What Does the U.S. Downgrade Mean?
It will be interesting to see what happens on the various stock indexes tomorrow. Asian markets (which opened 8pm EST today) were down and futures for the exchanges are all off. Others are worried but many in the U.S. government and financial establishment are blaming S&P or saying its numbers are off or saying it doesn’t matter because other (major Western) debt rating agencies still have the U.S. at AAA. Some say it will not have long-term effects and others are worried about contagion or market meltdowns and what this will do to already flagging Western economies and the still-emerging emerging economies.
From my (humble) perspective, this is what is going down:
The S&P downgrade might be somewhat flawed and comes from a flawed institution, but it is spot on and much too late.
This is, in itself, not going to be disastrous and completely crash an already declining system. It might get ugly but it has to happen. Bubbles need to deflate and right now there is much too much monopoly money in the system simply because Western governments are terrified of their populations realizing that their lifestyle is unsustainable and so have been (with the complicity of the financial system) pumping trillions into the financial system, and preventing losses from being counted. That is why we don’t really have a capitalistic, free market system today because the financial systems (that which is usually but falsely referred to as ‘the market’) and politicians have colluded to keep a ‘too big to fail’ and corrupt system afloat. Anyway, that is why S&P’s downgrade is overdue (but let’s not hope it is too late to fix the system). And that is also why S&P’s downgrade will NOT be the cause of further financial decline… because the system is already gaining momentum downward… it is already in decline.
Yes, there are other (Western) ratings agencies that are still maintaining that U.S. government debt is AAA, but it is they who are mistaken… or, more likely, are too afraid to also admit that the emperor just might not be wearing any clothes. (So, again, hats off to S&P for finally waking up.)
As well, S&P should not be blamed here or vilified. It seems clear that the markets were beginning to price in the next, anticipated round of quantitative easing by the U.S. federal reserve and bailouts of the banking systems (who, after all, are the ones loaning billions of dollars to countries like Greece and Ireland and the rest of the PIIGS). That is, the market was confident that the financial and banking system would be bailed out yet again by governments/taxpayers and therefore the market exuberance that has brought stock markets high again after the 2008 collapse was beginning to build once even more. Essentially, this is classic market distortion and on a huge scale. Thankfully, S&P’s downgrade seems to be one event that caused at least a little bit of reality to set in.
Sure, the U.S. economy is not a basket case and it could still pay its bills. But the era of American Exceptionalism has ended. The U.S. economy has been hollowed out, its financial system is rotten to the core (and I am not exaggerating here… just look into the whole murky world of financial derivatives) and what we are witnessing is the end of the American Empire. So, what the S&P downgrade means is that it will become increasingly difficult for the U.S. to service its debt, maintain spending (to maintain its position in the world), and maintain the standard of living that most U.S. citizens aspire to. The U.S. is now AA+ and will probably be downgraded further. What this means is that buying U.S. treasuries will become less desirable as will the U.S. dollar.
Leave it to Zero Hedge to quickly sift through the opinion/information out there when trying to make sense of this. The following quote comes from QBAMCO’s Paul Brodsky and Lee Quaintance, courtesy of ZH) and lucidly identifies what the downgrade means:
The stark difference separating nominal return of principal and interest from the return of inflation-adjusted principal and interest for holders of US Treasury obligations is the critical issue. The necessity to manufacture more money to service and repay existing Treasury debt suggests substantial diminution of the purchasing power of existing US dollars in which Treasury interest and principal have to be repaid. We believe unlevered holders of Treasury obligations are locking-in negatve real interest rates and levered holders of longer duration Treasury obligations are at great risk of capital loss in real terms.
What they are saying is that by purchasing U.S. treasuries one would be losing money because the U.S. government would–in the future–pay back the principle and interest in weakened, future U.S. dollars… and that is because the U.S. has to print money to pay its debt and will have to print even more in the future (since it seems incapable of dealing with its problems). Describe this any way you want but the U.S. dollar is a bad investment that will only get worse.
What the ridiculous ‘debt-ceiling debate’ did was pretty much cement in many people’s minds that the U.S. political system is corrupt and incompetent. It is a fascinating political system but it is ruled by political ideology and corrupting corporate interests… which means it has no seeming capacity to solve actual problems. I watched some of the Sunday morning political shows today and it is strange how the pundits and politicians seem to be walking around in another reality. The spell of American Exceptionalism/Empire is very strong and most inside that system just cannot get a grasp of anything else. Call it what you want: the blue pill (or is it the red pill?), the koolaid, spectacle, the ideology of empire, but the ideal/illusion that has fed the American Dream is for some all-encompassing and continues to colour the perceptions of many inside that system.
China and other emerging markets/economies will certainly be affected… because they already have been affected. But imagine what this means. The U.S. consumes an enormous amount of resources and commodities. The U.S. military spends slightly more than all of the rest of the world combined. It is the U.S., along with other Western nations, that keeps the emerging markets humming. China could not survive without the U.S. current rate of consumption… that is why they have been buying so much U.S. debt. But they will be paid is the future U.S. dollar that will be worth much less than it is now and the flood of printed U.S. monopoly money also creates inflation in those countries buying the debt too (kind of a double whammy… and that is why so many countries are actively trying to devalue their currencies too). So, when Vladimir Putin said today or yesterday that the U.S. is basically a parasite living off of other countries, he was partly right. IN fact, it is a fascinating, abstracted form of economic exploitation.
At any rate, tomorrow will be interesting. I unfortunately will be preoccupied for most of the day so I will not be able to follow the goings-on very closely but what is of real consequence is not whether North American markets will take a beating but the near future and whether politicians and policy makers can get their act together enough to steer us through this mess. (My bet is that they will do nothing but jockey for political position and hand over more wealth to the financial system that got us in this mess in the first place… god help us all.)
Peace.
.
Telling it like it is… for a change
Well, the conversosphere is atwitter with the fact that the U.S.A. was just downgraded from Triple-A to a mere AA+. Even though there seems to be little to separate the two, it’s more than symbolic. Certain investment instruments only allow for fixed percentages of ratings levels for its investments. So, this will have an effect of things. But more important–to my mind at least–is it forces some reality to creep into our lives for a change. I don’t have much respect for the ratings agencies–insiders with tremendous amounts of conflict of interest with respect to the financial and economic systems they are supposed to rate or grade–but I have to tip my hat at S&Ps’ description of the current political-fiscal situation that the U.S. is both in and slowly cluing into:
The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.
The financial press was reporting of ‘persistent rumours,’ that S&P would not ‘comment upon,’ about how the ratings agency would actually downgrade the U.S. financial rating and it seemed pretty obvious that it would happen. But I was a little shocked at the frank and sober language used. Hopefully, this will force more politicians to clue into the desperate situation that the U.S. (and the West more generally) is actually in.
Peace.
.
The Great Reset… Coming to an Economy Near You
I have not posted much here in the last while, mostly due to good ol’ apathy of late. At a time when humanity should be paying attention to what is going on, we apparently seem too fixated on visiting Royals, global athletic competitions, and celebrity scandals (I say ‘apparently’ since the only way to gauge this is through the filters of the mainstream, commercial media who are themselves overly obsessed with celebrities and scandals. Today, however, I wanted to say something in response to a number of articles I came across during lunch, all of which point to what is ‘coming down the pipe’ as they say:
“Playing Chicken with America’s Future”
Neil Macdonald, CBC.ca July 11, 2011
http://www.cbc.ca/news/world/story/2011/07/10/f-vp-macdonald-debt-chicken.html
“The Head Of The World’s Biggest Hedge Fund Sees ‘Economic Collapse’ Due To Money Printing By Early 2013″
Zero Hedge, July 18, 2011
http://www.zerohedge.com/article/head-worlds-biggest-hedge-fund-sees-economic-collapse-due-money-printing-early-2013
“The impending slow motion doom for housing – can the United States thrive with another decade long decline in home values?”
Dr. Housing Bubble, July 14, 2011
http://www.doctorhousingbubble.com/impending-slow-motion-doom-for-housing-home-values-lost-decades-price-cost-income-ratios/
“The Link Between Peak Oil and Peak Debt – Part 1″
Gail Tverberg, The Oil Drum, July 13, 2011
http://www.theoildrum.com/node/8126
To my mind, these different articles pretty much provide a summary of what is going on right now. Western economic growth has been reliant upon a underlying foundation of cheap petroleum energy. The combination of population growth, globalization, and dwindling supplies of petroleum-based energy are threatening that expectation of constant economic growth. In order to maintain the illusion of constant economic growth, we have become reliant upon finance-related sectors (including the housing market). Since finance-related sectors are little more than monopoly-money-generating Ponzi schemes (ultimately reliant upon cheap petroleum energy), they too are now failing. And, finally, because Western political systems have become little more than corrupt team sports which are themselves reliant upon corporate graft (and the underlying systems of finance and oil production), they are incapable of change. Add to all this a largely corporate-controlled media system that is itself largely incapable of facing reality and a public that is either too uninformed to care or to pre-occupied with mere survival and you pretty much have what we are faced with today.
The only thing left out is the political/military machinations that seem to always be at work.
At any rate, the bottom line is that the global system currently in place is entirely unsustainable and I think we are slowly coming to terms with the facts:
1. Western society is entirely dependent upon cheap energy and the exploitation of the labour and resources of other countries.
2. As globalization spreads, not to mention the astounding population increases, people in the developing parts of the world are expecting to attain some degree of the Western lifestyle.
3. Many of those developing nations are creating increased demand for those same dwindling resources which means that those dwindling resources are increasingly being consumed in those developing countries.
4. The Western standard of living, which the West is desperately trying to maintain and the rest are trying to attain, is ending.
I cannot comment on the predictions of when the “collapse” is going to occur. 2012 or 2013? Perhaps. Someone like Ray Dalio (the head of the largest hedge fund featured in the Zero Hedge article) is much better situated to make such predictions than I am even though everyone knows such things can only be estimations at best. I tend to think of this more like a ‘reset’ than a collapse and it might not happen all at once but is likely a more gradual process (in reality I tend to think that it has already started). That is not to say that it will not be painful. I just think that with something as large and as complex as humanity and the social and economic system we have collectively built, it is more likely that this all will unfold in fits and starts rather than in one giant collapse. (The big question is what will happen militarily and to my mind that is a completely open question.) As I said, I see this as something that is already happening. The large financial bubbles of recent decades are a part of this, as are such seemingly tangential happenings as the popular uprisings in the Middle East, the effective ending of the U.S. ‘civilian’ space program, or the fact that $90-100/barrel crude prices now seem cheap. That all being said, since Western economies are so dependent upon the monopoly-money financial sector, perhaps a large-scale reset in the bond/currency markets will be a cataclysmic event (I am sure it will appear that way to the commercial media). Even so, I don’t think any one is confident in how that might play out.
Peace.
.
China… the Saviour of Declining Western Economies?
Sometimes I wonder just how we got to where we are. It’s amazing to see how, as a species, we have evolved and not only do we number around 7 billion but we have developed our culture and technology beyond anything that resembles the vast majority of life on the planet. But it is also amazing, given the buffoons and fraudsters who are more often than not in 
charge of everything, that the human world actually runs at all. You just have to look around. At the people running your government(s). At the CEOs of the major corporations running the world. At the utter stupidity and naiveté that we regularly indulge in. Case in point… the fact that Japan is about to implode and Libya, explode… and when people bother to look up from their Facebook page they are faced with endless stories of ‘royal’ weddings and journalism that seems to only care about Twitter ‘twends’ and the latest tween whose music video has gone viral. Another case in point? China.
China? The saviour of the many, declining Western economies? Yes, that China… the centrally-planned, command economy run by a bunch of corrupt party bureaucrats in what is the world’s largest, totalitarian Communist country. Why no one sees the irony, yet the absurdity, in such a state affairs is further proof–as if any more should be needed–that we are utterly dependent upon the illusionary facades and paper thin veneer that is modern society. Well, there are some people out there… a few journalists, some financial types, a handful of politicians and academics… who in my estimation seem to be able to cut through it all and at least make a reasonable attempt to understand what is really going out there. And many of them, despite what we regularly hear in mainstream discourse, think that China could very well be, and most likely is, a giant real estate bubble. No one knows when this bubble will burst but it, like all the others, surely will and it will not be pretty. It might even be that China’s bubble will dwarf the recent bubbles in the West which themselves have consumed trillions in bail outs, quantitative easings, injections in the economy or whatever euphemism we use to hide the fact that corrupt, Western, pseudo-market economies are really nothing more than giant Ponzi schemes.
I have heard rumblings about China’s building boom, which is led by corrupt party functionaries and built on the backs of (and over the houses of) China’s poor, and it seems largely fueled by the Communist Party’s desire to keep the country’s GDP numbers high. Not unlike the West’s Ponzi schemers but one difference was that rumours indicated there were entire building projects, even an entire city, that were just sitting empty. This might indicate that the economic “miracle” that is China might not really be true; that the “astonishing” rise of a Chinese middle class (read: ‘consumer’ class) was not as astonishing as we might hope. Well, there is nothing like ‘seeing’ it and this SBS Dateline piece from Australia was a lucky find while eating lunch today. It turns out that it is not just one empty GDP city… the contagion has spread.
(In good Facebook, narcissistic fashion… I was alone, at my desk, eating (as usual) curry sliced beef and veggies over rice… yum.)
WikiLeaks and Western Economies
It has been some time since I last posted anything. I have been so busy with work and other things that I have barely looked at this blog. This does not mean that I have not been paying attention to the latest goings-on. In fact, I have been spending a lot of my spare time and any free time at work reading. And there certainly has been a lot happening in the world.
It has been interesting to see the latest official reactions to WikiLeaks, in particular the very concerted effort to distract anyone and everyone–but especially journalists (which is not very hard)–from the content of the leaks and direct their attention to ‘sex crimes,’ ‘Sex Crimes,’ ‘SEX CRIMES’ of Julian Assange. If you want to distract most journalists, all you have to do is dangle celebrities or the promise of lurid detail and simple, black-and-white stories in front of them. Few bother to look into the fact that Sweden (where the ‘sex crimes’ charges originated) has some bizarre laws pertaining to rape. Assange is allegedly being charged because the consensual sex he allegedly had with two women turned into rape because, under Swedish law, if the condom breaks and sex is not immediately halted, then the man can be charged with rape. I don’t want to minimize the charge of rape, and I certainly do not know the details of what went on, but under those strange laws, and the fact that the Swedish prosecution dropped the investigation, then re-started it and the fact that the British courts (where Assange was currently released on bail) has stipulated that Sweden pay all of the costs (widely regarded as a sign that the British court believes the charges are flawed), and the fact that the U.S. government is scouring all its laws trying to find something that could be used to charge Assange (Australia just announced Assange has broken none of its laws), then one has to conclude that something really fishy is going on.
That is all fine and good, but it led me to wonder why there is so much commotion. Most governments involved in the various WikiLeaks document dumps have stated that the information contained therein is not that revelatory or all that important. And in many ways they are right. The document dump in the summer contained a lot of raw intelligence reports (which, given their nature, cannot and should not be taken as truth in all cases) and the last installment contains a lot of diplomatic cables and such (which, again, requires analysis since these also contain the impressions, suspicions, and rants of those in the diplomatic corps). While there are certainly some embarrassing and revealing information, one would think the prudent thing to do would be to work behind the scenes diplomatically and then just ignore most of the information that comes out. They could bank on the normal levels of public apathy that has served them so well in the past. The simple fact is that most people will not take the time–especially so close to Christmas–to even try to understand what is going on… there are simply too many hockey games to watch, Happy Meals to eat, Oprah trips to scream about, game-changing iPads to buy, and gallons of Christmas cheer to pour down ones gullet. So other than the diplomatic, ruffled feathers to smooth, why bother with trying to turn Assange into a sex criminal?
Perhaps times are changing. Perhaps the powers that be are worried. There is increasing unrest, especially in Western capitals, and, despite all attempts to print more money and bailout banks (the Ireland bailout is less about bailing out the country and more about bailing out the UK, German, and US banks), Western economies are still in dire circumstances. And so, it would seem, the WikiLeaks information is adding further fuel to the fire, especially for the U.S. As a post from Global Research (and hosted by Market Oracle) states: there are “important structural consequences of the Wikileaks revelations on the United States’ international influence.” At a time when the U.S. is trying to hold itself together financially, this is potentially very damaging. If you listen to mainstream media voices, things are looking up. Journalists (or, newscasters) will quote some meaningless poll of consumer sentiment or some uncontextualized stat that seems positive as yet more proof that the recession is over. Bullshit. If you caught a stammering and clearly uncomfortable Ben Bernanke on 60 Minutes a while back, you would see a man desperately trying to offer reassurances that the most recent round of quantitative easing was necessary and would work. Right now, the only thing the U.S. has going for it is that the U.S. dollar is the world’s reserve currency. But as the rising price of gold and other precious metals indicates, as well as the fact that many countries are buying less and less U.S. debt, global confidence in the U.S. greenback is faltering. And the WikiLeaks documents–showing as they do the underbelly of global diplomacy and geopolitics–are not helping. Recall that the despot Saddam Hussein was not too long ago trying to sell Iraqi oil in Euros (which no doubt had an impact on the U.S. decision to occupy the country) and that there are rumours circulating that many nations want to replace the U.S. dollar with a basket of currencies. Perhaps then the real worry about the WikiLeaks documents is that they might further weaken confidence in the U.S. politically, which means, economically too.
Assange has stated he has a back-up plan if anything should happen to him: a series of documents so damning that he could use this as leverage against an assassination or whatever. If something happens to Assange, some mechanism will ensure these documents are made public. It is likely given what Assange has said in the past and what analysts are saying today, that these documents relate to large U.S. financial institutions. So, go figure.
The extreme reaction by some Western governments to the recent WikiLeaks document dump, and other somewhat odd happenings–Bernanke on 60 Minutes, the head of the Bank of Canada making repeated warnings to Canadians about excessive debt and other vague potentialities, etc.–make me think that something big might be potentially coming down the pipe. Perhaps the imminent implosion of a couple of major banks or financial institutions or something like that. It just seems strange that there would be such a reaction to WikiLeaks at the same time that odd signals are coming from heads of major Western financial institutions.
By the way, the image at the top was something I came across last week while reading an old war gaming magazine from 1982 called MOVES. It is an ad for another magazine that claimed to provide military and diplomatic intelligence analysis and news for the military history and wargame nerds of the era. It seems that it is OK for the ideologically aligned to have access to inside intelligence but not, even today, the general public.