The mother of all financial collapses, and a new beginning

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A dysfunctional debt-based monetary system, massive imbalances in the markets, immunity from prosecution for those responsible for the 2007-2009 crash, and inadequate responses on the part of Western central banks and governments have created gigantic, global commodity derivatives bubbles that will most likely burst by year’s end, causing a global financial collapse (Our Dysfunctional Monetary System, Forbes, 6 Feb 2016; Analyst: Here Comes the Biggest Stock Market Crash in a Generation, Fortune, 13 Jan 2016).

In such a scenario, banks would be bailed-in and this would produce huge layoffs. The US would hit the debt ceiling earlier than foreseen and would be forced to issue debt-free money (The Trillion-Dollar Platinum Coin Is Back, Bloomberg, 13 Mar 2015) to fund job-creating government spending.

This would, in turn, cause a worldwide flight from US$, a dramatic loss of confidence in the Federal Reserve, hyperinflation in the States, and an egregious overvaluation of the € currency and precious metals.

In order to ride out the storm and break free of the unilateral “Bretton Woods” system, BRICS countries would announce a new gold-backed, electronic currency for international trade settlements, presumably issued by their New Development Bank (In uncertain times, Germany takes more gold home, Reuters, 27 Jan 2016). It would be a common counting unit calculated on the composite exchange rates of a basket of major currencies available only to the Central Banks of the participating countries (Zhou Xiaochuan, Governor of the People’s Bank of China, Reform the international monetary system, BIS, 23 Mar 2009; RMB rate to depend more on basket of currencies: PBOC economist, China Daily, 12 Jan 2016). Eurozone countries would promptly apply for membership, as they did when the AIIB was launched (AIIB will “significantly” bring together Europe, Asia: Luxembourg minister , Xinhua 5 Nov 2015).

The new currency would likely prove a stabilizing novelty in world finance and politics. By contrast, the US$ would lose its privileged reserve status and the United States would no longer be able to export debt and inflation. New rules for a new architecture for the world economy and finance (Merkel and Sarkozy call for global ‘economic security’ council, EUObserver, 9 Jan 2009), as well as new methods of risk evaluation and investment (e.g. global project bonds to recycle surpluses as investments for infrastructures and research projects), would be introduced.

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House of Saud – The sacrifice of a major piece on the Middle Eastern chessboard

file-16-Saudi-Russia-ties

Maxim Oreshkin, the deputy finance minister, said the country is drawing up plans based on a price band fluctuating between $40 to $60 as far out as 2022, a scenario that would have devastating implications for Opec

(Russia plans $40 a barrel oil for next seven years as Saudi showdown intensifies, Telegraph, 11 Dec 2015)

Such a scenario would be devastating (deadly?) for the Saudi economy, already battered by the disastrous military intervention in the Yemeni civil war (A Saudi Afghanistan – the chickens will come home to roost in Yemen).

Are the Saudi royals really willing to risk domestic instability only to keep the oil price down?
To what end?

Only to save the US economy from collapsing?

https://www.facebook.com/mediaskopia

Se uno dei più brillanti eredi della famiglia reale saudita è stato inviato in Russia a stringere buoni rapporti con Mosca forse è perché i sauditi non sono più disposti a sottostare alle imposizioni di Wall Street e del Pentagono?

Mosca sta facendo la voce grossa con turchi e sauditi per costringerli a schierarsi una volta per tutte?

Sotto sotto qualcuno DEVE aver sospettato che c’è qualcosa di stranissimo nel comportamento di turchi e sauditi: prima pappa e ciccia con Mosca (con multiple visite reciproce, investimenti ingenti anche in settori ultra-strategici) e poi ai ferri corti.

Forse i sauditi sono sotto ricatto? Sono costretti a suicidare la propria economia per sostenere quella americana e danneggiare quella russa?
Per quanto a lungo tollereranno questo stato di cose che li mette a rischio di ghigliottina?
E i turchi? L’establishment turco, messo alle strette da Mosca (o con noi o contro di noi) e con la costante minaccia del separatismo curdo (fomentato dai soliti noti: guardate le “principesse curde” della famiglia Barzani dove vanno a fare shopping e che tipo di celebrity-style hanno adottato), andrà fino in fondo? Fino alla jugoslavizzazione della Turchia?

https://www.facebook.com/mediaskopia

Hide your shine and dim your lights – China’s multipolar strategy

Mackinder- Pivot Area (Knox, p.391)

Hide your shine and dim your lights

Deng Xiaoping

Some want a so-called multipolar world where you have different centers of power, and I believe will quickly develop into rival centers of power. And others believe, and this is my notion, that we need one polar power which encompasses a strategic partnership between Europe and America.

Tony Blair, British prime minister, 2003

http://www.themoscowtimes.com/sitemap/free/2003/4/article/blair-multipolar-world-imperils-global-stability/238777.html

When you look at the evolution of the world, you see that quite naturally a multipolar world is being created, whether one likes it or not. It’s inevitable… relations between the European Union and the United States will have to be relations of complementarity and partnership between equals.

Jacques Chirac, French president, 2003

http://app1.chinadaily.com.cn/star/2003/0501/cn9-2.html

It bears repeating that these moves had little to do with China’s domestic economic conditions, for the following reasons:

  • To have an economic effect a substantial devaluation would be required. That is not what is happening. Furthermore devaluation as an economic solution is essentially a Keynesian proposal and it is far from clear China’s leadership embraces Keynesian economics.
  • Together with Russia through the Shanghai Cooperation Organisation, China is planning an infrastructure revolution encompassing the whole of Asia, which will replicate China’s economic development post-1980, but on a grander scale. This is why “those in the know” jumped at the chance of participating in the financing opportunities through the Asian Infrastructure Investment Bank, which will be the principal financing channel.
  • China’s strategy in the decades to come is to be the provider of high-end products and services to the whole of the Eurasian continent, evolving from her current status as a low-cost manufacturer for the rest of the world.

Alasdair Macleod

https://www.goldmoney.com/research/analysis/china-chooses-her-weapons

None of America’s choices are good ones. At this point, no matter what the USA does, China wins.

https://socialforecasting.wordpress.com/2015/07/30/chinese-gold-and-u-s-dollar/

Washington needs a reset to preserve its primacy, but Beijing and Moscow won’t settle for less than a radical, multipolar changeover.

In an interconnected world, China has no reason to wish for a collapse of the U.S. market, but it must make sure that Western banking oligarchs no longer represent a threat (Russia and China have had enough of western banking, CNN, 4 May 2015).

This means that the Great Uncoupling will take some time to play out and that it will be cloaked. One way to accomplish that is by pretending to be weaker than one really is, even though China has absorbed the impact of the latest financial crisis with apparent ease (Why The “Great Recession” Only Had A Small Impact On China, ValueWalk, 28 March 2014).

If TTIP, TPP, TiSA do not get signed, global investors will gradually shift their “loyalties” from the US-led maritime trading bloc (The Strategic Costs of TPP Failure, The Diplomat, 22 August 2015) to the Eurasian land-based bloc.

Stem the flow, spread the panic, pop the bubble, milk the profits

black-monday-red_01
The richest one percent of this country owns half our country’s wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It’s bullshit. You got ninety percent of the American public out there with little or no net worth
.

Gordon Gekko, Wall Street, 1987

Two ways to interpret the financial panic.

  1. It’s all the fault of China (slumping manufacturing, bloated stock market), Russian sinking ruble and the fading euro;
  2. banks are deliberately crashing the markets in order to get QE4 and mop up assets and the U.S. economy is seriously in distress;

If 1, then this is the proof that China is a paper tiger and cannot challenge the U.S. primacy.

If 2, then the collapse of the Chinese stock market means that Chinese investors will buy more gold and silver and that, within a few weeks, a flood of US bond sales will begin, followed by a real estate crash in Australia, New Zealand, Canada, California and London.

A paper tiger?

Gordon Chang, The Coming Collapse of China, 2001

https://en.wikipedia.org/wiki/The_Coming_Collapse_of_China

Gordon Chang, The Coming Collapse of China, 2012

http://foreignpolicy.com/2011/12/29/the-coming-collapse-of-china-2012-edition/

Gordon Chang: China Headed for Crash in 6 Months, July 1, 2013
http://video.foxbusiness.com/v/2520338914001/chang-china-headed-for-crash-in-6-months/?#sp=show-clips

Gordon Chang: China’s economy on the brink of collapse, January 7, 2014
http://video.foxbusiness.com/v/3025495668001/chinas-economy-on-the-brink-of-collapse/?#sp=show-clips

When Chinese stocks crashed in mid-June, Asian markets were not particularly troubled and there is no reason to believe that they are much more concerned now.

A shark?

It is clear that overblown headlines about the renminbi’s “plunge” were woefully misleading. Had China really wanted to grab a bigger share of world exports, it is hard to imagine that its policymakers would have settled for such a modest adjustment. China’s real motivation seems to be more far-sighted. The devaluation advanced China’s strategic goal of turning the renminbi into an international reserve currencyand, in the long term, into a credible global challenger to the US dollar… While much of the world was distracted by the putative threat of currency wars, China may have found a way to sneak its way into the SDR basket. At least for now, it seems that the country’s long-term strategy for the renminbi is on track.

http://www.project-syndicate.org/commentary/renminbi-devaluation-reserve-currency-by-benjamin-j–cohen-2015-08#D6XCZvdpb9K4DldU.99

http://www.telegraph.co.uk/finance/economics/11813076/Global-currency-wars-why-Chinas-devaluation-is-a-peace-offering-misunderstood-by-the-world.html

China is not the problem.

The US

https://socialforecasting.wordpress.com/2015/08/11/us-economic-indicators-show-day-of-reckoning-is-near/

http://www.cbsnews.com/news/carnage-on-wall-street-signals-fears-about-u-s-economy/

UK

http://www.politico.eu/article/the-immoral-housing-bubble-london-house-prices-housing-shortage/

and Japan

http://www.theguardian.com/world/2015/aug/17/japans-economy-shrinks-by-04-in-a-blow-for-abenomics-growth-plan

are the problem.

The European, Russian, Chinese money trees have been shaken to shore up the status of the US dollar as a reserve currency

http://www.theguardian.com/business/economics-blog/2013/nov/22/us-dollar-status-fallen

and now the international media are being used to induce capital flights towards London, Wall Street and the US dollar by a well-orchestrated campaign spreading the economic catastrophe meme through hysteric reporting about the health of the Chinese economy.

Will it succeed?

China, the European Union and Russia have been pronounced dead several times already, but they are still alive.

By contrast, the dollar remains weak and the US economy stagnant

http://www.wsj.com/articles/dollar-plunges-on-concerns-for-global-growth-u-s-interest-rates-1440178286

Future currencies and gold – Bernard Lietaer (Sorbonne) on complementary currencies

quote-greed-and-competition-are-not-the-result-of-immutable-human-temperment-greed-and-fear-bernard-lietaer-79-46-81

Bernard Lietaer is one of the architects of the euro.

The WIR seems quite a good model, almost an ideal currency for things that could be looked at in other parts of the world?

I have an even better model to recommend than the WIR. My interest in the WIR is due the fact that it is the only case where we have quality data over 80 years. There’s no other system that has provided as much data, over as long a period. This is particularly important to evaluate long-term macro-economic impact.

The Commercial Credit Circuit (C3) – a convertible version of the WIR – is the one I would recommend as more interesting than the WIR, because it is a B2B complementary currency that is convertible into conventional money. This makes it possible for governments to accept it in payment of taxes.

Most government public procurements need to be open to all businesses. If the Swiss government wants to buy cars, say, they have to be able to buy them from everybody. And only 20% of Swiss businesses are members of the WIR system. A convertible WIR currency would solve that problem, and enable governments to participate directly in the complementary currency system. That is why I recommend the C3 model, as an improvement on the WIR.

Right, someone at the Federal Reserve in America mentioned that exchanges like Ripple are now a crucial area for private currencies,

Yes, but Ripple requires that someone makes a market in the currencies involved. ie. convertibility between the two currencies is a pre-condition. In other words, they are connecting market makers, they are not creating convertibility where none exists.

Would those market makers, should it be kept private or do you foresee that the state could play a role in that?

Ripple is a private payment system, and I don’t see why it couldn’t remain so…

Last time, we touched on the Bank of England document. Even economic textbooks used in universities talk about the multiplier model as opposed to endogenous money. With your experience working within central banks and with a lot of central bankers, are central bankers themselves and people in treasuries aware of endogenous money? To what level do they understand this versus using the textbook models?

Economists who work at central banks have been trained in believing the same monetary mythology as most economists. But the information about endogeneous money has been available: it has actually been available for more than a century! 5. It all depends on the degree of curiosity of each person.

It was a courageous gesture for a central bank like the Bank of England to go on record about the reality of money creation by private banks. The only other case I know about such an ideological reversal of views happened in Brazil, where after initially rejecting the idea of complementary currencies, an investigation by the central bank concluded that complementary currencies can solve social problems, that conventional money doesn’t do very well. And that they don’t pose any threat to the management of the official currency.

But there’s been so many papers, I remember Tobin and various others talking about endogenous money. It just seems quite strange what they’ve been teaching in economics textbooks, during my economics degree the multiplier model was taught straight from the textbook. It seems quite bizarre, really.

Well, yes. That’s been going on for a long time…

I know.

We got much deeper academic thinking in the monetary domain in the ’30s than today. There was clearly more debate about money during the Great Depression than has been the case today…

The Chicago Plan, and so on.

The Chicago Plan was fully developed at that time. It would involve making it illegal for banks to create money. Their role would be reduced to the role of money brokers, and governments would issue the currency (as many people still believe).

Out of interest, what are your thoughts on fractional reserve banking? Or in a sense what we have now is not even fractional reserve, it’s zero reserve. What are your thoughts on the Chicago Plan versus what we have now?

One can classify monetary problems in three categories: banking crashes, sovereign debt crises, and monetary instabilities. The Chicago Plan would solve the first two of of these systemic problems: it would solve the problem of banks getting overleveraged, and it would also solve the government indebtedness problem. However, it would not solve the currency instability problem. We would still have currency crashes like we would have had, say, in Russia. Under that plan, they may even be more frequent than today. Basically, the Chicago Plan somehow assumes that governments are more reliable than the private sector in managing the currency, and I’m not convinced that assumption is valid.

The recent Zimbabwe case is an extreme example of governmental abuse of a currency.  Government took over the central bank and ordered it to print money until the currency became valueless.

Touching on that topic, do you have sympathies with the gold standard, or any other commodity standard that would obviously restrict the amount of money that can be created?

One of my recommendations — the Terra currency — is a 100% commodity backed currency. In that system, a basked of a dozen commodities would play the same role as what gold used to do. Gold is actually one of the commodities in that basket. See the point?

Yes.

Let me emphasize that the Terra would be part of what I recommend as a monetary ecosystem, i.e. just one of the currencies in such an ecosystem. Terra is a global business-to-business currency that would make it profitable for multinational businesses to think long term.

http://www.cobdencentre.org/2015/03/exclusive-interview-with-bernard-lietaer-on-complementary-currencies/#sthash.NKCGa0r7.dpuf

After the next global financial crash – the coming revolution of banking

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Axel Troost and Philipp Hersel, HOW A SOCIALIZATION OF THE GERMAN BANKING SYSTEM MIGHT LOOK LIKE

[…]
It is desirable for the German banking sector to be consolidated in two pillars: a pillar of public-law banks (Sparkassen and restructured Landesbanken) and a pillar of co-operative banks (Volksbanken and Raiffeisenbanken).

At local level, there should only be Sparkassen (municipality-owned local credit unions) and Volksbanken and Raiffeisenbanken (co-operatively owned local credit unions). Above local level, the commercial banks (which are to be transferred to public ownership) and Landesbanken should be formed into new regional Sparkassen.

In parallel to this, the co-operative banking system can set up regional co-operative banks. Many financial services (such as the nation-wide supply of cash to automated teller machines) will be provided on a uniform nation-wide basis via strengthened co-operation within the respective pillar.

This strengthening of joint operations within the pillar will also make it possible for the banks to support large financing transactions and foreign business operations, despite the fact that the banking structure will be more decentralised than it is today.

Overall, a reduction in the size of the banking sector is unavoidable, because the financially overblown and speculative capital market business is no longer permitted. At the same time, this severely curtails the powerful influence enjoyed by the financial sector over government and the real economy.

Whether local or regional: the statutes governing the public-law and co-operative banks will follow the model of the Sparkassen and commit these banks to focussing their operations on the common good and to a business model based on the core PSL functions.

The powers of the banks’ own controlling bodies (administrative or supervisory boards) will be strengthened, and the composition of these bodies expanded to include representatives of civil society organisations, e.g. trade unions, nature conservation and environmental associations, consumer associations, social bodies and movements, welfare associations, etc. The members of the controlling bodies must be democratically legitimated, e.g. by direct election. Further to this, advisory boards will be set up, e.g. on questions of steering loans in the overall economy or on the development of individual sectors.

Every socialisation of a banking system will inevitably reach its limits if—owing to the financial system’s unacceptable complexity and due to a lack of information and expertise—the majority of the population basically does not understand what is going on in the financial sector. The reduction of the banks to their core PSL functions will make a substantial contribution to alleviating this complexity. In addition, there is a need for an information and education campaign on the financial system for the general public, especially within the school curriculum.

In parallel to the restructuring and socialization of the banks, strict regulation is required.

The capital adequacy requirements for the banks must be significantly increased and designed in an anti-cyclical way. The volume of turnover and the volatility on the financial markets must be restricted by a financial transaction tax or stopped entirely by the prohibition of certain financial instruments such as higher-order derivatives and OTC trading.

There will be a “reversal of proof” for financial instruments: permission to use them will be made subject to a new approval system for financial instruments. Financial instruments can only be marketed following detailed scrutiny, evaluation and approval from a financial standards inspection body.

Corrections must be made to the remuneration systems for and the liability borne by the bank managers. Bankers must be subject to salary caps and liable with their private assets. Bonuses will be abolished.

Changes to the law and the establishment of a public European rating agency must reduce the power of the rating agencies and the significance of their ratings.

In future, monetary policy must take far more resolute action against bubbles on asset markets. This necessitates precisely targeted instruments like an active minimum reserve.

Finally, the banking sector needs at last to be subject to effective and motivated financial oversight. There must be a new culture of supervision.

On the one hand, initiatives in this direction should involve clearer statutory rights of intervention for the supervisory bodies. On the other, the authorities must be required to point to gaps in supervision at an early stage and to call for remedies, rather than to sit and watch as a banking crisis takes shape.

[…].

http://www.rosalux-nyc.org/wp-content/files_mf/troosthersel_socializationofgermanbanking.pdf

Something big and bad will happen to the bond market within 6 months

market_plunge

…regardless of what the US government is doing, why would these two banks make such a huge long-term investment in physical gold bullion bars? Perhaps, we are seeing a “Big Long,” similar to the “Big Short” Goldman Sachs is known to have taken in 2006/07. There are many who believe that we are soon going to see the collapse of a worldwide bond bubble, just as we saw a worldwide collapse of real estate values back then.

Maybe, these banks know something. Top bank executives don’t appear to trust counter-party promises…. You would not ordinarily take physical delivery of gold bars unless you wanted to have an asset free of counter-party risk. It implies they are seeing something big and bad as happening in the bond market, within 6 months to 2 years down the road. It strongly suggests that they do not trust the solvency of counter-parties. I base the timing on the timing used by Goldman Sachs as they slowly built up their “Big Short” in 06/07.

http://seekingalpha.com/article/3421396-the-big-long-goldman-sachs-and-hsbc-buy-7_1-tons-of-physical-gold

It is pretty clear that central banks and multinational banking enterprises know that the approaching financial crisis will be huge, possibly unprecedented in scale and implications, mostly because governments no longer have the means to rescue “too big to fail” financial institutions. Thus, over the past few years, national central banks have been reclaiming their gold reserves in order to save their banking systems.

Far eastern market – not London and Comex, which have been presumably drained of gold, by now – will determine the price of physical gold and this could lead to a derivatives meltdown.

The only way out will be a major monetary reset.

Some big players are making sure to be prepared for such a scenario:

To avoid counter-party risk, you want to own physical assets, one of the most convenient and liquid of which is gold. You might also want to own other precious metals with similar characteristics. So, we see these two banks, literally, buying tons of gold. Not surprising, really, because making a “killing” in the market involves thinking about what will work tomorrow, not what worked yesterday.

http://seekingalpha.com/article/3421396-the-big-long-goldman-sachs-and-hsbc-buy-7_1-tons-of-physical-gold

Putin is not shouting about it all over the world. And of course, he still accepts US dollars as an intermediate means of payment. But he immediately exchanges all these dollars obtained from the sale of oil and gas for physical gold!…Putin sells Russian energy resources in exchange for US dollars, artificially propped by the efforts of the West. With these dollar proceeds Putin immediately buys gold, artificially devalued against the U.S. dollar by the efforts of the West itself!

http://www.gold-eagle.com/article/grandmaster-putins-golden-trap