Mapping the ‘Recovery’… err… Money Printing
This is a nice little animation about the current fiscal crisis and how central banks around the world are printing money and how governments everywhere are trying to solve a debt problem with more debt:
http://www.youtube.com/watch?v=JrFX28Xq9Jw&feature=player_embedded
Enjoy!
The Recession is sooo… 2009 (For the Upper Classes at Least)
Over the past week or so I have had a few conversations with friends and colleagues where the conversation turned to why–in the midst of a global recession and EU fiscal problems–that some companies are pulling in record profits and/or revenues. To me the answer is obvious but then, I guess, I have to remember that as someone with virtually no social life and who enjoys spending almost every spare moment reading and what not, I have the luxury of time to spend on such matters. For others (who have a social life or other family responsibilities) the seemingly conflicting signals coming out of the mainstream media about the economy would be exceedingly confusing.
When it comes to the media, we should always remember that most of these conflicting signals originate in a media echo chamber, itself filled by a mixture of mainstream and social media, which more often than not tends to latch onto good news without digging any deeper. This is why whether stocks or gold or currencies are up or down is such a major focus… it can be delivered quickly and spun in almost any way (good or bad). In an era where news is crafted into fifteen second sound bites and 140-character-or-less chunks it is easy to become convinced that being well-connected is therefore the same as being well-informed. And when those doing most of shouting in the echo chamber are nothing more than readers of government and/or corporate press-releases or are (paid to be) obsessed with the latest celebrity Facebook posts and Twitter ‘Twends’… it should not be surprising that people get confused or are sometimes completely misinformed.
A week or so ago, while listening to CBC Radio (coming out of Calgary so this shouldn’t be surprising), they held up another statistic stating that some high-end retail sector in the city is doing great and that this must be some sign that the recovery is here/gaining-momentum. This is typical of Calgary radio… economic analysis with heavy rose-coloured spin is a regular occurrence. Which brings me to the title of this post or at least the ‘the recession is sooo… 2009′ part. That was another statement made by someone on CBC radio in early 2010. Another rose-coloured, and completely misleading, statement made by a business reporter on our beloved public broadcaster. On the private broadcasters (I cannot even watch Global National anymore) it is just as bad. After Christmas, the stories centered around boutique brands and other high-end retail enjoying healthy sales over the holidays:
Porche & Lamborghini: http://www.bloomberg.com/news/2012-01-10/porsche-rolls-royce-chasing-record-sales.html
Samsung: http://www.arabianbusiness.com/samsung-posts-record-q4-profit-amid-high-end-sales-boom-438831.html
And, of course, more recently, Apple: http://www.theglobeandmail.com/globe-investor/apple-profit-doubles-thanks-largely-to-37-million-iphone-sales-in-three-months/article2313464/
And this is not a recent trend either as is evidenced by these articles from approximately a year ago:
IBM: http://www.theregister.co.uk/2011/01/18/ibm_q4_2010_numbers/
High-end Retail: http://blogs.wsj.com/marketbeat/2011/03/03/retail-sales-high-end-most-trendy-teens-doing-best/
So, what is up? Should we be like the average CBC Calgary reporter and announce that this all is just more evidence that the recession (and economic worries) are “sooo… 2009″? that European contagion is a myth? that Canada is not in a housing bubble? That everything is just the fault of lazy Greeks and PIIGS?
As I said, I do not find this surprising at all and if you have been reading entries on this blog then you will know why. To me, this makes perfect sense. Since the global meltdown in 2007 and 2008, governments and central banks have been pouring trillions into various financial sectors and bailing out corporations in sectors like banking and auto manufacturing. And this continues. It continues because the crisis never went away; rather than being a solution, the actions of governments and central banks the world over were just an attempt to kick the can down the road… and funnel more money into the financial/banking sector (which donates lots to (re)election campaigns after all). The (intended) side-effect was that all that money-printing went directly to the upper echelons of the economy. With a few exceptions, such as Lehman Brothers Holdings Inc., the upper echelon was preserved. The best example is the housing market in the U.S. As thousands of individual homeowners lost their homes, the lenders and mortgage brokers were thrown government-guaranteed lifelines. This is the real ‘wealth redistribution’ and not the kind that those on the extreme right banter about.
And this is reflected in the retail numbers. While the U.S. faces record numbers of people living under the poverty level or using food stamps (http://www.businessweek.com/news/2011-11-02/u-s-food-stamp-use-reaches-record-45-8-million-usda-says.html), high-end retail surges. The upper middle class and the elites in Western nations are doing fine (and are driving record sales in upscale, high-end, and boutique sectors). Their wealth has been preserved while the poor and the lower end of the working population are suffering and inflation is exported to less-developed parts of the world.
The dangerous thing is that for in the media echo chamber (which, let’s face it, is populated mostly by the middle and upper-middle classes) they look in the mirror and things seem fine. The mainstream media doesn’t tell anyone that the stock markets are kept afloat by a few profitable companies like Apple (http://www.zerohedge.com/news/ieconomy-demonstrating-how-apple-distorts-market), Microsoft and IBM (mostly tech and energy companies) and the illusory effects of ramped up high-frequency trading (http://www.zerohedge.com/news/presenting-rise-hft-machine-visual-confirmation-how-skynet-broke-stock-market-us-downgrade-day). And the illusion is rebroadcast and retweeted endlessly so that it appears, on the surface of televisions and smartphones everywhere, that the recession is sooo… very 2009.
The Money Printers
This weekend, I started Currency Wars: The Making of the Next Global Crisis by James Rickards. Rickards is an investment banker and is tied into the U.S. financial and defense circles so he is well positioned to understand the international monetary and financial system. It is a good read (so far) but one section really opened my eyes to not only the interconnectedness of it all but how the world financial system is a self-perpetuating mise-en-abyme of debt creation.
This is the scenario:
As part of its strategy to spur growth and especially employment (made altogether more urgent after the Tiananmen uprising in 1989), China embarked on a program whereby its abundant labour could be made available to the world. As part of this, it pegged its currency to the U.S. dollar. As of 1997, the yuan was pegged at 8.28 to the dollar and China’s GDP growth more than doubled in the 1990s.
Meanwhile, in the U.S. financial deregluation and ultra low interests rates fuelled bubblenomics. The tech bubble bursting and, later, 911 and the ensuing war on terror… coupled with Chinese growth… kept the U.S. Federal Reserve scared enough to keep rates at these low rates. As Rickards adds, Federal Reserve Chairman Alan “Greenspan’s low rates… were also a kind of intravenous drug to Wall Street.” (104) ‘Helicopter Ben’ Bernake arrived at the Fed (first as a governor but then as Greenspan’s replacement), underlining the deflation-fighting low interest rates with a plan for the printing of money to monetize government deficits. The stage was set for the housing bubble and the grand printing of money involving the U.S. Treasury, the Federal Reserve System, Wall Street and Congress. Oh yeah, and let’s not forget China and the many Western corporations taking advantage of extremely poorly paid Chinese workers (as well as the non-existent labour and environmental laws), because here is where it all gets so very interesting:
When a Chinese exporter ships goods abroad and earns dollars or euros, it must hand over those currencies to the People’s Bank of China in exchange for yuan at a rate fixed by the bank. When an exporter needs some dollars or euros to buy foreign materilas or other imports, it can get them, but the PBOC makes only enough dollars or euros available to pay for the imports and no more; the rest is kept by the bank.
The process of absorbing all the surplus dollars… produced a number of unintended consequences. The first problem was that the PBOC did not just take the surplus dollars, but rather purchased them with newly printed yuan. This meant that as the Fed printed dollars and those dollars ended up in China to purchase goods, the PBOC had to print yuan to soak up the suplus. In effect, China had outsourced its monetary policy to the Fed, and as the Fed printed more, the PBOC also printed more in order to maintain the pegged exchange rate.
The second problem was what to do with the newly acquired dollar. The PBOC needed to invest its reserves somewhere… preferring highly liquid government securities issued by the United States Treasury. (106)
And this doesn’t even get at the internal debt financing happening inside China as part of its economic expansion and domestic building spree, nor does really include the Euro Zone. Truly, the global financial system is out of control.
The U.S. Debt Limit; Just More of the Same
Building upon the last post, here is interesting news about the U.S. debt limit:
Obama to Seek $1.2 Trillion Increase in U.S. Debt Limit Dec. 30
http://www.bloomberg.com/news/2011-12-27/obama-to-seek-1-2-trillion-increase-in-u-s-debt-limit-dec-30.html
My favourite line in the article is this:
“Obama may have little difficulty financing a fourth consecutive year of $1 trillion budget deficits after the U.S. government received record demand for its bonds in 2011, pushing longer-maturity Treasuries to their best performance since 1995.”
It’s just so matter-of-fact. The way that governments in the early 21st century pay for its services is simply by selling high-performing debt (translation: by selling the future wealth of its citizens).
I can’t wait to see what happens in three days time.
Peace
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Let’s Play ‘Capitalism’!! The Bizarre World of Western Financial Markets
For me, yesterday was a bizarre day. On the one hand, a BBC interview with a European trader was making its way through the financial blogosphere where the trader basically said he believed a large, global meltdown in the stock markets would happen in the next twelve months and that politicians worldwide are helpless to really do anything as the financial industry (Goldman Sachs) basically rules the world. On the other hand, rumours that the European zone might come up with some ungodly large amount (I heard 2.5 trillion, which is supposedly not enough) to basically insure that the global banking system will not go belly-up.
Of course, and showing their complete disconnection with reality, the stock markets shot up (hey, rumours of band-aid solutions are as good as anything to trade upon I guess).
And then, this morning, markets are already up as much as they were yesterday because the Greek P.M. went begging, telling potential investors (bail-outers) that they would be investing in the ‘new’ Greece. Consequently, clueless media-talking-heads on the radio, TV, and online are confidently gushing and in Canada this is especially worrying since there are a lot of people that believe the country is fundamentally sound and well-run (even though we have a similar debt-to-GDP ratio as many other countries, governments cannot balance the books (even in Alberta), and most people are themselves over-leveraged).
All this tells me just how much we rely on wishful thinking and good news… and just how much economic activity is based on small amounts of poor quality information. It also shows to me that we have no idea what ‘capitalism’ and ‘free-market economy’ even mean anymore. Let’s survey the situation. Western governments everywhere are living completely beyond their means and when you include future liabilities like health care and pensions, we are essentially bankrupt. The financial/banking system, which is on the hook for billions because of bad loans to governments, has also created an unregulated, derivatives market that is basically one giant casino… except this one deals in the hundreds of trillions (with a ‘T’) of dollars. If this system is not bailed-out by taxpayers world-wide, it will fall in on itself, taking with it the savings and investments and pensions of millions of people across the globe. This system fits the definition of a Ponzi scheme to a ‘T’ (which is of course measured in trillions).
So, for the Western system to continue, we need to have further bailouts… that is, on top of the bailouts of three years ago. And then you have to think of all of the quantitative easings (basically, injecting more monopoly-money into the financial system and stock markets). And, of course, there are all of the government loan-guarantees that are given out regularly (this morning, the promised loan-guarantee for the asbestos industry in Canada is in the news). Oh, and then there are the subsidies and tax-breaks for massive industries ranging from petroleum to agriculture to biotech. And, then there are those industries–communications, aerospace, weapons, defense, etc.–that are dependent upon government spending for the majority of their annual sales. When you add it all up, it seems we capitalists are indeed socialists… or corporate-socialists. (Hmmm… isn’t that partly the definition of fascism?)
At any rate, that pretty much sums up the world economy. I do see more capitalism and competitive markets around me but these are mostly restricted to local, small businesses and entrepreneurs. Anything on a larger scale (where one can afford lobbyists) seems to feed almost entirely from the public trough of make-believe money and the future wealth of taxpayers.
Peace.
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