a rise in interest rates, and a negative growth in GDP for 2016.

3. De-Dollarization:

Many nations are living under the brutal regime of the petrodollar standard. Attempts in the past by countries such as Iraq, Libya and France/Germany/South Africa, have failed.

It was not until the two Eurasian giants Russia and  China started BRICS that the first real opposition to the petrodollar began to emerge.

In 2014 Russia and China signed two mammoth 30-year contracts for Russian gas to China. The contracts were not in dollars, but in Yuan and rubles. That was the beginning of an accelerating process of de-dollarization that is underway today.

In addition, China began a program of currency swaps with its various trading partners. An example is Russia-China. Russia will supply china with rubles, and China will supply Russia with yuan. These currencies would be used to settle trade payments between the two nations. It becomes obvious that these two nations are using their own currencies, and substituting it for the US dollar.

From late 2013 , China has conducted currency swaps with about 40 countries. The effect has been a sharp fall in the use of the dollar.

Furthermore, a Russian-Chinese alternative to the dollar in the form of a gold-backed rubles and yuan, could start a snowball exit from the dollar, and with it, a severe decline in America’s ability to use the reserve dollar role to finance her wars with other people’s money.

To counter Washington’s plans to break-up Eurasia, the Chinese launched the two new banks for infrastructure development for Eurasia; the BRICS Bank, and the Asian Infrastructure Investment Bank, or the AIIB. These two banks are direct challenges to the IMF and the World Bank.

Since the ‘break-up’ between the two families in June 2013, London was looking for a way to really hurt New York. As a result, most of the nations that are in London’s orbit – UK, France, Italy, Switzerland, Australia, and even “other allies” of Washington rushed to join the AIIB, before its closing date of March 31, 2015.

Washington’s blind arrogance is driving its closest allies into the ‘adversary’s camp’. New York retaliated against the Rothschilds. On 2 April, 2015, the US Fed fined Germany’s Commerzbank $1.7 billion for dealing with Cuba, Sudan and Iran – Washington sanctioned countries. Commerzbank is a Rothschild bank!

This can only happen as long as all international transactions have to be channeled through US banks and controlled by the Rothschild-dominated BIS – Bank for International Settlements.

Russia, China, and other SCO aligned countries have already broken away from the dollar system for international contracts and money transfers. They are about to launch an alternative to the western ruled and privately owned SWIFT transfer systems. The new system could be joined by any country wanting to break loose from the predatory dollar claws.

When even the staunchest stooges of Washington seek alliances in the East, the writing is on the wall, that the economic winds are shifting, and that a tectonic sea-change is in the offing.

A full-scale financial war is on between Washington and the rest of the world. Many nations are ducking for cover. Some will be badly hurt. This stress is going to be reflected in the international banking system, the weak link.

There is an ongoing slow-motion implosion of the banking system. Banks are going bust, daily, throughout the world, as we write. In the next issue, we will discuss the state of these banks, and find out that your money is NOT SAFE any longer.