Global financial system implosion begins

[ymu]

Well, exactly. Empires don't disappear overnight, but the US is in rapid decline and it's hard to see it recovering. In the last cold war, it was the USSR that was the economic basket-case; in this one, it is the US. China now has more influence in South America - the Monroe Doctrine is dead (unthinkable 10 years ago). ASEAN has all the money, BRIC is the new global power block, the dollar is declining in importance for world trade and with it the ability of the US to sustain immense debts on the back of it.

 

[xes]

Just posting this as it's being discussed else where. Is this a worrying sign, is it even true?
http://www.zerohedge.com/article/smart-money-preparing-sell-never

 

[ymu]

Double-dip, here we come.

 

[xes]

bad then?

 

[ymu]

I'd say so, yes.

 

[xes]

awesome

 

[ska invita]

English-language China Daily and People’s Daily Online reported that Russia and China have concluded an agreement to abandon the use of the US dollar in their bilateral trade and to use their own currencies in its place. http://www.counterpunch.com/

Is that true? Havent seen it reported anywhere else...

 

[ymu]

Is that true? Havent seen it reported anywhere else...

Bye bye USA. I'd like to say it's been a pleasure, but ... I really can't.

 

[teqniq]

Is that true? Havent seen it reported anywhere else...

It's in the The Daily Fail so it must be true.

Ah here we go, from the People daily

 

[kyser_soze]

Is that true? Havent seen it reported anywhere else...

It's been reported in a number of places, and is hardly the apocalypse that Roberts paints it as in the Counterpunch article:

http://community.nasdaq.com/News/2010-11/china-russia-open-up-nondollar-trading.aspx?storyid=46466

 

[ska invita]

It's been reported in a number of places, and is hardly the apocalypse that Roberts paints it as in the Counterpunch article:

http://community.nasdaq.com/News/2010-11/china-russia-open-up-nondollar-trading.aspx?storyid=46466

im sure you're right - though the drift away from the dollar is symptomatic i suppose. Its not in Chinas interest to see the dollar collapse just yet

 

[kyser_soze]

It's not in China's interests at all to see it happen in the next few decades. This idea that the US economy is tanked, or bust, or it being the end of the world is wishful thinking. What's happening is a transition to a place where it's not the only super-giant economy in the world, but rather is one of 3 - US, EU & China, with India and ASEAN chomping at the heels.

 

[ska invita]

It's not in China's interests at all to see it happen in the next few decades. This idea that the US economy is tanked, or bust, or it being the end of the world is wishful thinking. What's happening is a transition to a place where it's not the only super-giant economy in the world, but rather is one of 3 - US, EU & China, with India and ASEAN chomping at the heels.

agreed

there might come a point where China thinks it would be in its interest to lose some of the money it is owed in order to move into a more dominant position. im not sure if china has such imperial ambitions. it hasnt historically, and had the opportunity to in the distant past.

 

[elbows]

agreed

there might come a point where China thinks it would be in its interest to lose some of the money it is owed in order to move into a more dominant position. im not sure if china has such imperial ambitions. it hasnt historically, and had the opportunity to in the distant past.

Courtesy of wikileaks, here is what a Singapore minister thought:

16. (C) MM Lee said China is following an approach consistent with ideas in the Chinese television series "The Rise of Great Powers." The mistake of Germany and Japan had been their effort to challenge the existing order. The Chinese are not stupid; they have avoided this mistake. China's economy has surpassed other countries, with the exceptions of Japan and the United States. Even with those two countries, the gap is closing, with China growing at seven-nine percent annually, versus two-three percent in the United States and Japan. Overall GDP, not GDP per capita, is what matters in terms of power. China has four times the population of the United States. China is active in Latin America, Africa, and in the Gulf. Within hours, everything that is discussed in ASEAN meetings is known in Beijing, given China's close ties with Laos, Cambodia, and Burma, he stated.

17. (C) MM Lee said China will not reach the American level in terms of military capabilities any time soon, but is rapidly developing asymmetrical means to deter U.S. military power. China understands that its growth depends on imports, including energy, raw materials, and food. This is why China is working with South Africa on the China-Africa Development Fund. China also needs open sea lanes. Beijing is worried about its dependence on the Strait of Malacca and is moving to ease the dependence by means like a pipeline through Burma.

From http://www.guardian.co.uk/world/us-embassy-cables-documents/210110

 

[goebfwai]

I find all the excitement about Wikileaks releases all rather prurient. I honestly don't know what the fuss is all about. It's a big switch off for me. It's activities have become one big yawn and descended into serial exhibitionism, revealing secret stuff just for the hell of it. There should be a limit. There are some things that should be kept secret. Whistleblowing can be important in challenging injustice, but Wikileaks seems to have poor managerial and democratic oversight and crosses too many lines now, and seems to leak everything. What are we going to get next, shopping lists of the rich and famous? Maybe they should merge with Tatler. The latest brouhaha involving politicians is like a tabloid style celebrity sideshow. It's boring and simply not news. Childish naval gazing, voyeauristically obsessing about who thinks what about who on the world stage, while the national, continental and global financial architecture of the 20th century crumbles and disintegrates. A Nero anti-hero fiddling while Rome burns. That said, I am looking forward to reading the releases about some problem with a US bank in the New Year reported on a popular blog. Whistleblowing can of course be useful, and done properly is entirely legal. I don't think blanket leaking of stuff just for the sake of it can ever be. Bit of a blunderbus approach really. Whistleblowing of stuff like Bernie Madoff, the scandal of mortgage backed security trading etc, if it had actually been done - that might have prevented Great Contraction 2.0.

 

[elbows]

Who cares about the source in this case, and anyway there is a thread for wikileaks stuff in particular, I only posted that here because when I read it coincided perfectly with where the discussion had just got to on this thread.

Its not childish navel gazing to look at who thinks what on the diplomatic scene, because economics is affected by human sentiment. I dont care if the newspapers focus a lot on the tittle tattle and gossip, there is plenty else in the documents that is of substance and it can and will be brought into relevant discussions from this point forth.

 

[xes]

*agrees with elbows, cos he/she puts thingsr ather eloquently and understandably.

 

[goebfwai]

Interesting story headlining below in today's FT. (European banks took big slice of [$3.3trillion] Fed aid) With everyone borrowing from everyone elses (to pay back everyone else and cover funding liabilities), people would be forgiven for wondering whether there is any part of the global financial system that doesn't operate like a Ponzi scheme. In turn, who exactly was the FED borrowing from!? Are they just printing new money into existence or something?

"Foreign banks were among the biggest beneficiaries of the $3,300bn in emergency credit provided by the Federal Reserve during the crisis, according to new data on the extraordinary efforts of the US authorities to save the global financial system." http://www.ft.com/cms/s/0/4dd95e42-fd6d-11df-a049-00144feab49a.html#ixzz16vvqNhTK

 

[newharper]

Interesting story headlining below in today's FT. people would be forgiven for wondering whether there is any part of the global financial system that doesn't operate like a Ponzi scheme.

Smoke and mirrors.

I'm not suggesting we return to the Gold Standard.

 

[ska invita]

Apologies if this has been posted before - cant keep up - but interesting graph here from Paul Masons blog, suggesting that boom and bust is unavoidable no matter what policies/actions take place. If the cyclke continues as you would expect it to, then theres a way to go down yet ...if ive understood it right that is.
http://www.bbc.co.uk/blogs/newsnight/paulmason/2010/11/can_policy_ever_control_the_cr.html

 

[Barking_Mad]

US unemployment rises to 9.8%

http://www.nytimes.com/2010/12/04/business/economy/04jobs.html?hp

 

[Falcon]

Are they just printing new money into existence or something?

Yes. In debt based, fiat currency systems all money is printed into existence. To preserve the stability of the system, it must be matched in value by the thing for which it was created. I suspect you are asking: "Are they just printing new money into existence that isn't matched by things of value, and therefore initiating the implosion of their financial system, or something?"

The answer, again, is yes. Most people didn't notice that the $600 billion of US Federal debt the Federal Reserve Board agreed to buy last month is exactly the amount of debt the US government expects to issue over the next few months. The Fed is paying for that purchase by exercising its legal right to print money.

The "debt" is worthless - it is the valueless mortgage-backed securities acquired by the tax-payer to briefly extend the functioning of the US financial system. So they have created $600 billion of new money for which there is no corresponding value in the economy, thereby violating the fundamental stability rule.

Because they have no choice other than to deliberately collapse the debt (rational if you thought you could obtain a better final outcome), they will keep doing this until the collapse of the illusion that the debt supporting the economy is serviceable, at which point the currency, the financial system, the US economy, and a large chunk of the global economy, will collapse. Like the collapse of Iceland, this is something that will take place in the course of hours, rather than weeks, months or years.

 

[deke t lefel]

for quite a while, the derivatives market gave the illusion that newly created money had a corresponding value........that money bag now seems to be stuffed

 

[goebfwai]

There are a couple of articles in Foreign Affairs magazine that suggest that US power brokers are starting to prepare the ground for a retrenchment of the American Empire. It's probably inevitable that this will include Europe style austerity measures of some sort. Can't see that working out very well though, as America being so free market, they have already experienced enough of that as it is.

Manufacturing Insecurity by William Pfaff
November/December 2010, Volume 6, Number 89, Essay
"The United States has built a worldwide system of more than 1,000 military bases, stations, and outposts -- a system designed to enhance U.S. national security. It has actually done the opposite, provoking conflict and creating insecurity." http://www.foreignaffairs.com/articles/66869/william-pfaff/manufacturing-insecurity

American Profligacy and American Power: The Consequences of Fiscal Irresponsibility, By Roger C. Altman and Richard N. Haass
November/December 2010, Volume 6, Number 89,
Summary: "The U.S. government is incurring debt at an unprecedented rate. If U.S. leaders do not act to curb their debt addiction, then the global capital markets will do so for them, forcing a sharp and punitive adjustment in fiscal policy. The result will be an age of American austerity." http://www.foreignaffairs.com/artic...-haass/american-profligacy-and-american-power

 

[goebfwai]

Yes. In debt based, fiat currency systems all money is printed into existence. To preserve the stability of the system, it must be matched in value by the thing for which it was created. I suspect you are asking: "Are they just printing new money into existence that isn't matched by things of value, and therefore initiating the implosion of their financial system, or something?"

The answer, again, is yes. Most people didn't notice that the $600 billion of US Federal debt the Federal Reserve Board agreed to buy last month is exactly the amount of debt the US government expects to issue over the next few months. The Fed is paying for that purchase by exercising its legal right to print money.

The "debt" is worthless - it is the valueless mortgage-backed securities acquired by the tax-payer to briefly extend the functioning of the US financial system. So they have created $600 billion of new money for which there is no corresponding value in the economy, thereby violating the fundamental stability rule.

Because they have no choice other than to deliberately collapse the debt (rational if you thought you could obtain a better final outcome), they will keep doing this until the collapse of the illusion that the debt supporting the economy is serviceable, at which point the currency, the financial system, the US economy, and a large chunk of the global economy, will collapse. Like the collapse of Iceland, this is something that will take place in the course of hours, rather than weeks, months or years.

How very interesting. So can the debt - these valueless mortgage backed securities - acquire a value later on? Say if America becomes choc-a-bloc with a new era of mass immigration (and people seeking housing). Immigration was a real boon for America in the 30's-50's. There will be some anti-immigrant elements that would be opposed to it, but I must say it would be rather prosaic if America were to make a thing of offering to re-patriate climate change refugees. Refugees often have an abundance of talents and capital, and can be a real boon. Seemingly, there are already a number of low lying island nations rushing to build up sovereign wealth funds so they can buy land abroad for the time their countries finally end up unhabitable. It would be the ethical thing to do. Be rather apt if the US, one of the world's greatest emitters of greenhouse gases, were to step up to the plate and patriate and house them. I am sure that would restore confidence and help prevent the scandal of all the abandoned foreclosed housing rotting away, and give them some 'value'. It seems odd too, that Fanne Mae and Freddie Mac don't convert some of this housing into UK and Canadian style social housing for rent.

 

[Falcon]

How very interesting. So can the debt - these valueless mortgage backed securities - acquire a value later on?

Sadly, no, for a few reasons. The first is the extent to which the debt is multiplied out of all proportion to physical wealth. Commodity money (gold) is tethered to reality by the cost of its production - fiat money is not. That gets multiplied by the pyramiding of the fractional lending system. That gets multiplied by the pyramiding of stocks and "derivatives" purchased on margin with fiat, fractional debt. Even more quasi-money debt piles on through credit cards and "innovations" (i.e. financial instruments for circumventing public interest regulation). The value of current real wealth is insufficient to serve as a lien on even a fraction of that future debt, even if it were possible to maintain growth rates at historic levels.

The second reason is the quantity of debt our parents incurred by running the economy over the last 40 years like a remortgage. Their binge lifestyle was funded the same way you (until recently) released cash by remortgaging your house on the assumption it would be worth more in the future. The collateral on the loan to our parents generation was the economic growth that was supposed to take place in our generation. Well now there isn't any - our parents basically stole the money off us, and we are left with the debt.

The third reason is the sheer magnitude of the future financial obligations promised in the expectation of future growth. The most conspicuous is the pension system, which in the UK is underfunded by £2.2 trillion *assuming the economy grows 1.8% per annum for the next 30 years*. If the economy is flat, it will be £5 trillion. Others are health care costs for societies in which the average age is rising rapidly. These are all hard baked in and are entirely unserviceable, even with historic growth levels.

The fundamental reason is that the energy growth that was necessary to expand the wealth necessary to service these debts has stopped, and will shortly contract - conventional hydrocarbon liquids peaked in 2005, and all liquids peaked in 2008. In your hypothetical, it doesn't matter how many immigrants show up, with whatever skills, if they have insufficient food, resources and energy to produce any wealth.

The debt is unredeemable and will be repudiated, either directly by bankruptcy and confiscation, or indirectly by inflation.

 

[goebfwai]

Because they have no choice other than to deliberately collapse the debt (rational if you thought you could obtain a better final outcome), they will keep doing this until the collapse of the illusion that the debt supporting the economy is serviceable, at which point the currency, the financial system, the US economy, and a large chunk of the global economy, will collapse. Like the collapse of Iceland, this is something that will take place in the course of hours, rather than weeks, months or years.

The debt is unredeemable and will be repudiated, either directly by bankruptcy and confiscation, or indirectly by inflation.

Thanks. So when do you evisage all this happening? Is it likely to be within a couple of years of the result of the next presidential election, when a much more fiscally conservative, Austrian school leaning, tea-party appeasing, Republican Party looks likely to take over the reins?

The guy below, a Professor of History at the University of Wisconsin-Madison, outlines a few scenarios but envisages the empire adjustment itself to be on a slightly longer timescale:

The Decline And Fall Of The American Empire
By Alfred W. McCoy
06 December, 2010, Countercurrents.org
Four Scenarios for the End of the American Century by 2025
"A soft landing for America 40 years from now? Don’t bet on it. The demise of the United States as the global superpower could come far more quickly than anyone imagines. If Washington is dreaming of 2040 or 2050 as the end of the American Century, a more realistic assessment of domestic and global trends suggests that in 2025, just 15 years from now, it could all be over except for the shouting. http://www.countercurrents.org/mccoy061210.htm

 

[RhymnRzn]

How very interesting. So can the debt - these valueless mortgage backed securities - acquire a value later on? Say if America becomes choc-a-bloc with a new era of mass immigration (and people seeking housing). Immigration was a real boon for America in the 30's-50's. There will be some anti-immigrant elements that would be opposed to it, but I must say it would be rather prosaic if America were to make a thing of offering to re-patriate climate change refugees. Refugees often have an abundance of talents and capital, and can be a real boon. Seemingly, there are already a number of low lying island nations rushing to build up sovereign wealth funds so they can buy land abroad for the time their countries finally end up unhabitable. It would be the ethical thing to do. Be rather apt if the US, one of the world's greatest emitters of greenhouse gases, were to step up to the plate and patriate and house them. I am sure that would restore confidence and help prevent the scandal of all the abandoned foreclosed housing rotting away, and give them some 'value'. It seems odd too, that Fanne Mae and Freddie Mac don't convert some of this housing into UK and Canadian style social housing for rent.

If any of the system in place is to be salvaged, or if there is any value presently established to continue to go by, then this comment is on the right track: otherwise its all cast away, and new terms are demanded (notwithstanding the ancient paths are the paths cast up, where the essential exchanges are efficient, and what is stored is secure), because they say they cannot afford or govern an arrangement for the people who are escaped to have a safe haven, when they have the means to heal the nations right next to them.

 

[Falcon]

Thanks. So when do you evisage all this happening?

The fiat in fiat currency means let it be done. Commodity money (e.g. money backed by a stack of gold bars) has some value regardless of people's sentiment. Fiat money only has value if people say it does. Commodity money can't change in value over night. Fiat currency can change in value as rapidly as people's sentiment, which is to say, instantly.

Our financial system is a Complex system in the formal sense of the word. Phase transitions between stable states in complex systems, often provoked by destabilisation of the current previously stable state, take place very rapidly. This is why the talk of "soft landings" is fairly disconnected with reality - it's rather like imagining the point where you fail to outrun a bear as having a soft landing.

None of which answers you question. The Chinese are stealthily removing their assets from the US economy at a rate calculated not to exceed the system's threshold of Least Noticeable Difference (the mechanism by which frogs, slowly warmed up, boil to death, as it happens). But likely some random event, probably fuel related, will trigger a shift in sentiment that will cascade. Might be a really cold winter, might be a failure of the underinvested electrical distribution infrastructure, might be an incident in the Strait of Hormuz, through which a large proportion of the worlds oil is shipped, might be a dumb trader getting a few zeros wrong in a trade (again) and triggering panic selling. In the UK's case it will probably be linked to the repayment dates of the bonds that underpin the majority of our debt, which are still 3 to 4 years out (that's one of the reasons we aren't doing an Ireland and Greece right now)

 

[yield]

(the mechanism by which frogs, slowly warmed up, boil to death, as it happens)

That isn't true. http://www.snopes.com/critters/wild/frogboil.asp